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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-23 · 148 added, 178 removed, 267 unchanged (55% of the section changed)

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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.

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:

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For a more complete description of our operations, refer to Item 1.

Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.

Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment due to changes in our internal reporting structure aimed at realigning our service offerings.

Market Update

Throughout 2022, our business and end markets remained resilient despite the impact of uncertain global economic conditions, including supply chain, production, and other logistical issues, an inflationary cost environment, rising interest rates, skilled labor shortages in certain regions, and the lingering effects of the COVID-19 pandemic.

For example, we experienced pressures in our supply chain, which resulted in material and equipment lead times significantly in excess of normal levels.

These disruptions, which are expected to persist to varying degrees in 2023, have manifested themselves through project delays or scheduling impacts and reduced labor productivity and efficiency, particularly within our United States construction segments and our United States building services segment.

Delays in critical material and equipment deliveries have additionally resulted in us funding purchases at earlier stages of project progression, or in advance of project commencement, which has and will continue to apply pressure on working capital requirements.

During 2022, we also experienced the effects of inflation through increases in fuel, material, and other commodity prices.

While current economic indicators suggest that inflation will slow, we anticipate that our business will continue to be impacted by wage and general inflation to some extent throughout 2023.

Further, in an effort to mitigate inflation, the Federal Reserve Board has increased the federal funds rate throughout 2022, raised it further in February 2023, and it is anticipated that rate increases will continue through the remainder of 2023.

These actions have resulted, and may continue to result, in an increase in our interest expense.

Beyond these impacts, the Russian invasion of Ukraine in February 2022 has created another layer of uncertainty, especially with respect to energy costs as the resulting sanctions imposed on Russian oil and gas exports caused the prices of crude oil and natural gas to increase significantly for several months.

While higher energy prices have historically led to an increase in demand for certain of our services, such as those performed by our United States industrial services segment, significant increases in the price or demand for crude oil may also result in the short-term curtailment or deferral of spending by our customers, as facility downtime to perform certain of the services we provide comes at a higher opportunity cost.

In response to these challenges, we continue to strive to manage our business more effectively through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging our relationships with our suppliers and customers.

While we believe the actions we have taken continue to be effective, as evidenced in part by the sequential improvement in our operating performance throughout each quarter of 2022, the impact of these disruptions continues to evolve and there can be no assurance that our actions will serve to mitigate such impacts in future periods.

Our business and end markets remained resilient despite the impact of uncertain global economic conditions, including supply chain, production, and other logistical issues, an inflationary cost environment, elevated interest rates, and skilled labor shortages in certain regions.

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

As evidenced by the growth in our remaining performance obligations, which increased to $8.85 billion at December 31, 2023, from $7.46 billion at December 31, 2022, we anticipate a similar level of demand for our services in the near term, provided that the business environment does not significantly deteriorate.

Although improved from 2022, we continued to experience pressures in our supply chain, which resulted in material and equipment lead times significantly in excess of normal levels.

Delays in critical material and equipment deliveries additionally resulted in us funding purchases at earlier stages of project progression, or in advance of project commencement.

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

Although we experienced a reduction in commodity prices when compared to 2022, and current economic indicators suggest that inflation is slowing, there continues to be volatility in the price of fuel, certain materials, and other commodities used in our operations.

Further, in an effort to mitigate inflation, the Federal Reserve Board increased the federal funds rate throughout 2022 and into 2023.

Our management teams continue to adapt to the challenges of the current operating environment in order to manage our business more effectively through diligent contract negotiations, enhanced labor planning and project scheduling, and increased supplier engagement.

As contractually permitted, and in order to combat inflationary pressures, we have and will continue to seek increases in pricing to the extent we experience increases in our costs.

While we believe the actions we have taken continue to be effective, as evidenced in part by our operating performance and operating cash flow in 2023, the impact of these disruptions continues to evolve and there can be no assurance that our actions will serve to mitigate such impacts in future periods.

Further, while we believe our remaining performance obligations are firm, and we have not experienced any material project cancellations to date, prolonged delays in the receipt of critical equipment could impact our ability to convert such remaining performance obligations to revenues in the near term or result in our customers seeking to delay or terminate existing or pending agreements.

Lastly, rising interest rates may cause a decline in capital or maintenance spending of our customers or prospective customers and, therefore, the demand for our services.

Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.

Lastly, the current interest rate environment may cause a decline in capital or maintenance spending of our customers or prospective customers, particularly as it pertains to short duration project work.

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

2023 versus 2022

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Revenues of $12.58 billion for the year ended December 31, 2023 set a new annual record for the Company and represent an increase of 13.6% from revenues of $11.08 billion for the year ended December 31, 2022.

Demand for our services continues to be strong and, as described in further detail below, we experienced revenue growth within all of our reportable segments except for our United Kingdom building services segment, the reduction in revenues of which was entirely due to unfavorable exchange rate movements during 2022, which more than offset revenue growth that was experienced on a local currency basis.

Operating income for 2022 was $564.9 million, or 5.1% of revenues, compared to operating income of $530.8 million, or 5.4% of revenues, in 2021.

This increase resulted from greater operating income contribution, largely as a result of the aforementioned increase in revenues, from each of our reportable segments, other than our United States electrical construction and facilities services segment.

The decrease in operating margin period over period was driven by a 70 basis point reduction in consolidated gross profit margin, due to reduced gross profit margins within each of our United States construction segments.

Partially offsetting the decrease in gross profit margin was a reduction in the ratio of selling, general and administrative expenses to revenues as we were able to leverage our overhead cost structure during this period of revenue growth.

Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.

Demand for our services continues to be strong across the majority of the market sectors we serve and, as described in further detail below, we experienced revenue growth within all of our reportable segments except for our United Kingdom building services segment.

Operating income for 2023 was $875.8 million, or 7.0% of revenues, establishing new annual records for the Company with respect to both operating income and operating margin.

This compares to operating income of $564.9 million, or 5.1% of revenues, in 2022.

The $310.9 million increase in operating income, and corresponding 190 basis point improvement in operating margin, were a result of improved operating performance across all of our reportable segments other than our United Kingdom building services segment.

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

(a) better project execution and productivity, (b) a more favorable mix of work, (c) the successful close-out of several projects and resolution of certain disputes within our United States construction segments, and (d) a reduction in the price of certain commodities and materials utilized in our operations.

Net income of $633.0 million, or $13.31 per diluted share, for the year ended December 31, 2023, compares favorably to net income of $406.1 million, or $8.10 per diluted share, for the year ended December 31, 2022.

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

During 2023, we acquired eight companies for total consideration of $99.6 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) seven companies, the results of operations of which were de minimis, consisting of:

(i) three companies that have been included within our United States mechanical construction and facilities services segment, one of which provides mechanical and pipe fabrication services in the Midwestern region of the United States, and two of which add capabilities to our national fire protection services, 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 and enhance our presence in geographies where we have existing operations.

During 2022, we acquired six companies for total consideration of $100.8 million.

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(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.

We acquired eight companies during 2021 for total consideration of $131.2 million.

Such acquisitions include:

(a) two companies, the results of operations of which were de minimis, included within our United States mechanical construction and facilities services segment, consisting of:

(i) a company that provides mechanical services within the Southern region of the United States and (ii) a company that provides fire protection services in the Midwestern region of the United States, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of:

(i) a company that provides mobile mechanical services across North Texas and (ii) three companies, the results of operations of which were de minimis, that enhance our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.

Companies acquired in 2022 and 2021 generated incremental revenues of $149.7 million and incremental operating income of $3.9 million, inclusive of $7.3 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2022.

Discussion and Analysis of Results of Operations

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Total operations $ 12,582,873 100 % $ 11,076,120 100 %

As described in more detail below, revenues for the year ended December 31, 2022 increased to $11.08 billion compared to revenues of $9.90 billion for the year ended December 31, 2021.

During 2022, we experienced increases in revenues from all of our reportable segments, except for our United Kingdom building services segment, the reduction in revenues of which was entirely due to unfavorable exchange rate movements, which more than offset revenue growth that was experienced on a local currency basis.

As a result of strong demand for our services across the majority of the market sectors we serve, revenues for the year ended December 31, 2023 increased to $12.58 billion compared to revenues of $11.08 billion for the year ended December 31, 2022.

As described in more detail below, we experienced increases in revenues from all of our reportable segments, except for our United Kingdom building services segment.

Companies acquired in 2023 and 2022 generated incremental revenues of $107.1 million in 2023.

Revenues of our United States electrical construction and facilities services segment were $2,783.7 million for the year ended December 31, 2023 compared to revenues of $2,433.1 million for the year ended December 31, 2022.

This segment’s results for the year ended December 31, 2022 included $135.1 million of incremental revenues from acquired companies.

Excluding the impact of acquisitions, revenues of this segment increased by $268.1 million primarily as a result of an increase in revenues from:

(a) the commercial market sector, predominantly within the telecommunications sub-market sector, inclusive of our data center projects, and the technology sub-market sector, (b) the healthcare market sector due to large project activity, and (c) certain transmission and distribution projects, including those to support sustainable energy solutions such as solar and wind.

These revenue increases were partially offset by a reduction in transportation and institutional market sector activity due to the completion or substantial completion of various projects.

This segment’s results included $88.5 million of incremental acquisition revenues for the year ended December 31, 2023.

Excluding the impact of acquisitions, revenues of this segment increased by $262.1 million as a result of an increase in revenues within many of the market sectors in which we operate, most notably including:

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

Partially offsetting these increases were modest revenue declines from the commercial market sector and the institutional market sector as well as a reduction in short duration project volume.

Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2023 were $5,074.8 million, a $782.6 million increase compared to revenues of $4,292.2 million for the year ended December 31, 2022.

The increase in this segment’s revenues for the year ended December 31, 2022 was primarily attributable to revenue growth within:

(a) the commercial market sector, as a result of increased demand:

(i) for our mechanical construction and/or fire protection services by certain customers engaged in the design and manufacturing of semiconductors as well as customers within the biotech, life-sciences, and pharmaceutical industries, (ii) for our fire protection services within various warehousing and distribution facilities to support the build-out of our customers’ e-commerce supply chains, and (iii) from certain of our data center customers, (b) the institutional market sector, due to project activity throughout several of the regions in which we operate, (c) the manufacturing market sector, driven by certain large food processing projects currently in process, and (d) the water and wastewater market sector, given greater project activity within the Southern region of the United States.

The year-over-year increase in this segment’s revenues was primarily attributable to revenue growth within:

(a) the high-tech manufacturing market sector, as a result of increased demand for our mechanical construction and/or fire protection services by certain customers:

(i) engaged in either the design and manufacturing of semiconductors or the production and development of electric vehicles and/or lithium batteries, and (ii) within the biotech, life-sciences, and pharmaceutical industries, (b) the network and communications market sector, due to increased data center project activity, and (c) the manufacturing and industrial market sector, due in part to continued re-shoring of critical supply chain by certain of our customers.

Revenues of our United States building services segment were $3,120.1 million and $2,755.0 million for the years ended December 31, 2023 and 2022, respectively.

Excluding incremental acquisition revenues within this segment’s mobile mechanical services division of $14.6 million during 2022, this segment’s revenue growth was primarily attributable to:

(a) its mobile mechanical services division, due to:

(i) increased project work, including incremental demand for HVAC system retrofits and building automation and controls services, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, and (ii) greater service repair and maintenance volumes, partially as a result of incremental repair opportunities driven by supply chain delays, which have created a need to extend the life of existing equipment in instances when replacement equipment is not readily available, and (b) its commercial site-based services division, due to the award of facilities maintenance contracts with new customers, as well as scope or site expansion and increased project work with existing customers.

Excluding incremental acquisition contribution of $18.6 million, the $346.6 million increase in this segment’s revenues was primarily attributable to its mechanical services division, due to increased:

(a) HVAC project and retrofit work, as a result of greater:

(i) project execution stemming from the increased availability of materials and equipment when compared to the prior year, which experienced greater supply chain disruptions and delays, and (ii) demand for system upgrades and replacements, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, (b) service repair and maintenance volumes, given growth in our service contract base, and (c) building automation and controls projects, as we continue to expand our service offerings.

In addition to increased revenues from its mechanical services division, this segment also experienced revenue growth from its commercial site-based services and government site-based services divisions, due to the award of facilities maintenance contracts with new customers as well as scope or site expansion and increased project work with existing customers.

Such increased revenues were despite the loss of certain facilities maintenance contracts not renewed pursuant to rebid.

Revenues of our United States industrial services segment for the year ended December 31, 2023 were $1,167.8 million, a $49.0 million increase compared to revenues of $1,118.8 million for the year ended December 31, 2022.

While there remains significant disruption and uncertainty within the broader oil and gas industry, most notably within the upstream and midstream energy sectors, we began to experience a resumption in downstream energy demand within this segment during the second half of 2021.

Such increased demand continued into 2022, resulting in revenue growth within this segment.

Specifically, more normalized turnaround project demand and an increase in maintenance and capital project activity, when compared to the prior year, has resulted in increased revenues from this segment’s field services operations.

In addition, revenues of this segment’s shop services operations have increased as a result of greater maintenance, repair, and hydro blast cleaning services and a slight increase in new build heat exchanger sales.

Our United Kingdom building services segment revenues were $477.1 million in 2022 compared to $510.0 million in 2021.

The year-over-year decrease in this segment’s revenues was entirely a result of unfavorable exchange rate movements for the British pound versus the United States dollar, which negatively impacted this segment’s revenues by $53.5 million for the year ended December 31, 2022.

Excluding the impact of foreign exchange rate movements, this segment’s revenues for 2022 increased as a result of growth in project activities with existing customers, primarily within the commercial market sector, including certain telecommunication projects, and the transportation market sector.

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

In addition to steady demand for maintenance and turnaround projects, during 2023, we experienced increased levels of capital spending by our customers, in the form of greater new build heat exchanger orders and the award of certain renewable fuel projects.

Our United Kingdom building services segment revenues were $436.4 million for the year ended December 31, 2023 compared to $477.1 million for the year ended December 31, 2022.

Favorable exchange rate movements for the British pound versus the United States dollar positively impacted this segment’s 2023 revenues by $2.6 million.

Excluding the impact of foreign exchange rate movements, this segment’s revenues decreased during 2023 as a result of:

(a) the loss of certain facilities maintenance contracts not renewed pursuant to rebid, and (b) a reduction in project activity, notably within the network and communications market sector.

Cost of sales and gross profit

The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit as a percentage of revenues (“gross profit margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):

Cost of sales $ 10,493,534 $ 9,472,526

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Gross profit margin 16.6 % 14.5 %

Our gross profit for the year ended December 31, 2022 was $1,603.6 million, a $101.9 million increase compared to gross profit of $1,501.7 million for the year ended December 31, 2021.

Companies acquired in 2022 and 2021 generated incremental gross profit of approximately $21.1 million in 2022.

Excluding the impact of acquisitions, the increase in gross profit for 2022 was largely a result of increased revenue volume, which despite the decrease in gross profit margin discussed below, resulted in an increase in consolidated gross profit.

Our gross profit margin was 14.5% and 15.2% for 2022 and 2021, respectively.

The decrease in gross profit margin for the year ended December 31, 2022 was primarily attributable to a reduction in gross profit margin within each of our United States construction segments, partially as a result of a less favorable project mix.

For the year ended December 31, 2022, certain discrete project losses within both our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment negatively impacted our consolidated gross profit margin by 40 basis points.

Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments, including the above referenced losses.

Our gross profit for the year ended December 31, 2023 was $2,089.3 million, or 16.6% of revenues, compared to gross profit of $1,603.6 million, or 14.5% of revenues, for the year ended December 31, 2022.

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

In 2023, acquisitions contributed incremental gross profit of approximately $15.9 million, inclusive of amortization expense attributable to identifiable intangible assets of $3.6 million.

Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.

Selling, general and administrative expenses

The following table presents selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

The following table presents selling, general and administrative expenses (“SG&A”) and selling, general and administrative expenses as a percentage of revenues (“SG&A margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):

Selling, general and administrative expenses $ 1,211,233 $ 1,038,717

SG&A margin 9.6 % 9.4 %

Our selling, general and administrative expenses for the year ended December 31, 2022 were $1,038.7 million compared to selling, general and administrative expenses of $970.9 million for the year ended December 31, 2021.

Our selling, general and administrative expenses for the year ended December 31, 2023 were $1,211.2 million, or 9.6% of revenues, compared to selling, general and administrative expenses of $1,038.7 million, or 9.4% of revenues, for the year ended December 31, 2022.

For the year ended December 31, 2023, selling, general and administrative expenses included $17.3 million of incremental expenses directly related to companies acquired in 2023 and 2022, including amortization expense attributable to identifiable intangible assets of $4.6 million.

Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $50.6 million for the year ended December 31, 2022.

The organic increase in selling, general and administrative expenses was primarily attributable to an increase in:

(a) salaries and related employment expenses, largely as a result of an increase in headcount to support our organic revenue growth, (b) incentive compensation expense within those of our reportable segments which had higher operating results than in the prior year, (c) travel and entertainment expenses, given a resumption in travel and business meals as COVID-19 related restrictions have eased, (d) rent and other occupancy costs driven by:

(i) the expansion or addition of certain fabrication facilities, which support our operations, and (ii) the impact of inflation on the real estate market, and (e) computer hardware and software costs, as a result of various information technology and cybersecurity initiatives currently in process.

Selling, general and administrative expenses as a percentage of revenues were 9.4% and 9.8% for 2022 and 2021, respectively.

The year-over-year decrease in SG&A margin was largely a result of an increase in revenues without a commensurate increase in overhead costs, as we were able to leverage our existing overhead cost structure.

Excluding incremental expenses from businesses acquired, the increase in selling, general and administrative expenses, and SG&A margin, was predominantly attributable to increases in incentive compensation expense across the majority of our reportable segments, due to higher operating results than in the prior year, and salaries and related employment expenses, largely as a result of additional headcount to support our organic revenue growth as well as annual cost of living adjustments.

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

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

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

Operating income (loss)

The following table presents by segment our operating income (loss) and each segment’s operating margin (operating income (loss) as a percentage of such segment’s revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues (“operating margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):

Revenues 2022 % of

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Corporate administration (127,229) — (110,440) —

Impairment loss on long-lived assets

(2,350) — — —

Total operations 875,756 7.0 % 564,877 5.1 %

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Income before income taxes $ 872,853 $ 558,750

As described in more detail below, operating income was $564.9 million for the year ended December 31, 2022, compared to operating income of $530.8 million for the year ended December 31, 2021.

Largely as a result of increases in revenues, we experienced greater operating income contribution from each of our reportable segments other than our United States electrical construction and facilities services segment.

Companies acquired in 2022 and 2021 generated incremental operating income of $3.9 million, inclusive of $7.3 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2022.

Operating margin was 5.1% and 5.4% for the years ended December 31, 2022 and 2021, respectively.

The decrease in operating margin year-over-year was driven by a reduction in gross profit margin within our United States construction segments, due to a change in project mix as well as the impact of certain discrete project losses, described in further detail below.

These declines in gross profit margin were partially offset by increased gross profit margins from the remainder of our reportable segments as well as a reduction in the ratio of selling, general and administrative expenses to revenues across each of our reportable segments.

Operating income for the year ended December 31, 2023 was $875.8 million, an increase of $310.9 million compared to operating income of $564.9 million for the year ended December 31, 2022.

Operating margin was 7.0% and 5.1% in 2023 and 2022, respectively.

Our performance in 2023 established new annual records for the Company with respect to operating income and operating margin.

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

(a) better project execution, (b) a more favorable mix of work, (c) the successful close-out of certain projects within our United States construction segments, and (d) the impact in 2022 of certain supply chain disruptions and delays, which were greater than those experienced in 2023, and which, in the prior year, led to:

(i) reduced labor productivity and efficiency, (ii) the under-absorption of labor costs in instances where projects were delayed pending the receipt of materials, or (iii) material and commodity price escalations.

Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2023 was $230.6 million, or 8.3% of revenues, compared to operating income for the year ended December 31, 2022 of $148.7 million, or 6.1% of revenues.

This segment’s results for the year ended December 31, 2022 included incremental operating income from acquired companies of $6.3 million, inclusive of $4.7 million of amortization expense associated with identifiable intangible assets.

Excluding the contribution from acquisitions, operating income of this segment decreased by $26.9 million year-over-year.

A less favorable project mix within the institutional and transportation market sectors, coupled with certain discrete project losses recognized during 2022, due, in part, to supply chain disruptions and delays, resulted in a decrease in gross profit and gross profit margin.

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, the operating results of our United States electrical construction and facilities services segment were negatively impacted by approximately $33.5 million during the year ended December 31, 2022.

These reductions in estimated project profitability negatively affected the operating margin of this segment by 140 basis points in 2022.

In addition to the impact of supply chain disruptions, a portion of these losses were attributable to project completion delays and time extensions, beyond our control, on certain projects which were bid a number of years ago under different economic conditions.

We continue to evaluate our contractual rights and are pursuing recovery for such impacts to the extent permitted.

The aforementioned reductions in gross profit margin were partially offset by a reduction in the ratio of selling, general and administrative expense to revenues as:

(a) this segment was able to successfully leverage its overhead cost structure during this period of revenue growth and (b) the reduced profitability has resulted in a decrease in incentive compensation expense for certain of the operating subsidiaries within this segment.

The $81.9 million increase in operating income and the 220 basis point improvement in operating margin of this segment were largely a result of greater gross profit and gross profit margin given:

(a) a more favorable mix of work, (b) improved project execution and productivity, and (c) the successful close-out of certain construction projects during the year.

The largest increases in gross profit and gross profit margin were recognized within the network and communications market sector, the commercial market sector, and the healthcare market sector.

Although we continue to experience supply chain disruptions and delays, which are impacting project delivery in various ways, market conditions surrounding equipment availability steadily improved over the last year and our management teams continued to adapt to this environment.

Such developments led to improved job-site and labor productivity as well as more normalized project sequencing, resulting in fewer project write-downs when compared to the prior year.

For example, 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, the operating results of our United States electrical construction and facilities services segment were negatively impacted by approximately $12.5 million during the year ended December 31, 2023, compared to $33.5 million during the year ended December 31, 2022.

While these reductions in estimated project profitability negatively affected operating margin of this segment by 40 basis points for 2023, the impact in 2022 was 140 basis points.

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

Our United States mechanical construction and facilities services segment’s operating income for the year ended December 31, 2023 was $530.6 million, a $200.3 million increase compared to operating income of $330.3 million for the year ended December 31, 2022.

Operating margins within this segment for the years ended December 31, 2022 and 2021 were 7.7% and 8.0%, respectively.

The increase in operating income for the year ended December 31, 2022 was primarily a result of increased gross profit contribution from the commercial market sector, including profit recognized on:

(a) certain construction projects for customers engaged in the manufacturing of semiconductors and (b) several fire protection projects.

Partially offsetting the growth in operating income for the year ended December 31, 2022, and the primary factor resulting in the decline in operating margin for such period, were certain project write-downs, partially a result of supply chain disruptions and/or material price escalations, a portion of which we are seeking recovery from our customers.

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, the operating results of our United States mechanical construction and facilities services segment were negatively impacted by approximately $13.7 million during the year ended December 31, 2022.

These reductions in estimated project profitability negatively affected the operating margin of this segment by 30 basis points in 2022.

Similar to our United States electrical construction and facilities services segment, operating margin of this segment for 2022 benefited from a reduction in the ratio of selling, general and administrative expenses to revenues, given an increase in revenues without a commensurate increase in certain overhead costs.

Operating income of our United States building services segment for the year ended December 31, 2022 was $144.7 million compared to operating income of $122.7 million for the year ended December 31, 2021.

The year-over-year increase in operating income was largely due to greater gross profit contribution from this segment’s mobile mechanical services division resulting from improved profitability across the majority of its service lines, including projects, service repair and maintenance, and building automation and controls.

Further contributing to the increase in operating income of this segment was an increase in gross profit contribution from its commercial site-based services division.

Despite certain economic headwinds which have impacted this segment throughout the year, including supply chain disruptions, increased fuel prices, material and wage inflation, and skilled labor shortages, operating margin of this segment was 5.3% for the year ended December 31, 2022, an increase from the operating margin of 5.1% for the year ended December 31, 2021.

This improvement in operating margin reflects our continued focus on project execution and pricing as well as disciplined cost management.

Our United States industrial services segment reported operating income of $19.8 million for the year ended December 31, 2022 compared to an operating loss of $1.7 million for the year ended December 31, 2021.

Operating margin of this segment was 1.8% and (0.2)% for 2022 and 2021, respectively.

The improved performance for the year ended December 31, 2022 was primarily due to:

(a) the growth in this segment’s revenues referenced above, which resulted in both incremental gross profit contribution as well as greater absorption of certain indirect costs of sales, and (b) an improvement in gross profit margin, most notably from this segment’s shop services division given:

(i) a greater percentage of repair and cleaning projects, which tend to carry higher profit margins, and (ii) more favorable pricing across this division’s portfolio of work.

Operating performance of our United States industrial services segment for the year ended December 31, 2022 also benefited from a reduction in selling, general and administrative expenses as well as a decrease in the ratio of selling, general and administrative expenses to revenues, when compared to the prior year.

In addition to successfully leveraging its overhead cost structure during 2022, the year-over-year comparison was impacted by an increase in the provision for credit losses in 2021, which included $5.8 million of expense associated with two customer bankruptcies, that negatively impacted this segment’s 2021 operating margin by 60 basis points.

Our United Kingdom building services segment operating income for the year ended December 31, 2022 was $29.8 million, or 6.3% of revenues, which compares favorably to operating income of $28.0 million, or 5.5% of revenues, for the year ended December 31, 2021.

This segment’s operating income for the year ended December 31, 2022 was negatively impacted by $3.1 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar.

Excluding the impact of foreign exchange rate movements, operating income of this segment increased by $4.9 million year-over-year.

The improvement in this segment’s operating income and operating margin for 2022 was primarily a result of:

(a) an increase in gross profit and gross profit margin, primarily as a result of a change in the mix of work, which included a greater amount of revenue generated from project activity as opposed to traditional facilities maintenance services, including an increased number of telecommunication projects as referenced in the revenue commentary for this segment, and (b) the favorable close-out of certain other contracts throughout 2022.

Operating margin of this segment for the year ended December 31, 2023 was 10.5%, a 280 basis point improvement over its operating margin for the year ended December 31, 2022 of 7.7%.

This increased annual operating performance was primarily a result of contribution from projects within:

(a) the high-tech manufacturing market sector, including certain mechanical construction or fire protection projects for customers:

(i) engaged in either the design or manufacturing of semiconductors or the production and development of electric vehicles and/or lithium batteries, and (ii) within the biotech, life-sciences, and pharmaceutical industries, (b) the commercial market sector, including various fire protection projects, and (c) the manufacturing and industrial market sector, which continues to benefit from customer initiatives to re-shore their critical supply chain.

Operating income and operating margin of this segment were also favorably impacted as a result of the successful close-out of certain projects during 2023 and improved productivity, due in part to investments in building information modeling, prefabrication, and digital tools.

Similar to our United States electrical construction and facilities services segment, the results of this segment in the prior year were negatively impacted by external market conditions, which manifested themselves through price escalations, particularly for materials and commodities, such as copper and steel, that are used in our mechanical and fire protection operations.

Although there remains volatility in the pricing of these commodities, more favorable pricing year-over-year has resulted in improved profitability of this segment during 2023.

Increased gross profit and gross profit margin of this segment were partially offset by higher selling, general and administrative expenses and a slight increase in SG&A margin, given greater:

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

Operating income of our United States building services segment for the year ended December 31, 2023 was $183.0 million, or 5.9% of revenues, compared to operating income of $146.6 million, or 5.3% of revenues, for the year ended December 31, 2022.

The $36.4 million increase in operating income and the 60 basis point increase in operating margin for 2023 was almost entirely attributable to this segment’s mechanical services division, as a result of greater gross profit and gross profit margin across all of its service lines, with the largest incremental contribution from projects and retrofits as well as building automation and controls.

These improvements were due in part to favorable project execution, greater absorption of indirect costs, and favorable contractual terms.

Our United States industrial services segment’s operating income for the year ended December 31, 2023 was $35.4 million, or 3.0% of revenues, compared to operating income of $19.8 million, or 1.8% of revenues, for the year ended December 31, 2022.

In addition to the growth in this segment’s revenues referenced above, which resulted in greater gross profit contribution, the improved year-over-year performance was due to an increase in gross profit margin within both this segment’s field services and shop services divisions.

Operating performance of this segment continues to improve steadily and we are beginning to experience better pricing, most notably within the shop services division.

Operating income of our United Kingdom building services segment for the year ended December 31, 2023 was $25.7 million compared to operating income of $29.8 million for the year ended December 31, 2022.

The decrease in this segment’s operating income for 2023 was attributable to a reduction in gross profit, due to lower revenues, as well as an increase in selling, general and administrative expenses, resulting from certain initiatives undertaken during the year.

This segment’s operating margin for 2023 of 5.9% declined by 40 basis points when compared to an operating margin in 2022 of 6.3%.

Despite an increase in gross profit margin, driven by both the successful close-out of certain projects and a more favorable contract mix, operating margin was negatively impacted by an increase in the ratio of selling, general and administrative expenses to revenues, given the aforementioned decline in revenues and the increase in overhead costs in 2023.

This segment’s operating income for the year ended December 31, 2023 was positively impacted by $0.5 million related to the effect of favorable exchange rate movements.

Our corporate administration expenses were $127.2 million for 2023 compared to $110.4 million in 2022.

The increase in corporate administration expenses for the year ended December 31, 2022 was primarily due to greater:

(a) incentive compensation expense and (b) employment costs, given an increase in headcount to support the revenue growth within our business as well as annual cost of living wage increases.

Interest expense was $13.2 million and $6.1 million for 2022 and 2021, respectively, and interest income was $2.8 million and $0.9 million for 2022 and 2021, respectively.

The increase in both interest expense and interest income for 2022 resulted from higher average interest rates when compared to 2021.

In addition, the increase in interest expense was attributable to greater average outstanding borrowings year-over-year.

The increase in corporate expenses for 2023 was primarily due to greater incentive compensation expense, largely associated with our long-term incentive plans, given higher projected future operating results.

In addition, we have experienced increases in:

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

Interest expense was $17.2 million and $13.2 million for the years ended December 31, 2023 and 2022, respectively.

The year-over-year increase in interest expense was a result of higher interest rates, partially offset by reduced average outstanding borrowings.

Interest income was $15.4 million and $2.8 million for the years ended December 31, 2023 and 2022, respectively.

The increase in annual interest income resulted from greater returns on our invested cash, due to the previously referenced interest rate environment, as well as an increase in average bank deposits.

Our income tax provision for the year ended December 31, 2023 was $239.5 million, based on an income tax rate of 27.5%, compared to an income tax provision and an income tax rate of $152.6 million and 27.3%, respectively, for the year ended December 31, 2022.

The increase in our income tax provision for 2022 was due to increased income before income taxes, while the slight decrease in our income tax rate for 2022 was attributable to the favorable impact of certain discrete tax items.

Refer to Note 11 - Income Taxes of the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data for further discussion regarding our income tax provision and effective income tax rate.

Remaining Unsatisfied Performance Obligations

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Our remaining performance obligations at December 31, 2023 were $8.85 billion compared to $7.46 billion at December 31, 2022.

The increase in remaining performance obligations year-over-year was attributable to an increase in remaining performance obligations within all of our reportable segments.

Most notably, we experienced an increase in remaining performance obligations from:

(a) our United States construction segments, driven by the award of various construction projects within the majority of the market sectors in which we operate, and (b) our United States building services segment given increased project opportunities within its mobile mechanical services division and the award or renewal of several facilities maintenance contracts within its commercial site-based services division.

From a market sector perspective, we experienced the largest growth in remaining performance obligations within the commercial market sector, inclusive of data center, semiconductor, and other projects for customers:

(i) within the biotech, life-sciences, and pharmaceutical industries or (ii) engaged in the production and development of electric vehicles and/or lithium batteries.

Remaining performance obligations of our United Kingdom building services segment increased by $42.4 million since December 31, 2021, despite unfavorable exchange rates for the British pound versus the United States dollar, which negatively impacted this segment’s remaining performance obligations by $19.0 million.

While the continued growth in our remaining performance obligations is largely due to the strength in demand for our services, a portion of this increase can likely be attributed to external market factors such as material and labor inflation, which has increased the price of certain of our project work, as well as supply chain delays, which has impacted the timing of conversion of our remaining performance obligations to revenue, in certain instances.

The increase in remaining performance obligations year-over-year was attributable to an increase in remaining performance obligations within:

(a) each of our United States construction segments, driven by the award of various projects within the majority of the market sectors in which we operate, and (b) our United States building services segment, largely due to increased project opportunities within its mechanical services division.

From a market sector perspective, we experienced the most significant growth in remaining performance obligations within:

(a) the high-tech manufacturing market sector, inclusive of projects for customers engaged in:

(i) the design and manufacturing of semiconductors, and (ii) the production and development of electric vehicles and/or lithium batteries, (b) the network and communications market sector, driven by data center construction projects, (c) the institutional market sector, and (d) the water and wastewater market sector, due to the award of several construction projects within the Southeastern region of the United States.

Remaining performance obligations increased by $23.7 million as a result of acquisitions during 2023.

These increases were partially offset by a reduction in remaining performance obligations from the commercial market sector, primarily given the completion of several warehouse and distribution center projects.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 8.

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The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash.

We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on our outstanding indebtedness, and shareholder return through dividend payments and share repurchases.

We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on any outstanding indebtedness, and shareholder return through dividend payments and share repurchases.

We strive to maintain a balanced approach to capital allocation in order to achieve growth, deliver value, and minimize risk.

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While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers.

As of December 31, 2022, we had cash and cash equivalents, excluding restricted cash, of $456.4 million, which are maintained in depository accounts and highly liquid investments with original maturity dates of three months or less.

As of December 31, 2023, we had cash and cash equivalents of $789.8 million, which are maintained in depository accounts and highly liquid investments with original maturity dates of three months or less.

Both our short-term and long-term liquidity requirements are expected to be met through our cash and cash equivalent balances, cash generated from our operations, and, as necessary, the borrowing capacity under our revolving credit facility.

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ 6,372 $ (12,515)

Decrease in cash, cash equivalents, and restricted cash $ (365,500) $ (80,994)

For the year ended December 31, 2022, our cash balance, including cash equivalents and restricted cash, decreased by $365.5 million from $822.6 million at December 31, 2021 to $457.1 million at December 31, 2022.

Increase (decrease) in cash, cash equivalents, and restricted cash

$ 332,682 $ (365,500)

During the year ended December 31, 2023, our cash balance, including cash equivalents and restricted cash, increased by $332.7 million from $457.1 million at December 31, 2022 to $789.8 million at December 31, 2023.

Changes in our cash position from December 31, 2022 to December 31, 2023 are described in further detail below.

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For 2023, net cash provided by operating activities was approximately $899.7 million compared to approximately $497.9 million of net cash provided by operating activities in 2022.

The $179.1 million increase in operating cash flows during 2022, when compared to 2021, was primarily a result of the collection of advanced billings on certain of our uncompleted construction projects, as evidenced in part by the growth in our contract liabilities, net of the increase in outstanding accounts receivable.

The $401.7 million increase in operating cash flows during 2023, when compared to 2022, was largely a result of increased income, coupled with customer deposits and advanced payments on certain construction contracts, as evidenced by the growth in our contract liabilities.

Investing Activities – Investing cash flows consist primarily of payments for the acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment.

For 2022, we utilized approximately $140.8 million of cash for investing activities compared to $153.1 million in 2021.

The decrease in investing cash outflows year-over-year was primarily driven by a decrease in payments for business acquisitions, partially offset by higher capital expenditures used to invest in organic growth.

During 2023, we utilized approximately $161.3 million of cash for investing activities compared to $140.8 million during 2022.

The increase in investing cash outflows year-over-year was primarily driven by higher capital expenditures to support our organic growth, partially offset by an increase in proceeds from the sale or disposal of property, plant, and equipment.

Payments for the acquisition of businesses were fairly consistent each year as we utilized $96.5 million in 2023, compared to $98.7 million in 2022.

Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payments of dividends to stockholders, and the issuance of common stock through certain equity plans.

Net cash used in financing activities for 2022 was $710.1 million compared to $245.5 million in 2021.

The increase in cash used in financing activities in 2022, when compared to 2021, was primarily due to the increase in funds used for the repurchase of our common stock.

During the year ended December 31, 2022, cash payments related to share repurchases were $660.6 million compared to $195.5 million for the year ended December 31, 2021.

Net cash used in financing activities during 2023 was $412.1 million compared to $710.1 million during 2022.

The $298.1 million reduction in financing cash outflows was primarily due to a decrease in funds used for the repurchase of our common stock during 2023, partially offset by an increase in net repayments of debt under our credit agreement.

The timing of common stock repurchases is at management’s discretion subject to securities laws and other legal requirements and depends upon several factors, including market and business conditions, current and anticipated future liquidity, share price, and share availability, among others.

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Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash – We are exposed to fluctuations in foreign currency exchange rates, almost entirely with respect to the British pound.

Therefore, the $11.2 million variance between the years ended December 31, 2022 and 2021 was a direct result of unfavorable exchange rate movements for the British pound versus the United States dollar.

Therefore, the $18.9 million variance between the years ended December 31, 2023 and 2022 was a direct result of favorable exchange rate movements for the British pound versus the United States dollar.

Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2023, our short-term and long-term material cash requirements for known contractual and other obligations were as follows:

Outstanding Debt and Interest Payments – As of December 31, 2022, there were no direct borrowings outstanding under our revolving credit facility and the amount outstanding under our term loan was $242.8 million.

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

All remaining unpaid amounts are due on March 2, 2025, when the credit agreement governing our term loan and revolving credit facility expires.

Until such time, we are required to make periodic interest payments on our outstanding indebtedness.

Future interest payments will be determined based on prevailing interest rates during that time, which are anticipated to increase in the near term.

Outstanding Debt and Interest Payments – As of December 31, 2023, there were no direct borrowings outstanding under our revolving credit facility.

Interest payments on any future borrowings will be determined based on prevailing interest rates at that time.

Refer to Note 9 - Debt of the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data for further detail of our debt obligations, including our term loan and revolving credit facility.

Financial Statements and Supplementary Data for further detail of our debt obligations, including our revolving credit facility.

Operating and Finance Leases – In the normal course of business, we lease real estate, vehicles, and equipment under various arrangements which are classified as either operating or finance leases.

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To the extent that the amount required to settle claims covered by insurance continues to increase, the cost of our insurance coverage, including premiums and deductibles, is likely to increase.

Retirement Plan Obligations – As of December 31, 2022, expected future payments relating to our defined benefit post retirement plans were approximately $1.5 million per year.

We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations.

In determining the minimum funding required, we utilize current actuarial assumptions and exchange rates to forecast amounts that may be payable.

In our judgment, minimum funding estimates cannot be reliably estimated beyond a five-year time horizon.

Refer to Note 14 - Retirement Plans of the notes to consolidated financial statements in Item 8.

Financial Statements and Supplementary Data for further information about our post retirement plans.

Contingent Consideration Liabilities – We have incurred liabilities related to contingent consideration arrangements associated with certain acquisitions, payable in the event discrete performance objectives are achieved by the acquired businesses during designated post-acquisition periods.

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As of December 31, 2023, the present value of expected future payments relating to these contingent consideration arrangements was $9.5 million.

Of this amount, $10.0 million is estimated as being payable during 2023, with the remainder due pursuant to the terms of our contractual agreements some of which extend through 2025.

Of this amount, $6.1 million is estimated as being payable during 2024, with the remainder due in 2025.

In addition, material cash requirements for other potential obligations, for which we cannot reasonably estimate future payments, include the following:

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We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.

To help mitigate the impacts of greenhouse gas emissions on climate change, EMCOR has established initial carbon-based fuel consumption and greenhouse gas emission reduction targets, and has committed to setting science-based targets.

Although to date we have not incurred any material costs or capital expenditures associated with achieving our targets, we could be required to expend amounts in future periods as we continue to work towards our goals.

During 2022, EMCOR purchased carbon credits totaling 31,000 metric tons, for approximately $0.2 million.

It is not possible, at this time, to estimate the impact that future costs and/or capital expenditures may have on our business, financial condition, results of operations, or liquidity.

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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.

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 by approximately $48.5 million during the year ended December 31, 2022.

Of this amount, approximately $33.5 million was reported within our United States electrical construction and facilities services segment, approximately $13.7 million was reported within our United States mechanical construction and facilities services segment, and approximately $1.3 million was reported within our United States building services segment.

There were no increases in total estimated costs or reductions to anticipated contract value that had a significant impact on our operating results during each of the years ended December 31, 2021 and 2020.

Additionally, there were no significant amounts of revenue recognized during the years ended December 31, 2022 or 2021 related to performance obligations satisfied in prior periods.

During the year ended December 31, 2020, we recognized revenue of $6.1 million associated with the final settlement of contract value for two projects within our United States electrical construction and facilities services segment that were completed or substantially completed in prior periods.

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 years ended December 31, 2023, 2022, and 2021, as summarized in the following table (in thousands):

2023 2022 2021

United States electrical construction and facilities services

$ 12,535 $ 33,463 $ 4,627

United States mechanical construction and facilities services

10,864 13,679 2,264

United States building services

5,658 1,261 —

$ 29,057 $ 48,403 $ 6,891

During the year ended December 31, 2023, we recognized revenue of approximately $16.5 million 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 this amount, approximately $3.4 million was reported within our United States electrical construction and facilities services segment and approximately $13.1 million was reported within our United States mechanical construction and facilities services segment.

There were no significant amounts of revenue recognized during the years ended December 31, 2022 or 2021 related to performance obligations satisfied in prior periods.

Due to the significant judgments utilized in the estimation process described above, if subsequent actual results and/or updated assumptions, estimates, or projections related to our underlying project positions were to change from those utilized at December 31, 2023, it could result in a material impact to our results of operations.

For example, a 50 basis point increase or decrease in the estimated gross profit margin on our uncompleted construction projects, in the aggregate, as a result of a revision in estimated costs to complete a performance obligation or a revision in estimated transaction price, would have resulted in an increase or decrease to operating income of nearly $90 million for the year ended December 31, 2022.

For example, a 50 basis point increase or decrease in the estimated gross profit margin on our uncompleted construction projects, in the aggregate, as a result of a revision in estimated costs to complete a performance obligation or a revision in estimated transaction price, would have resulted in an increase or decrease to operating income of approximately $100 million for the year ended December 31, 2023.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data for further disclosure regarding revenue recognition.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional.

The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value.

A considerable amount of judgment is required when determining expected credit losses.

Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating.

Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions.

In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.

At December 31, 2022 and 2021, our accounts receivable of $2,567.4 million and $2,204.5 million, respectively, were recorded net of allowances for credit losses of $22.4 million and $23.5 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 2022.

We have adjusted our allowance for credit losses during 2022 to account for the impact of changing economic conditions, including rising interest rates.

Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received.

The provision for credit losses during 2022, 2021, and 2020 amounted to approximately $5.2 million, $8.0 million, and $3.3 million, respectively.

The decrease in the provision for credit losses for the year ended December 31, 2022, when compared to the year ended December 31, 2021, was a result of the impact, in 2021, of $5.8 million of reserves established in connection with two customer bankruptcies within our United States industrial services segment.

Such reduction was partially offset by incremental expense taken during 2022, which primarily resulted from the aforementioned change in economic conditions.

Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our allowances for credit losses.

For example, if economic conditions were to significantly deteriorate, such as to those experienced during the last global financial crisis, the portion of our allowance for credit losses, which is estimated based on our historical credit loss experience, could increase by up to approximately $12.5 million.

Insurance Liabilities

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If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims were to increase by 10%, it would have resulted in $22.0 million of additional expense for the year ended December 31, 2023.

As of December 31, 2022 and 2021, we had net deferred income tax liabilities of $61.6 million and $51.0 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets.

Included within these net deferred income tax liabilities are $211.9 million and $212.3 million of deferred income tax assets as of December 31, 2022 and 2021, respectively.

The total valuation allowance on deferred income tax assets was approximately $3.6 million and $2.5 million as of December 31, 2022 and 2021, respectively.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Based on our taxable income, which has generally exceeded the amount of our net deferred income tax asset balance, as well as current projections of future taxable income, we have determined that it is more likely than not that our net deferred income tax assets will be realized.

However, revisions to our forecasts or declining macroeconomic conditions could result in changes to our assessment of the realization of these deferred income tax assets.

Refer to Note 11 - Income Taxes of the notes to consolidated financial statements in Item 8.

Financial Statements and Supplementary Data for further detail regarding our deferred income taxes.

Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets

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Based on these impairment assessments, the fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment exceeded their carrying values by approximately $1,724.3 million, $4,411.7 million, $1,048.0 million, and $89.1 million, respectively.

As part of such annual testing, we compared the aggregate fair value of our reporting units to our market capitalization, noting that such comparison supported the reasonableness of the key assumptions utilized in determining the fair value of each of our reporting units.

In completing our annual impairment assessment, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital.

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Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, the decreases in estimated fair values described above would not have significantly impacted the results of our 2023 impairment tests.

Further, for each of our reporting units, other than our United States industrial services segment, a 10% decline in the estimated fair value of such reporting unit, due to other changes in our assumptions, including forecasted future cash flows, would not have significantly impacted the results of our impairment tests.

In the case of our United States industrial services segment, however, a 10% decrease would cause the estimated fair value of this reporting unit to approximate its carrying value.

Further, for each of our reporting units, a 10% decline in the estimated fair value of such reporting unit, due to other changes in our assumptions, including forecasted future cash flows, would not have significantly impacted the results of our 2023 impairment tests.

Identifiable Intangible Assets and Other Long-Lived Assets

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(a) a 50 basis point increase in the discount rate utilized in our testing, (b) a 50 basis point decline in the perpetual growth rate utilized in our testing, or (c) a 10% decrease in the estimated fair value of each trade name.

With respect to identifiable intangible assets that are being amortized as well as other long-lived assets, no impairment was recognized during the year ended December 31, 2022.

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 estimated to result from the use of such assets.

As a result of this test, we determined that these assets were impaired, and, during the third quarter of 2023, recognized a $2.4 million impairment charge as calculated using a discounted cash flow model.

For the year ended December 31, 2023, there were no other indicators of impairment with respect to identifiable intangible assets that are being amortized as well as other long-lived assets.

Other Considerations

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In addition, estimates of weighted average costs of capital are developed with the assistance of an independent third-party valuation specialist.

These assumptions and estimates may change in future periods.

These assumptions and estimates may change in future periods, especially in times of uncertain economic conditions and rising interest rates.

Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges, particularly with respect to our United States industrial services segment given that the fair value of this reporting unit more closely approximates its carrying value.

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Refer to Note 8 - Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets of the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data for further information about our goodwill and identifiable intangible assets as well as our impairment testing, including the $232.8 million of impairment charges recorded during the year ended December 31, 2020.

For the year ended December 31, 2021, no impairment of our goodwill, identifiable intangible assets, or other long-lived assets was recognized.

Financial Statements and Supplementary Data for further information about our goodwill and identifiable intangible assets as well as our impairment testing.

No impairment of our goodwill, identifiable intangible assets, or other long-lived assets was recognized during the years ended December 31, 2022 or 2021.

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What changed 10-K

Item 7. Management’s Discussion and Analysis