EMCOR Group, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Business Description We are one of the largest specialty contractors in the United States and a leading provider of electrical and mechanical construction and facilities services, building services, and industrial services. Our services are provided to a broad range of commercial, 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. For a more complete description of our operations, refer to Item 1. Business of our Form 10-K for the year ended December 31, 2023. Overview The following table presents selected financial data for the three months ended March 31, 2024 and 2023 (in thousands, except percentages and per share data): For the three months ended March 31, 2024 2023 Revenues $ 3,432,276 $ 2,890,432 Revenues increase from prior year 18.7 % 11.5 % Gross profit $ 589,309 $ 436,062 Gross profit as a percentage of revenues 17.2 % 15.1 % Operating income $ 259,953 $ 154,910 Operating income as a percentage of revenues 7.6 % 5.4 % Net income $ 197,149 $ 111,473 Diluted earnings per common share $ 4.17 $ 2.32 Revenues of $3.43 billion for the quarter ended March 31, 2024 set a new first quarter record for the Company and represent an increase of 18.7% from revenues of $2.89 billion for the quarter ended March 31, 2023. 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. Revenues for the first quarter of 2024 included incremental acquisition contribution of approximately $7.9 million. Operating income for the quarter ended March 31, 2024 was $260.0 million, or 7.6% of revenues, establishing new first quarter records for the Company with respect to both operating income and operating margin. This compares to operating income of $154.9 million, or 5.4% of revenues, for the quarter ended March 31, 2023. The $105.0 million increase in operating income, and corresponding 220 basis point expansion in operating margin, were predominantly a result of improved operating performance within our United States construction segments, as described in further detail below. Net income of $197.1 million, or $4.17 per diluted share, for the quarter ended March 31, 2024, compares favorably to net income of $111.5 million, or $2.32 per diluted share, for the quarter ended March 31, 2023. While the majority of the increase in our diluted earnings per share was a result of the increased operating income referenced above, diluted earnings per share for the quarter ended March 31, 2024 additionally benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 2023 and the first quarter of 2024. 23 Table of Contents Impact of Acquisitions In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses, and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period. For further discussion regarding our acquisitions, refer to Note 4 - Acquisitions of Businesses of the notes to consolidated financial statements. We acquired eight companies during calendar year 2023 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. Results of Operations Revenues The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages): For the three months ended March 31, 2024 % of Total 2023 % of Total Revenues: United States electrical construction and facilities services $ 764,711 22 % $ 644,746 22 % United States mechanical construction and facilities services 1,427,665 42 % 1,078,558 38 % United States building services 781,160 23 % 725,375 25 % United States industrial services 354,053 10 % 330,883 11 % Total United States operations 3,327,589 97 % 2,779,562 96 % United Kingdom building services 104,687 3 % 110,870 4 % Total operations $ 3,432,276 100 % $ 2,890,432 100 % As described below in more detail, as a result of revenue growth within the majority of our reportable segments, our consolidated revenues for the first quarter of 2024 increased to $3.43 billion compared to $2.89 billion for the first quarter of 2023. Revenues of our United States electrical construction and facilities services segment were $764.7 million for the three months ended March 31, 2024 compared to revenues of $644.7 million for the three months ended March 31, 2023. The $120.0 million increase in this segment’s revenues was primarily a result of revenue growth within the network and communications market sector, predominantly due to our data center projects. Increased demand for cloud computing, data storage, and the emergence of artificial intelligence has resulted in a greater number of construction project opportunities for us in several of the geographies in which we operate. Our United States mechanical construction and facilities services segment revenues for the three months ended March 31, 2024 were $1,427.7 million, a $349.1 million increase compared to revenues of $1,078.6 million for the three months ended March 31, 2023. The increase in this segment’s revenues was attributable to revenue growth within the majority of the market sectors in which we operate, most notably including: (a) the high-tech manufacturing market sector, as a result of stronger 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 manufacturing and industrial market sector, due to continued re-shoring of critical supply chain by certain of our customers as well as an increase in food processing project revenue, (c) the institutional market sector, given several public sector projects which were active during the first quarter of 2024, and (d) the network and communications market sector, due to increased data center project activity as this segment benefited from the same market demand described above within our United States electrical construction and facilities services segment. In addition, revenues of this segment were positively impacted by greater levels of short duration projects and service work. 24 Table of Contents Revenues of our United States building services segment were $781.2 million for the three months ended March 31, 2024 compared to revenues of $725.4 million for the three months ended March 31, 2023. Included in this segment’s results for the first quarter of 2024 were $7.9 million of incremental acquisition revenues. Excluding such acquisition contribution, the $47.9 million increase in revenues was primarily attributable to this segment’s 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 period, which experienced greater supply chain disruptions and delays, and (ii) demand for system upgrades and replacements, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, (b) service repair and maintenance volumes, given growth in our service contract base, and (c) building automation and controls projects, as we continue to expand our service offerings. Revenues of our United States industrial services segment for the three months ended March 31, 2024 were $354.1 million compared to revenues of $330.9 million for the three months ended March 31, 2023. This $23.2 million increase was largely driven by this segment’s field services division due to: (a) greater turnaround project demand, including scope growth on certain projects that were active in the first quarter of 2024, and (b) an increase in renewable fuel project revenues. Our United Kingdom building services segment revenues were $104.7 million for the three months ended March 31, 2024 compared to revenues of $110.9 million for the three months ended March 31, 2023. The decrease in this segment’s revenues was 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. Partially offsetting these decreases was the impact of favorable exchange rate movements for the British pound versus the United States dollar, which positively impacted this segment’s revenues by $4.4 million during the first quarter of 2024. Cost of sales and gross profit The following table presents our cost of sales, gross profit (revenues less cost of sales), and gross profit as a percentage of revenues (“gross profit margin”) (in thousands, except for percentages): For the three months ended March 31, 2024 2023 Cost of sales $ 2,842,967 $ 2,454,370 Gross profit $ 589,309 $ 436,062 Gross profit margin 17.2 % 15.1 % Our gross profit for the three months ended March 31, 2024 was $589.3 million, or 17.2% of revenues, compared to gross profit of $436.1 million, or 15.1% of revenues, for the three months ended March 31, 2023. The increase in gross profit and the expansion in gross profit margin were the result of stronger operating performance within the majority of our reportable segments due to an improved revenue mix, excellent project execution, and/or favorable pricing. Our gross profit for the first quarter of 2024 included incremental acquisition contribution of $1.8 million. Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments. Selling, general and administrative expenses The following table presents our selling, general and administrative expenses (“SG&A”) and selling, general and administrative expenses as a percentage of revenues (“SG&A margin”) (in thousands, except for percentages): For the three months ended March 31, 2024 2023 Selling, general and administrative expenses $ 329,356 $ 281,152 SG&A margin 9.6 % 9.7 % Our selling, general and administrative expenses for the three months ended March 31, 2024 were $329.4 million, or 9.6% of revenues, compared to selling, general and administrative expenses of $281.2 million, or 9.7% of revenues, for the three months ended March 31, 2023. Selling, general and administrative expenses for the first quarter of 2024 included $3.0 million of incremental expenses directly related to companies acquired in 2023, including amortization expense attributable to identifiable intangible assets of $1.0 million. 25 Table of Contents Excluding incremental expenses from businesses acquired, the increase in selling, general and administrative expenses period-over-period was predominantly attributable to increases in: (a) salaries and related employment expenses, largely as a result of additional headcount to support our organic revenue growth as well as annual cost of living adjustments, (b) incentive compensation expense across the majority of our reportable segments, due to higher projected annual operating results, and (c) the provision for credit losses, primarily due to a reserve taken for a specific customer bankruptcy within our United States building services segment. Operating income (loss) The following table presents our operating income (loss) and operating income (loss) as a percentage of segment revenues (“operating margin”) (in thousands, except for percentages): For the three months ended March 31, 2024 % of Segment Revenues 2023 % of Segment Revenues Operating income (loss): United States electrical construction and facilities services $ 91,589 12.0 % $ 40,516 6.3 % United States mechanical construction and facilities services 150,720 10.6 % 86,227 8.0 % United States building services 33,459 4.3 % 37,650 5.2 % United States industrial services 17,966 5.1 % 15,020 4.5 % Total United States operations 293,734 8.8 % 179,413 6.5 % United Kingdom building services 5,377 5.1 % 5,424 4.9 % Corporate administration (39,158) — (29,927) — Total operations 259,953 7.6 % 154,910 5.4 % Other items: Net periodic pension income (cost) 222 (274) Interest income (expense), net 7,541 (1,832) Income before income taxes $ 267,716 $ 152,804 Operating income for the three months ended March 31, 2024 was $260.0 million, an increase of $105.0 million compared to operating income of $154.9 million for the three months ended March 31, 2023. Operating margin for the three months ended March 31, 2024 was 7.6% compared to an operating margin of 5.4% for the three months ended March 31, 2023. As described in more detail below, this increase in profitability was predominantly a result of improved operating performance within our United States construction segments, due to a more favorable mix of work and better project execution, including enhanced productivity, due in part to investments in virtual design and construction, prefabrication, and automation. Operating income of our United States electrical construction and facilities services segment was $91.6 million, or 12.0% of revenues, for the three months ended March 31, 2024, compared to $40.5 million, or 6.3% of revenues, for the three months ended March 31, 2023. The $51.1 million increase in operating income and the 570 basis point improvement in operating margin of this segment were largely a result of greater gross profit and gross profit margin from projects within the majority of the market sectors in which we operate, due to both an increase in quarterly revenues as well as a more favorable mix of work. The most notable increases in gross profit were experienced within the network and communications market sector, the commercial market sector, and the manufacturing and industrial market sector. Our United States mechanical construction and facilities services segment’s operating income for the three months ended March 31, 2024 was $150.7 million, or 10.6% of revenues, compared to operating income of $86.2 million, or 8.0% of revenues, for the three months ended March 31, 2023. The $64.5 million increase in operating income and the 260 basis point improvement in operating margin of this segment were 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, and (b) the commercial market sector, including various fire protection projects. While the most significant increases in gross profit were seen within the above referenced market sectors, this segment also experienced increases in gross profit within the majority of the other market sectors in which we operate. In addition to the increases in gross profit margin referenced above, operating margin of each of our United States construction segments 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. 26 Table of Contents Operating income of our United States building services segment was $33.5 million, or 4.3% of revenues, for the three months ended March 31, 2024 compared to $37.7 million, or 5.2% of revenues, for the three months ended March 31, 2023. The operating results of this segment for the first quarter of 2024 were positively impacted by increased gross profit and gross profit margin, primarily from continued strength in its mechanical services division, including greater profitability from HVAC projects and retrofits. However, operating income and operating margin decreased when compared to the same prior year period, due to an $11.0 million reserve taken within this segment’s commercial site-based services division for a specific customer bankruptcy, which negatively impacted the operating margin of this segment by 140 basis points for the three months ended March 31, 2024. Our United States industrial services segment reported operating income of $18.0 million, or 5.1% of revenues, for the three months ended March 31, 2024 compared to operating income of $15.0 million, or 4.5% of revenues, for the three months ended March 31, 2023. In addition to a slight increase in gross profit margin period-over-period, this segment benefited from greater overhead absorption given the previously referenced increase in quarterly revenues. For the three months ended March 31, 2024 and 2023, operating income of our United Kingdom building services segment was essentially flat at $5.4 million for each period and operating margin was 5.1% and 4.9%, respectively. Despite the reduction in quarterly segment revenues discussed above, we continue to optimize our project and service mix while seeking to more effectively leverage the overhead cost structure of this segment, resulting in the modest improvement in operating margin period-over-period. Operating income of this segment for the first quarter of 2024 was positively impacted by $0.2 million related to the effect of favorable exchange rate movements for the British pound versus the United States dollar. Our corporate administration expenses for the three months ended March 31, 2024 were $39.2 million compared to $29.9 million for the three months ended March 31, 2023. This increase in corporate expenses was primarily due to greater employment compensation costs, including certain severance expenses as well as an increase in share-based compensation expense. In addition to the above, we have experienced an increase in computer hardware and software costs, due to various information technology and cybersecurity initiatives currently in process. Other items As a result of an increase in our average daily invested cash balance, coupled with the repayment, in December of 2023, of all previously outstanding borrowings under our credit facility, we generated net interest income for the three months ended March 31, 2024 of $7.5 million compared to net interest expense of $1.8 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, our income tax provision was $70.6 million compared to an income tax provision of $41.3 million for the three months ended March 31, 2023. Our effective income tax rate for the three months ended March 31, 2024 was 26.4% compared to an effective income tax rate for the three months ended March 31, 2023 of 27.0%. Refer to Note 9 - Income Taxes of the notes to consolidated financial statements for further discussion regarding our income tax provision and effective income tax rate. Remaining Unsatisfied Performance Obligations The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages): March 31, 2024 % of Total December 31, 2023 % of Total March 31, 2023 % of Total Remaining performance obligations: United States electrical construction and facilities services $ 2,551,430 28 % $ 2,387,844 27 % $ 2,050,956 26 % United States mechanical construction and facilities services 4,997,257 54 % 4,940,519 56 % 4,295,524 54 % United States building services 1,351,585 15 % 1,264,818 14 % 1,254,787 16 % United States industrial services 111,935 1 % 113,291 1 % 131,759 2 % Total United States operations 9,012,207 98 % 8,706,472 98 % 7,733,026 98 % United Kingdom building services 163,145 2 % 140,949 2 % 140,117 2 % Total operations $ 9,175,352 100 % $ 8,847,421 100 % $ 7,873,143 100 % 27 Table of Contents Our remaining performance obligations at March 31, 2024 were $9.18 billion compared to $8.85 billion at December 31, 2023 and $7.87 billion at March 31, 2023. The increase in remaining performance obligations at March 31, 2024, when compared to December 31, 2023, was attributable to an increase in remaining performance obligations within all of our reportable segments, except for our United States industrial services segment, which experienced a slight decrease in remaining performance obligations period-over-period. From a market sector perspective, we experienced the largest growth in our remaining performance obligations within the network and communications market sector, driven by data center construction projects. In addition to the network and communications market sector, the increase in our remaining performance obligations was due to continued strength in the following market sectors: (a) institutional, (b) healthcare, (c) manufacturing and industrial, (d) transportation, and (e) hospitality and entertainment. These increases were partially offset by a reduction in remaining performance obligations from the commercial market sector, 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 for further disclosure regarding our remaining performance obligations. Liquidity and Capital Resources The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash. We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on 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. Management monitors financial markets and overall economic conditions for factors that may affect our liquidity and capital resources and adjusts our capital allocation strategy as necessary. Negative macroeconomic trends could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms, an increase in credit losses, or significant increases in the price of commodities or the materials and equipment utilized for our project and service work, beyond those experienced to date. In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Our liquidity is also impacted by: (a) the type and length of construction contracts in place, as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within our United States industrial services segment, as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within our United States and United Kingdom building services segments. While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers. As of March 31, 2024, we had cash and cash equivalents, excluding restricted cash, of $841.0 million, which are maintained in depository accounts and highly liquid investments with original maturity dates of three months or less. Both our short-term and long-term liquidity requirements are expected to be met through our cash and cash equivalent balances, cash generated from our operations, and, as necessary, the borrowing capacity under our revolving credit facility. Our credit agreement provides for a $1.30 billion revolving credit facility, for which there is $1.21 billion of available capacity as of March 31, 2024. Refer to Note 7 - Debt of the notes to consolidated financial statements for further information regarding our credit agreement. Based upon our current credit rating and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives; however, no assurances can be made that such debt financing will be available on favorable terms. We believe that we have sufficient financial resources available to meet our short-term and foreseeable long-term liquidity requirements. 28 Table of Contents Cash Flows The following table presents a summary of our operating, investing, and financing cash flows (in thousands): For the three months ended March 31, 2024 2023 Net cash provided by (used in) operating activities $ 132,264 $ (84,583) Net cash used in investing activities $ (19,439) $ (25,405) Net cash (used in) provided by financing activities $ (58,948) $ 71,506 Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ (1,140) $ 2,239 Increase (decrease) in cash, cash equivalents, and restricted cash $ 52,737 $ (36,243) During the three months ended March 31, 2024, our cash balance, including cash equivalents and restricted cash, increased by approximately $52.7 million from $789.8 million at December 31, 2023 to $842.5 million at March 31, 2024. Changes in our cash position from December 31, 2023 to March 31, 2024 are described in further detail below. Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by operating activities for the three months ended March 31, 2024 was approximately $132.3 million compared to approximately $84.6 million of net cash used in operating activities for the three months ended March 31, 2023. In addition to the increase in our income, the favorable operating cash flow performance period-over-period was largely a result of the timing of cash receipts from our customers and payments to our vendors as we continue to effectively manage our working capital. Investing Activities – Investing cash flows consist primarily of payments for acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment. Net cash used in investing activities for the three months ended March 31, 2024 decreased by approximately $6.0 million compared to the three months ended March 31, 2023, primarily due to a decrease in payments for acquired businesses, partially offset by a reduction in proceeds from the sale or disposal of property, plant, and equipment. Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payments of dividends to stockholders, and the issuance of common stock through certain equity plans. Net cash used in financing activities for the three months ended March 31, 2024 was $58.9 million compared to net cash provided by financing activities for the three months ended March 31, 2023 of $71.5 million. The $130.5 million variance was primarily due to: (a) the impact in the first quarter of 2023 of $100.0 million of proceeds from our revolving credit facility and (b) a $23.0 million increase in common stock repurchases made by us during the first quarter of 2024. The timing of common stock repurchases is at management’s discretion subject to securities laws and other legal requirements and depends upon several factors, including market and business conditions, current and anticipated future liquidity, share price, and share availability, among others. For additional detail regarding our share repurchase program, refer to Note 10 - Common Stock of the notes to consolidated financial statements. We currently pay a regular quarterly dividend, which, commencing with the dividend to be paid on April 30, 2024, will increase from $0.18 per share to $0.25 per share. For the three months ended March 31, 2024 and 2023, cash payments related to dividends were $8.5 million and $7.2 million, respectively. Our credit agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay such quarterly dividends for the foreseeable future. Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash – We are exposed to fluctuations in foreign currency exchange rates, almost entirely with respect to the British pound. Therefore, the $3.4 million variance between the three months ended March 31, 2024 and 2023 was a direct result of exchange rate movements for the British pound versus the United States dollar. Material Cash Requirements from Contractual and Other Obligations As of March 31, 2024, our short-term and long-term material cash requirements for known contractual and other obligations were as follows: Outstanding Debt and Interest Payments – As of March 31, 2024, 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 7 - Debt of the notes to consolidated financial statements for further detail of our debt obligations, including our revolving credit facility. 29 Table of Contents Operating and Finance Leases – In the normal course of business, we lease real estate, vehicles, and equipment under various arrangements which are classified as either operating or finance leases. Future payments for such leases, excluding leases with initial terms of one year or less, were $394.2 million at March 31, 2024, with $91.0 million payable within the next 12 months. Open Purchase Obligations – As of March 31, 2024, we had $2.30 billion of open purchase obligations, of which payments totaling approximately $1.92 billion are expected to become due within the next 12 months. These obligations represent open purchase orders to suppliers and subcontractors related to our construction and services contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and are not expected to impact future liquidity as amounts should be recovered through customer billings. Insurance Obligations – As described in further detail in Note 12 - Commitments and Contingencies of the notes to consolidated financial statements, we have loss payment deductibles and/or self-insured retentions for certain insurance matters. As of March 31, 2024, our insurance liabilities, net of estimated recoveries, were $225.4 million. Of this net amount, approximately $40.1 million is estimated to be payable within the next 12 months. Due to many uncertainties inherent in resolving these matters, it is not practical to estimate these payments beyond such period. To the extent that the amount required to settle claims covered by insurance continues to increase, the cost of our insurance coverage, including premiums and deductibles, is likely to increase. Contingent Consideration Liabilities – We have incurred liabilities related to contingent consideration arrangements associated with certain acquisitions, payable in the event discrete performance objectives are achieved by the acquired businesses during designated post-acquisition periods. The aggregate amount of these liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, changes in the fair value of amounts owed based on performance during such post-acquisition periods, and accretion in present value. As of March 31, 2024, the present value of expected future payments relating to these contingent consideration arrangements was $8.5 million. Of this amount, $5.0 million is estimated as being payable within the next 12 months, with the remainder due before the end of 2025. In addition, material cash requirements for other potential obligations, for which we cannot reasonably estimate future payments, include the following: Legal Proceedings – We are involved in several legal proceedings in which damages and claims have been asserted against us. While litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance, we do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. Refer to Note 12 - Commitments and Contingencies of the notes to consolidated financial statements for more information regarding legal proceedings. Multiemployer Benefit Plans – In addition to our Company sponsored benefit plans, we participate in certain multiemployer pension and other post-retirement plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining agreements. Our future contributions to the multiemployer plans are dependent upon a number of factors. Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated. Off-Balance Sheet Arrangements and Other Commercial Commitments The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts. These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf. As of March 31, 2024, 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 $2.2 billion, which represents approximately 24% of our total remaining performance obligations. Surety bonds expire at various times ranging from final completion of a project to a period extending beyond contract completion in certain circumstances. Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity. For example, public sector contracts require surety bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. Our estimated maximum exposure as it relates to the value of the surety bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a surety bond generally extinguishes concurrently with the expiration of its related contractual obligation. 30 Table of Contents Surety bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees. In addition, surety bonds or letters of credit may be issued as collateral for certain insurance obligations. As of March 31, 2024, we satisfied approximately $48.1 million and $71.1 million of the collateral requirements of our insurance programs by utilizing surety bonds and letters of credit, respectively. All such letters of credit were issued under our revolving credit facility, therefore reducing the available capacity of such facility. We are not aware of any losses in connection with surety bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future. From time to time, we discuss with our current and other surety bond providers the amounts of surety bonds that may be available to us based on our financial strength and the absence of any default by us on any surety bond issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may: (a) seek to satisfy certain customer requests for surety bonds by posting other forms of collateral in lieu of surety bonds, such as letters of credit, parent company guarantees, or cash, in order to convince customers to forego the requirement for surety bonds, (b) increase our activities in our businesses that rarely require surety bonds, and/or (c) refrain from bidding for certain projects that require surety bonds. There can be no assurance that we would be able to effectuate alternatives to providing surety bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require surety bonds. Accordingly, a reduction in the availability of surety bonds could have a material adverse effect on our financial position, results of operations, and/or cash flows. In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees. We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein. New Accounting Pronouncements We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - New Accounting Pronouncements of the notes to consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements is based on the application of significant accounting policies, which require management to make estimates and assumptions. Our significant accounting policies are described further in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2023. We base our estimates on historical experience, known or expected trends, third-party valuations, and various other assumptions that we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. There have been no significant changes to our critical accounting policies or methods during the three months ended March 31, 2024. 31 Table of Contents