Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$358,818$363,907
Accounts receivable, less allowance for doubtful accounts of $14,466 and $15,361, respectively2,030,8131,773,620
Contract assets177,830158,243
Inventories40,44642,321
Prepaid expenses and other51,97648,116
Total current assets2,659,8832,386,207
Property, plant and equipment, net156,187134,351
Operating lease right-of-use assets245,471—
Goodwill1,063,911990,887
Identifiable intangible assets, net611,444488,286
Other assets93,46289,076
Total assets$4,830,358$4,088,807
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt and finance lease liabilities$18,092$16,013
Accounts payable665,402652,091
Contract liabilities623,642552,290
Accrued payroll and benefits382,573343,069
Other accrued expenses and liabilities195,757170,935
Operating lease liabilities, current53,144—
Total current liabilities1,938,6101,734,398
Borrowings under revolving credit facility50,00025,000
Long-term debt and finance lease liabilities244,139254,764
Operating lease liabilities, long-term204,950—
Other long-term obligations334,879333,204
Total liabilities2,772,5782,347,366
Equity:
EMCOR Group, Inc. stockholders’ equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding——
Common stock, $0.01 par value, 200,000,000 shares authorized, 60,359,252 and 60,123,184 shares issued, respectively604601
Capital surplus32,27421,103
Accumulated other comprehensive loss(89,288)(87,662)
Retained earnings2,367,4812,060,440
Treasury stock, at cost 4,139,421 shares(253,937)(253,937)
Total EMCOR Group, Inc. stockholders’ equity2,057,1341,740,545
Noncontrolling interests646896
Total equity2,057,7801,741,441
Total liabilities and equity$4,830,358$4,088,807

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31,

(In thousands, except per share data)

201920182017
Revenues$9,174,611$8,130,631$7,686,999
Cost of sales7,818,7436,925,1786,539,987
Gross profit1,355,8681,205,4531,147,012
Selling, general and administrative expenses893,453799,157758,714
Restructuring expenses1,5232,3061,577
Impairment loss on goodwill and identifiable intangible assets—90757,819
Operating income460,892403,083328,902
Net periodic pension (cost) income1,5532,7431,652
Interest expense(13,821)(13,544)(12,770)
Interest income2,2652,746965
Income from continuing operations before income taxes450,889395,028318,749
Income tax provision125,749109,10690,699
Income from continuing operations325,140285,922228,050
Loss from discontinued operation, net of income taxes—(2,345)(857)
Net income including noncontrolling interests325,140283,577227,193
Less: Net (income) loss attributable to noncontrolling interests—(46)3
Net income attributable to EMCOR Group, Inc.$325,140$283,531$227,196
Basic earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders$5.78$4.92$3.85
From discontinued operation—(0.04)(0.01)
Net income attributable to EMCOR Group, Inc. common stockholders$5.78$4.88$3.84
Diluted earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders$5.75$4.89$3.83
From discontinued operation—(0.04)(0.01)
Net income attributable to EMCOR Group, Inc. common stockholders$5.75$4.85$3.82
Dividends declared per common share$0.32$0.32$0.32

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For The Years Ended December 31,

(In thousands)

201920182017
Net income including noncontrolling interests$325,140$283,577$227,193
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments1,689(1,322)(1,384)
Changes in post retirement plans (1)(3,315)7,8608,887
Other comprehensive (loss) income(1,626)6,5387,503
Comprehensive income323,514290,115234,696
Less: Comprehensive (income) loss attributable to noncontrolling interests—(46)3
Comprehensive income attributable to EMCOR Group, Inc.$323,514$290,069$234,699
(1)Net of tax benefit (provision) of $0.7 million, $(2.1) million, and $(1.8) million for the years ended December 31, 2019, 2018, and 2017, respectively.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31,

(In thousands)

201920182017
Cash flows - operating activities:
Net income including noncontrolling interests$325,140$283,577$227,193
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization43,94538,47239,915
Amortization of identifiable intangible assets48,14242,44348,594
Provision for doubtful accounts2,6282,1237,264
Deferred income taxes1,7014,249(53,358)
Gain on sale or disposal of property, plant and equipment(3,981)(517)(1,846)
Excess tax benefits from share-based compensation(984)(1,646)(1,616)
Equity loss (income) from unconsolidated entities2,990(347)(864)
Non-cash expense for amortization of debt issuance costs1,1861,1861,186
Non-cash expense from contingent consideration arrangements1,373186317
Non-cash expense for impairment of goodwill and identifiable intangible assets—90757,819
Non-cash share-based compensation expense11,38611,0309,939
Non-cash income from changes in unrecognized tax benefits—(72)(5,641)
Distributions from unconsolidated entities1,0743,1105,506
Changes in operating assets and liabilities, excluding the effect of businesses acquired:
Increase in accounts receivable(135,954)(146,101)(80,514)
Decrease (increase) in inventories4,345(3,915)(4,936)
(Increase) decrease in contract assets(10,111)(30,935)12,433
(Decrease) increase in accounts payable(33,971)78,55454,910
Increase in contract liabilities51,31020,72624,695
Increase (decrease) in accrued payroll and benefits and other accrued expenses and liabilities49,551(24,715)24,017
Changes in other assets and liabilities, net(4,070)(7,304)1,036
Net cash provided by operating activities355,700271,011366,049
Cash flows - investing activities:
Payments for acquisitions of businesses, net of cash acquired(300,980)(72,080)(107,223)
Proceeds from sale or disposal of property, plant and equipment5,4871,2374,014
Purchase of property, plant and equipment(48,432)(43,479)(34,684)
Investments in and advances to unconsolidated entities(2,252)(3,484)(675)
Distributions from unconsolidated entities83884475
Net cash used in investing activities(345,339)(117,722)(138,093)
Cash flows - financing activities:
Proceeds from revolving credit facility50,000——
Repayments of revolving credit facility(25,000)—(100,000)
Repayments of long-term debt(15,198)(15,235)(15,202)
Repayments of finance lease liabilities(4,571)(1,501)(1,445)
Dividends paid to stockholders(17,950)(18,640)(18,971)
Repurchase of common stock—(216,244)(93,166)
Taxes paid related to net share settlements of equity awards(6,451)(3,848)(3,462)
Issuance of common stock under employee stock purchase plan6,0905,7654,793
Payments for contingent consideration arrangements(5,917)(3,339)(1,017)
Distributions to noncontrolling interests(250)——
Net cash used in financing activities(19,247)(253,042)(228,470)
Effect of exchange rate changes on cash, cash equivalents and restricted cash2,592(3,421)3,242
(Decrease) increase in cash, cash equivalents and restricted cash(6,294)(103,174)2,728
Cash, cash equivalents and restricted cash at beginning of year (1)366,214469,388466,660
Cash, cash equivalents and restricted cash at end of period (1)$359,920$366,214$469,388
(1)Includes $1.1 million, $2.3 million, $2.0 million and $2.0 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheet as of December 31, 2019, 2018, 2017 and 2016, respectively.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

For The Years Ended December 31,

(In thousands)

EMCOR Group, Inc. Stockholders
TotalCommon stockCapital surplusAccumulated other comprehensive (loss) income (1)Retained earningsTreasury stockNoncontrolling interests
Balance, December 31, 2016$1,537,942$606$52,219$(101,703)$1,596,269$(10,302)$853
Net income including noncontrolling interests227,193———227,196—(3)
Other comprehensive income7,503——7,503———
Common stock issued under share-based compensation plans12(1)————
Tax withholding for common stock issued under share-based compensation plans(3,462)—(3,462)————
Common stock issued under employee stock purchase plan4,79314,792————
Common stock dividends(18,971)—164—(19,135)——
Repurchase of common stock (2)(90,821)(10)(55,646)—(7,774)(27,391)—
Share-based compensation expense9,939—9,939————
Balance, December 31, 2017$1,674,117$599$8,005$(94,200)$1,796,556$(37,693)$850
Net income including noncontrolling interests283,577———283,531—46
Other comprehensive income6,538——6,538———
Cumulative-effect adjustment (3)(854)———(854)——
Common stock issued under share-based compensation plans—1(1)————
Tax withholding for common stock issued under share-based compensation plans(3,848)—(3,848)————
Common stock issued under employee stock purchase plan5,76515,764————
Common stock dividends(18,640)—153—(18,793)——
Repurchase of common stock (2)(216,244)————(216,244)—
Share-based compensation expense11,030—11,030————
Balance, December 31, 2018$1,741,441$601$21,103$(87,662)$2,060,440$(253,937)$896
Net income including noncontrolling interests325,140———325,140——
Other comprehensive loss(1,626)——(1,626)———
Common stock issued under share-based compensation plans—3(3)————
Tax withholding for common stock issued under share-based compensation plans(6,451)—(6,451)————
Common stock issued under employee stock purchase plan6,090—6,090————
Common stock dividends(17,950)—149—(18,099)——
Distributions to noncontrolling interests(250)—————(250)
Share-based compensation expense11,386—11,386————
Balance, December 31, 2019$2,057,780$604$32,274$(89,288)$2,367,481$(253,937)$646
(1)Represents cumulative foreign currency translation and post retirement liability adjustments of $0.8 million and $(90.1) million, respectively, as of December 31, 2019, $(0.9) million and $(86.8) million, respectively, as of December 31, 2018, and $0.5 million and $(94.7) million, respectively, as of December 31, 2017.
(2)Beginning June 1, 2017, shares of common stock repurchased are held as treasury stock by the Company.
(3)Represents adjustment to retained earnings upon the adoption of Accounting Standards Codification Topic 606.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise.

We are one of the largest electrical and mechanical construction and facilities services firms in the United States. In addition, we provide a number of building services and industrial services. We specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance and management of facilities, including refineries and petrochemical plants.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and joint ventures. Significant intercompany accounts and transactions have been eliminated. All investments over which we exercise significant influence, but do not control (a 20% to 50% ownership interest), are accounted for using the equity method of accounting. For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.

The results of operations of companies acquired have been included in the results of operations from the date of the respective acquisition.

Principles of Preparation

The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services and our United States industrial services segments due to changes in our internal reporting structure.

During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.

Revenue Recognition

The Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018. In accordance with ASC 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Refer to Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements for additional information.

For the periods presented prior to the adoption of ASC 606, revenues from long-term construction contracts were recognized in accordance with ASC Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” Revenues from the performance of services for maintenance, repair and retrofit work were recognized consistent with the performance of the services, generally on a pro-rata basis over the life of the contractual arrangement. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers were recognized when the product was shipped and all other revenue recognition criteria were met.

Cash and cash equivalents

For purposes of the consolidated financial statements, we consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. We maintain a centralized cash management system whereby our excess cash balances are invested in high quality, short-term money market instruments, which are considered cash equivalents. We have cash balances in certain of our domestic bank accounts that exceed federally insured limits.

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts. This allowance is based upon the best estimate of the probable losses in existing accounts receivable. The Company determines the allowances based upon individual accounts when information indicates the customers may have an inability to meet their financial obligations, as well as historical collection and write-off experience. These amounts are re-evaluated and adjusted on a regular basis as additional information is received. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful. At December 31, 2019 and 2018, our accounts receivable of $2,030.8 million and $1,773.6 million, respectively, were recorded net of allowances for doubtful accounts of $14.5 million and $15.4 million, respectively. The provision for doubtful accounts during 2019, 2018, and 2017 amounted to approximately $2.6 million, $2.1 million, and $7.3 million, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined principally using the average cost method.

Property, plant and equipment

Property, plant and equipment is stated at cost. Depreciation, including amortization of assets under finance leases, is recorded principally using the straight-line method over estimated useful lives of 3 to 10 years for machinery and equipment, 3 to 7 years for vehicles, furniture and fixtures and computer hardware/software, and 25 years for buildings. Leasehold improvements are amortized over the shorter of the remaining life of the lease term or the expected useful life of the improvement.

The carrying values of property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. In performing this review for recoverability, property, plant and equipment is assessed for possible impairment by comparing their carrying values to their undiscounted net pre-tax cash flows expected to result from the use of the asset. Impaired assets are written down to their fair values, generally determined based on their estimated future discounted cash flows. Based on the results of our testing for the years ended December 31, 2019, 2018, and 2017, no impairment of property, plant and equipment was recognized.

Goodwill and Identifiable Intangible Assets

Goodwill and other identifiable intangible assets with indefinite lives that are not being amortized, such as trade names, are tested at least annually for impairment (which we test each October 1, absent any earlier identified impairment indicators) and are written down if impaired. Identifiable intangible assets with finite lives are amortized over their useful lives and are reviewed for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable. See Note 9 - Goodwill and Identifiable Intangible Assets of the notes to consolidated financial statements for additional information.

Insurance Liabilities

Insurance liabilities for automobile liability, workers’ compensation and general liability claims are determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. At December 31, 2019 and 2018, the estimated current portion of such undiscounted insurance liabilities of $48.3 million and $44.6 million, respectively, were included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets. The estimated non-current portion of such undiscounted insurance liabilities included in “Other long-term obligations” at December 31, 2019 and 2018 were $186.0 million and $179.1 million, respectively. The current portion of anticipated insurance recoveries of $13.8 million and $12.6 million at December 31, 2019 and 2018, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $50.9 million and $49.3 million at December 31, 2019 and 2018, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets.

Foreign Operations

The financial statements and transactions of our foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars in accordance with Accounting Standards Codification Topic 830, “Foreign Currency Matters.” Translation adjustments have been recorded as “Accumulated other comprehensive loss,” a separate component of “Equity.”

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Income Taxes

We account for income taxes in accordance with the provisions of Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”). ASC 740 requires an asset and liability approach which requires the recognition of deferred income tax assets and deferred income tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized.

We account for uncertain tax positions in accordance with the provisions of ASC 740. We recognize accruals of interest related to unrecognized tax benefits as a component of the income tax provision.

Valuation of Share-Based Compensation Plans

We have various types of share-based compensation plans and programs, which are administered by our Board of Directors or its Compensation and Personnel Committee. See Note 14 - Share-Based Compensation Plans of the notes to consolidated financial statements for additional information regarding the share-based compensation plans and programs.

We account for share-based payments in accordance with the provisions of Accounting Standards Codification Topic 718, “Compensation-Stock Compensation” (“ASC 718”). ASC 718 requires that all share-based payments issued to acquire goods or services, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Compensation expense related to share-based awards is recognized over the requisite service period, which is generally the vesting period. For shares subject to graded vesting, our policy is to apply the straight-line method in recognizing compensation expense. ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be recognized in the Consolidated Statements of Operations when the underlying awards vest or are settled.

New Accounting Pronouncements

On January 1, 2019, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”) to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases continue to be recognized in a manner similar to previous accounting guidance. We adopted this pronouncement utilizing the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. The adoption of this accounting pronouncement resulted in the recognition of operating lease right-of-use assets and associated lease liabilities on our balance sheet of $220.2 million and $227.1 million, respectively, as of January 1, 2019. Additional required disclosures have been included within Note 17 - Leases of the notes to consolidated financial statements. Such adoption did not have an impact on our liquidity, results of operations or our compliance with the various covenants contained within our 2016 Credit Agreement as described in further detail within Note 10 - Debt of the notes to consolidated financial statements.

On January 1, 2019, we adopted the accounting pronouncement issued by the FASB related to the reporting of certain items in accumulated other comprehensive income (loss) (“AOCI”). This guidance provides entities the option to reclassify to retained earnings certain tax effects stranded in AOCI as a result of tax reform. As part of our adoption of this accounting pronouncement, we elected not to reclassify the stranded tax effects related to the retirement plans of our United States subsidiaries as such amounts are immaterial. Tax effects remaining in AOCI will be released upon liquidation of each individual retirement plan.

In June 2016, an accounting pronouncement was issued by the FASB which changes the way in which entities estimate and present credit losses for most financial assets, including accounts receivable. This pronouncement is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In preparation for adoption, we have substantially completed a process to identify and group financial assets with similar characteristics into collective pools. We have additionally begun implementing processes and internal controls to identify information, including macroeconomic forecasts and key credit indicators, relevant to estimating expected credit losses. As a result of the procedures performed to date, we do not anticipate that the adoption of this pronouncement will have a material impact on our financial position and/or results of operations.

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

In December 2019, an accounting pronouncement was issued by the FASB which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to intraperiod tax allocations and the methodology for calculating income taxes in an interim period. The guidance also simplifies aspects of the accounting for franchise taxes as well as enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The pronouncement is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Certain aspects of this standard must be applied retrospectively while other aspects are to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company intends to adopt this accounting pronouncement on January 1, 2021, and we are currently evaluating the potential impact on our financial position and/or results of operations.

NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by applying the following five step model:

(1) Identify the contract with a customer

A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectibility of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectibility of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer.

(2) Identify the performance obligations in the contract

At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.

In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry.

Our contracts are often modified through change orders to account for changes in the scope and price of the goods or services we are providing. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of our change orders are for goods or services that are not distinct within the context of our original contract, and therefore, are not treated as separate performance obligations.

(3) Determine the transaction price

The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)

amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes.

Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts.

Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied.

Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs.

For some transactions, the receipt of consideration does not match the timing of the transfer of goods or services to the customer. For such contracts, the Company evaluates whether this timing difference represents a financing arrangement within the contract. Although rare, if a contract is determined to contain a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money when determining the transaction price of such contract. Although our customers may retain a portion of the contract price until completion of the project and final contract settlement, these retainage amounts are not considered a significant financing component as the intent of the withheld amounts is to provide the customer with assurance that we will complete our obligations under the contract rather than to provide financing to the customer. In addition, although we may be entitled to advanced payments from our customers on certain contracts, these advanced payments generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract.

Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate. There were no significant amounts of revenue recognized during the year ended December 31, 2019 related to performance obligations satisfied in prior periods. For the year ended December 31, 2018, we recognized revenue of $7.3 million associated with the final settlement of contract value for three projects which were completed in prior periods. For the years ended December 31, 2019 and 2018, there were no significant reversals of revenue recognized associated with the revision of transaction prices.

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NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)

(4) Allocate the transaction price to performance obligations in the contract

For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation.

(5) Recognize revenue as performance obligations are satisfied

The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.

For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the amount of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.

For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.

The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping, if certain recognition criteria are met.

For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate

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NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)

of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. During 2019, there were no changes in total estimated costs that had a significant impact on our operating results. During 2018, we recognized losses of $10.0 million related to a change in total estimated costs on a transportation project within our United States electrical construction and facilities services segment, resulting in part from contract scope issues. There were no other changes in total estimated costs that resulted in a significant impact to our operating results for the year ended December 31, 2018.

Disaggregation of Revenues

Our revenues are principally derived from contracts to provide construction services relating to electrical and mechanical systems, as well as to provide a number of building services and industrial services to our customers. Our contracts are with many different customers in numerous industries. Refer to Note 19 - Segment Information of the notes to the consolidated financial statements for additional information on how we disaggregate our revenues by reportable segment, as well as a more complete description of our business.

The following tables provide further disaggregation of our revenues by categories we use to evaluate our financial performance within each of our reportable segments (in thousands):

2019% of Total2018% of Total
United States electrical construction and facilities services:
Commercial market sector$1,081,73749%$839,04543%
Institutional market sector125,5376%110,0466%
Hospitality market sector16,9851%32,3382%
Manufacturing market sector462,95321%388,15720%
Healthcare market sector88,7524%126,2186%
Transportation market sector210,5159%284,46414%
Water and wastewater market sector19,9211%23,3371%
Short duration projects (1)158,6197%120,1096%
Service work54,9552%34,1052%
2,219,9741,957,819
Less intersegment revenues(3,374)(3,496)
Total segment revenues$2,216,600$1,954,323
2019% of Total2018% of Total
United States mechanical construction and facilities services:
Commercial market sector$1,185,12936%$1,057,54235%
Institutional market sector313,4099%289,88210%
Hospitality market sector35,3851%93,8273%
Manufacturing market sector533,69916%393,63713%
Healthcare market sector304,6229%240,8188%
Transportation market sector32,6861%19,4151%
Water and wastewater market sector202,4286%176,5466%
Short duration projects (1)365,72111%318,41311%
Service work378,83911%385,67113%
3,351,9182,975,751
Less intersegment revenues(11,581)(12,908)
Total segment revenues$3,340,337$2,962,843
(1)Represents those projects which generally are completed within three months or less.

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2019% of Total2018% of Total
United States building services:
Commercial site-based services$571,34527%$519,64128%
Government site-based services176,2828%213,67711%
Mechanical services1,238,42059%1,032,08255%
Energy services120,8256%110,0856%
Total segment revenues$2,106,872$1,875,485
2019% of Total2018% of Total
United States industrial services:
Field services$922,30885%$752,45882%
Shop services165,23515%170,65118%
Total segment revenues1,087,543923,109
Total United States operations$8,751,352$7,715,760
2019% of Total2018% of Total
United Kingdom building services:
Service work$212,87650%$216,88052%
Projects & extras210,38350%197,99148%
Total segment revenues$423,259$414,871
Total worldwide operations$9,174,611$8,130,631

Contract Assets and Contract Liabilities

Accounts receivable are recognized in the period when our right to consideration is unconditional. Accounts receivable are recognized net of an allowance for doubtful accounts. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.

The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets.

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NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)

As of December 31, 2019 and 2018, contract assets included unbilled revenues for unapproved change orders of approximately $33.1 million and $25.2 million, respectively. As of December 31, 2019 and 2018, there were no claim amounts included within contract assets or accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of approximately $89.0 million and $96.1 million as of December 31, 2019 and 2018, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of the related claims.

Contract liabilities from our long-term construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets.

Net contract liabilities consisted of the following (in thousands):

20192018
Contract assets, current$177,830$158,243
Contract assets, non-current——
Contract liabilities, current(623,642)(552,290)
Contract liabilities, non-current(2,142)(2,069)
Net contract liabilities$(447,954)$(396,116)

Included within net contract liabilities were $406.6 million and $359.2 million of net contract liabilities on uncompleted construction projects as of December 31, 2019 and 2018, respectively, as follows (in thousands):

20192018
Costs incurred on uncompleted construction contracts$9,885,192$8,656,642
Estimated earnings, thereon1,349,3381,172,224
11,234,5309,828,866
Less: billings to date11,641,08210,188,023
$(406,552)$(359,157)

The $51.8 million increase in net contract liabilities for the year ended December 31, 2019 was primarily attributable to the $47.4 million increase in the net contract liabilities on our uncompleted long-term construction contracts, partially as a result of the timing of billings to our customers as amounts invoiced exceeded the revenue recognized on certain large projects in the earlier stages of completion. Contract assets and contract liabilities increased by approximately $8.2 million and $29.0 million, respectively, as a result of acquisitions made in 2019. There was no significant impairment of contract assets recognized during the period.

Contract Retentions

As of December 31, 2019 and 2018, accounts receivable included $298.5 million and $254.6 million, respectively, of retainage billed under terms of our contracts. These retainage amounts represent amounts which have been contractually invoiced to customers where payments have been partially withheld pending the achievement of certain milestones, satisfaction of other contractual conditions or completion of the project. We estimate that approximately 88% of this retainage will be collected during 2020.

As of December 31, 2019 and 2018, accounts payable included $64.7 million and $43.3 million, respectively, of retainage withheld under terms of our subcontracts. These retainage amounts represent amounts invoiced to the Company by our subcontractors where payments have been partially withheld pending the achievement of certain milestones, satisfaction of other contractual conditions or upon completion of the project. We estimate that approximately 86% of this retainage will be paid during 2020.

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NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)

Transaction Price Allocated to Remaining Unsatisfied Performance Obligations

The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentages of total remaining performance obligations (in thousands, except for percentages):

2019% of Total
Remaining performance obligations:
United States electrical construction and facilities services$1,036,21626%
United States mechanical construction and facilities services2,229,09055%
United States building services542,26913%
United States industrial services104,6133%
Total United States operations3,912,18897%
United Kingdom building services124,1763%
Total worldwide operations$4,036,364100%

Our remaining performance obligations at December 31, 2019 were $4.04 billion. Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made.

Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts due to the inherent substantial economic penalty that would be incurred by our customers upon cancellation. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.

Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.

Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.

Refer to the table below for additional information regarding our remaining performance obligations, including an estimate of when we expect to recognize such remaining performance obligations as revenue (in thousands):

Within one yearGreater than one year
Remaining performance obligations:
United States electrical construction and facilities services$861,268$174,948
United States mechanical construction and facilities services1,802,865426,225
United States building services532,5409,729
United States industrial services104,613—
Total United States operations3,301,286610,902
United Kingdom building services83,55840,618
Total worldwide operations$3,384,844$651,520

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NOTE 4 - ACQUISITIONS OF BUSINESSES

Acquisitions are accounted for utilizing the acquisition method of accounting and the prices paid for them are allocated to their respective assets and liabilities based upon the estimated fair value of such assets and liabilities at the dates of their respective acquisition by us.

On November 1, 2019, we completed the acquisition of Batchelor & Kimball, Inc. (“BKI”), a leading full service provider of mechanical construction and maintenance services. This acquisition strengthens our position and broadens our capabilities in the Southern and Southeastern regions of the United States, and its results of operations have been included within our United States mechanical construction and facilities services segment. Under the terms of the transaction, we acquired 100% of BKI’s outstanding capital stock for total consideration of approximately $220.0 million. In connection with the acquisition of BKI, we acquired working capital of $29.8 million and other net assets of $4.9 million and have preliminarily ascribed $43.6 million to goodwill and $141.7 million to identifiable intangible assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired and represents the future economic benefits expected from this strategic acquisition. The weighted average amortization period for the identifiable intangible assets, which consist of a trade name, customer relationships, and contract backlog, is approximately 10.5 years.

In addition to BKI, during 2019, we completed six other acquisitions for total consideration of $85.3 million. Such companies include: (a) a company which provides electrical contracting services in central Iowa, the results of operations of which have been included within our United States electrical construction and facilities services segment, (b) a company which provides mechanical contracting services in south-central and eastern Texas, the results of operations of which have been included within our United States mechanical construction and facilities services segment, and (c) four companies within our United States building services segment which bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions. In connection with these acquisitions, we acquired working capital of $25.3 million and other net assets of $1.3 million and have preliminarily ascribed $29.1 million to goodwill and $29.6 million to identifiable intangible assets.

During 2018, we acquired four companies for total consideration of $71.6 million. Two companies provide mobile mechanical services, one within the Eastern region and the other within the Western region of the United States. The third company is a full service provider of mechanical services within the Southern region of the United States. The results of these three companies have been included in our United States building services segment. The fourth company provides electrical construction and maintenance services for industrial and commercial buildings in north Texas, and its results have been included in our United States electrical construction and facilities services segment. In connection with these acquisitions, we acquired working capital of $8.7 million and have ascribed $26.3 million to goodwill and $36.6 million to identifiable intangible assets.

During 2017, we acquired three companies for total consideration of $111.9 million. One company provides fire protection and alarm services primarily in the Southern region of the United States. The second company provides millwright services for manufacturing companies throughout the United States. Both of their results have been included in our United States mechanical construction and facilities services segment. The third company provides mobile mechanical services within the Western region of the United States, and its results have been included in our United States building services segment. In connection with these acquisitions, we acquired working capital of $12.3 million and other net assets of $2.3 million and have ascribed $40.7 million to goodwill and $56.6 million to identifiable intangible assets.

We expect that all of the goodwill acquired in connection with these acquisitions will be deductible for tax purposes. The purchase price allocations for the businesses acquired in 2019 are preliminary and subject to change during their respective measurement periods. The purchase price allocations for the businesses acquired in 2018 and 2017 have been finalized during their respective measurement periods with an insignificant impact.

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NOTE 5 - DISPOSITION OF ASSETS

Due to a historical pattern of losses in the construction operations of our United Kingdom segment and our negative assessment of construction market conditions in the United Kingdom, we ceased construction operations in the United Kingdom during the third quarter of 2014. The results of the construction operations of our United Kingdom segment for all periods are presented in the Consolidated Financial Statements as discontinued operations.

No income or expense was recognized from discontinued operations for the year ended December 31, 2019.

The results of discontinued operations for the years ended December 31, 2018 and 2017 were as follows (in thousands):

20182017
Revenues$—$863
Loss from discontinued operation, net of income taxes$(2,345)$(857)
Diluted loss per share from discontinued operation$(0.04)$(0.01)

The loss from discontinued operations in 2018 was primarily due to the settlement of a previously outstanding legal matter. The loss from discontinued operations in 2017 was primarily due to legal costs incurred, partially offset by revenues recognized upon the settlement of a previously outstanding contract claim.

Included in the Consolidated Balance Sheet at December 31, 2018 were approximately $3.7 million of current liabilities associated with the discontinued operation, primarily consisting of contract retentions, contract warranty obligations and other accrued expenses. No significant liabilities remain as of December 31, 2019.

NOTE 6 - EARNINGS PER SHARE

The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the years ended December 31, 2019, 2018, and 2017 (in thousands, except share and per share data):

201920182017
Numerator:
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders$325,140$285,876$228,053
Loss from discontinued operation, net of income taxes—(2,345)(857)
Net income attributable to EMCOR Group, Inc. common stockholders$325,140$283,531$227,196
Denominator:
Weighted average shares outstanding used to compute basic earnings (loss) per common share56,208,28058,112,83859,254,256
Effect of dilutive securities—Share-based awards311,001330,629364,713
Shares used to compute diluted earnings (loss) per common share56,519,28158,443,46759,618,969
Basic earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders$5.78$4.92$3.85
From discontinued operation—(0.04)(0.01)
Net income attributable to EMCOR Group, Inc. common stockholders$5.78$4.88$3.84
Diluted earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders$5.75$4.89$3.83
From discontinued operation—(0.04)(0.01)
Net income attributable to EMCOR Group, Inc. common stockholders$5.75$4.85$3.82

The number of outstanding share-based awards excluded from the computation of diluted EPS for the years ended December 31, 2019, 2018, and 2017 because they would be anti-dilutive were 4,800, 550, and 2,700, respectively.

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NOTE 7 - INVENTORIES

Inventories as of December 31, 2019 and 2018 consist of the following amounts (in thousands):

20192018
Raw materials and construction materials$31,365$30,006
Work in process9,08112,315
Inventories$40,446$42,321

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2019 and 2018 (in thousands):

20192018
Machinery and equipment$166,087$151,339
Vehicles59,11658,205
Furniture and fixtures22,12320,655
Computer hardware/software104,91698,415
Land, buildings and leasehold improvements113,02097,937
Construction in progress10,23614,443
Finance lease right-of-use assets (1)9,609—
485,107440,994
Accumulated depreciation and amortization(328,920)(306,643)
$156,187$134,351
(1)Finance lease right-of-use assets are recorded net of accumulated amortization. Prior to the adoption of ASC 842 on January 1, 2019, assets under capital leases were recorded as machinery and equipment or computer hardware/software.

Depreciation and amortization expense related to property, plant and equipment, including finance leases, was $43.9 million, $38.5 million, and $39.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.

NOTE 9 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill at December 31, 2019 and 2018 was approximately $1,063.9 million and $990.9 million, respectively, and reflects the excess of the consideration transferred in a business combination over the fair value of the net assets acquired. Goodwill attributable to companies acquired in 2019 and 2018 has been valued at $72.7 million and $26.3 million, respectively. Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”) requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. Accounting Standards Codification Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives, such as trade names, not be amortized, but instead be tested at least annually for impairment (which we test each October 1, absent any earlier identified impairment indicators), and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives. As of December 31, 2019, approximately 13.4% of our goodwill related to our United States electrical construction and facilities services segment, approximately 28.1% of our goodwill related to our United States mechanical construction and facilities services segment, approximately 27.2% of our goodwill related to our United States building services segment and approximately 31.3% of our goodwill related to our United States industrial services segment.

We test for impairment of our goodwill at the reporting unit level. Our reporting units are consistent with the reportable segments identified in Note 19, “Segment Information,” of the notes to consolidated financial statements. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged

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NOTE 9 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - (Continued)

to operations. The fair value of each of our reporting units is generally determined using discounted estimated future cash flows; however, in certain circumstances, consideration is given to a market approach whereby fair value is measured based on a multiple of earnings.

For the years ended December 31, 2019 and 2018, no impairment of our goodwill was recognized. As part of our annual impairment testing for the year ended December 31, 2017, we recorded a non-cash impairment charge of $57.5 million within our United States industrial services segment.

The weighted average cost of capital used in our annual testing for impairment as of October 1, 2019 was 9.5%, 9.1% and 10.5% for our domestic construction segments, our United States building services segment and our United States industrial services segment, respectively. The perpetual growth rate used for our annual testing was 2.7% for all of our domestic segments. Unfavorable changes in these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average costs of capital would cause the estimated 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 to decrease by approximately $108.8 million, $156.7 million, $98.0 million and $40.3 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated 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 to decrease by approximately $61.4 million, $90.5 million, $55.7 million and $20.5 million, respectively. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units other than our United States industrial services segment, the decreases in estimated fair values described above would not have significantly impacted our 2019 impairment test. In the case of our United States industrial services segment, however, such decreases would cause the estimated fair value to approach its carrying value.

We also test for the impairment of trade names that are not subject to amortization by calculating the fair value using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. For the years ended December 31, 2019 and 2018, no impairment of our indefinite-lived trade names was recognized. The annual impairment review of our indefinite-lived trade names for the year ended December 31, 2017 resulted in a $0.3 million non-cash impairment charge as a result of a change in the fair value of a subsidiary trade name associated with a prior acquisition reported within our United States building services segment.

In addition, we review for the impairment of other identifiable intangible assets that are being amortized whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their discounted estimated future cash flows. For the years ended December 31, 2019 and 2017, no impairment of our other identifiable intangible assets was recognized. For the year ended December 31, 2018, we recorded a $0.9 million non-cash impairment charge associated with a finite-lived trade name within our United States industrial services segment.

Our development of the discounted future cash flow projections used in impairment testing is based upon assumptions and estimates by management from a review of our operating results and business plans, as well as forecasts of anticipated growth rates and margins, among other considerations. In addition, estimates of the weighted average cost of capital for each reporting unit are developed with the assistance of a third-party valuation specialist. Those assumptions and estimates can change in future periods and other factors used in assessing fair value, such as interest rates, are outside the control of management. There can be no assurance that estimates and assumptions made for purposes of our goodwill and identifiable intangible asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding future business performance including anticipated growth rates and margins are not achieved, or there is a rise in interest rates, we may be required to record goodwill and/or identifiable intangible asset impairment charges in future periods. It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - (Continued)

The changes in the carrying amount of goodwill by reportable segment during the years ended December 31, 2019 and 2018 were as follows (in thousands):

United States electrical construction and facilities services segmentUnited States mechanical construction and facilities services segmentUnited States building services segmentUnited States industrial services segmentTotal
Balance at December 31, 2017$125,707$256,265$255,733$327,188$964,893
Acquisitions, sales and purchase price adjustments7,5005618,438—25,994
Balance at December 31, 2018133,207256,321274,171327,188990,887
Acquisitions, sales and purchase price adjustments9,33848,69914,987—73,024
Intersegment transfers—(5,800)—5,800—
Balance at December 31, 2019$142,545$299,220$289,158$332,988$1,063,911

The aggregate goodwill balance as of December 31, 2017 included $268.1 million of accumulated impairment charges, which were comprised of $139.5 million within the United States building services segment and $128.6 million within the United States industrial services segment.

Identifiable intangible assets as of December 31, 2019 and 2018 consist of the following (in thousands):

December 31, 2019
Gross Carrying AmountAccumulated AmortizationAccumulated Impairment ChargeTotal
Contract backlog$66,745$(61,651)$—$5,094
Developed technology/Vendor network95,661(60,156)—35,505
Customer relationships644,755(277,601)(4,834)362,320
Trade names (amortized)31,148(21,830)—9,318
Trade names (unamortized)251,440—(52,233)199,207
Total$1,089,749$(421,238)$(57,067)$611,444
December 31, 2018
Gross Carrying AmountAccumulated AmortizationAccumulated Impairment ChargeTotal
Contract backlog$58,945$(56,812)$—$2,133
Developed technology/Vendor network95,661(55,318)—40,343
Customer relationships522,855(240,073)(4,834)277,948
Trade names (amortized)31,148(20,893)—10,255
Trade names (unamortized)209,840—(52,233)157,607
Total$918,449$(373,096)$(57,067)$488,286

Identifiable intangible assets attributable to businesses acquired in 2019 and 2018 have been valued at $171.3 million and $36.6 million, respectively, and consist of contract backlog, customer relationships, and trade names. See Note 4 - Acquisitions of Businesses of the notes to consolidated financial statements for additional information with respect to acquisitions.

Identifiable intangible amounts are amortized on a straight-line basis, as it best approximates the pattern in which the economic benefits of the identifiable intangible assets are consumed. The weighted average amortization periods for the unamortized balances remaining are, in the aggregate, approximately 8.5 years, which are comprised of the following: 0.75 years for contract backlog, 7.5 years for developed technology/vendor network, 8.75 years for customer relationships and 10.75 years for trade names.

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NOTE 9 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - (Continued)

Amortization expense related to identifiable intangible assets with finite lives was $48.1 million, $42.4 million, and $48.6 million for the years ended December 31, 2019, 2018, and 2017, respectively. The following table presents the estimated future amortization expense of identifiable intangible assets in the following years (in thousands):

2020$56,680
202150,792
202248,589
202347,650
202447,300
Thereafter161,226
$412,237

NOTE 10 - DEBT

Credit Agreement

We have a credit agreement dated as of August 3, 2016, which provides for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”) expiring August 3, 2021. We may increase the 2016 Revolving Credit Facility to $1.3 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $300.0 million of available capacity under the 2016 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. Obligations under the 2016 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2016 Credit Agreement contains various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We were in compliance with all such covenants as of December 31, 2019 and 2018. A commitment fee is payable on the average daily unused amount of the 2016 Revolving Credit Facility, which ranges from 0.15% to 0.30%, based on certain financial tests. The fee was 0.15% of the unused amount as of December 31, 2019. Borrowings under the 2016 Credit Agreement bear interest at (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (1.80% at December 31, 2019) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of (a) the prime commercial lending rate announced by Bank of Montreal from time to time (4.75% at December 31, 2019), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%.The interest rate in effect at December 31, 2019 was 2.80%. Fees for letters of credit issued under the 2016 Revolving Credit Facility range from 1.00% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense. The 2016 Term Loan previously required us to make principal payments of $5.0 million on the last day of March, June, September and December of each year, which commenced with the calendar quarter ended December 31, 2016. On December 30, 2016, we made a payment of $100.0 million, of which $5.0 million represented our required quarterly payment and $95.0 million represented a prepayment of outstanding principal. Such prepayment was applied against the remaining mandatory quarterly payments on a ratable basis. As a result, commencing with the calendar quarter ended March 31, 2017, our required quarterly payment has been reduced to $3.8 million. All unpaid principal and interest is due on August 3, 2021. As of December 31, 2019 and 2018, the balance of the 2016 Term Loan was $254.4 million and $269.6 million, respectively. As of December 31, 2019 and 2018, we had approximately $109.0 million of letters of credit outstanding. There were $50.0 million and $25.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of December 31, 2019 and December 31, 2018, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - DEBT - (Continued)

Long-term debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2019 and 2018 (in thousands):

20192018
Revolving credit facility$50,000$25,000
Term loan, interest payable at varying amounts through 2021254,431269,620
Unamortized debt issuance costs(1,879)(3,065)
Finance lease liabilities9,6794,213
Other—9
Total debt312,231295,777
Less: current maturities18,09216,013
Total long-term debt$294,139$279,764

Finance Lease Liabilities

See Note 17 - Leases of the notes to consolidated financial statements for additional information.

NOTE 11 - FAIR VALUE MEASUREMENTS

We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:

Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019 and 2018 (in thousands):

Assets at Fair Value as of December 31, 2019
Asset CategoryLevel 1Level 2Level 3Total
Cash and cash equivalents (1)$358,818$—$—$358,818
Restricted cash (2)1,102——1,102
Deferred compensation plan assets (3)30,295——30,295
Total$390,215$—$—$390,215
Assets at Fair Value as of December 31, 2018
Asset CategoryLevel 1Level 2Level 3Total
Cash and cash equivalents (1)$363,907$—$—$363,907
Restricted cash (2)2,307——2,307
Deferred compensation plan assets (3)23,124——23,124
Total$389,338$—$—$389,338
(1)Cash and cash equivalents consist of deposit accounts and money market funds with original maturity dates of three months or less, which are Level 1 assets. At December 31, 2019 and 2018, we had $164.0 million and $161.3 million, respectively, in money market funds.
(2)Restricted cash is classified as “Prepaid expenses and other” in the Consolidated Balance Sheets. Restricted cash primarily represents cash held in account for use on customer contracts.
(3)Deferred compensation plan assets are classified as “Other assets” in the Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - FAIR VALUE MEASUREMENTS - (Continued)

We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our debt associated with the 2016 Credit Agreement approximates its fair value due to the variable rate on such debt.

NOTE 12 - INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including, among other things, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating certain deductions including the domestic manufacturing deduction, providing additional limitations on deductions for executive compensation, imposing a mandatory one-time transition tax on accumulated earnings from certain foreign subsidiaries, and creating new taxes on certain foreign sourced earnings. The Tax Act also extended the option to claim accelerated depreciation deductions by allowing companies to fully deduct qualified property in the year such property is placed in service.

In 2018, we finalized our accounting for the income tax effects of the Tax Act, for which we had previously recorded provisional amounts in our 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118. During the year ended December 31, 2017, our net federal and state deferred tax liability balances were reduced by approximately $39.3 million, which was recorded as a reduction of income tax expense in the Company’s Consolidated Statements of Operations, as U.S. generally accepted accounting principles required a re-measurement of our deferred tax assets and liabilities as of the date of enactment.

We continue to monitor for potential future changes in certain state and local tax regulations resulting from the Tax Act which may have an impact on our consolidated income tax provision in future periods.

For the years ended December 31, 2019, 2018, and 2017, our income tax provision was calculated based on income from continuing operations before income taxes as follows (in thousands):

201920182017
United States$430,253$375,408$303,854
Foreign20,63619,62014,895
$450,889$395,028$318,749

The income tax provision in the accompanying Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 consisted of the following (in thousands):

201920182017
Current provision:
Federal$89,264$75,405$120,317
State and local31,09928,06323,496
Foreign3,6851,389244
124,048104,857144,057
Deferred provision (benefit)1,7014,249(53,358)
$125,749$109,106$90,699

Our 2019 income tax provision from continuing operations was $125.7 million compared to $109.1 million for 2018 and $90.7 million for 2017. The increase in the income tax provision for each year was primarily driven by increased income from continuing operations before income taxes.

The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2019, 2018, and 2017, were 27.9%, 27.6%, and 28.5%, respectively. The increase in the 2019 actual income tax rate compared to 2018 was predominantly due to: (a) an increase in our state deferred tax rate, partially as a result of a change in the mix of income, and (b) the continued application of the Tax Act, including the application of guidance regarding certain permanent differences and other nondeductible expenses. The decrease in the 2018 actual income tax rate

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - INCOME TAXES - (Continued)

compared to 2017 was due to the net impact of the Tax Act, including the reduction of the U.S. federal corporate tax rate from 35% to 21% in 2018, partially offset by the reduction in income tax expense associated with the re-measurement of our net deferred tax liability balance in 2017.

Items accounting for the differences between income taxes computed at the federal statutory rate and the income tax provision for the years ended December 31, 2019, 2018, and 2017 were as follows (in thousands):

201920182017
Federal income taxes at the statutory rate$94,687$82,946$111,562
State and local income taxes, net of federal tax benefits24,90421,82715,736
State tax reserves—(7)(2,543)
Permanent differences7,1496,5844,916
Domestic manufacturing deduction——(10,387)
Excess tax benefit from share-based compensation(733)(1,227)(1,341)
Goodwill impairment——17,055
Foreign income taxes (including UK statutory rate changes)(170)70(2,586)
Impact of federal rate change on net deferred tax liabilities——(39,343)
Federal tax reserves—(67)(1,247)
Other(88)(1,020)(1,123)
$125,749$109,106$90,699

Our income tax provision for the year ended December 31, 2019 and 2018 included $0.1 million and $0.6 million, respectively, for the minimum tax on global intangible low-taxed income for certain earnings of our foreign subsidiaries, as required under the Tax Act. The Company has elected to recognize such tax as an expense in the period incurred.

As of December 31, 2019, we had undistributed foreign earnings from certain foreign subsidiaries of approximately $69.8 million. Based on our evaluation, and given that a significant portion of such earnings were subject to tax in prior periods or are indefinitely reinvested, we have concluded that any taxes associated with the repatriation of such foreign earnings would be immaterial. As of December 31, 2019, the amount of cash held by these foreign subsidiaries was approximately $67.7 million which, if repatriated, should not result in any federal or state income taxes.

Tax benefits associated with uncertain tax positions are recognized only if it is “more likely than not” that the tax position would be sustained on its technical merits. For positions not meeting the “more likely than not” test, no tax benefit is recognized. As of December 31, 2019 and 2018, we had no unrecognized income tax benefits.

We file a consolidated federal income tax return including all of our U.S. subsidiaries with the Internal Revenue Service. We additionally file income tax returns with various state, local, and foreign tax agencies. The Company is currently under examination by various taxing authorities for the years 2014 through 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - INCOME TAXES - (Continued)

Deferred income tax assets and liabilities are recognized in the Consolidated Balance Sheets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The deferred income tax assets and deferred income tax liabilities recorded for the years ended December 31, 2019 and 2018 were as follows (in thousands):

20192018
Deferred income tax assets:
Excess of amounts expensed for financial statement purposes over amounts deducted for income tax purposes:
Insurance liabilities$47,022$44,192
Pension liability2,7333,204
Operating lease liabilities (1)68,158—
Deferred compensation32,68529,300
Other (including liabilities and reserves)25,64727,400
Total deferred income tax assets176,245104,096
Valuation allowance for deferred tax assets(3,463)(3,855)
Net deferred income tax assets172,782100,241
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes:
Goodwill and identifiable intangible assets(156,604)(152,761)
Operating lease right-of-use assets (1)(65,090)—
Depreciation of property, plant and equipment(18,622)(14,904)
Other(4,212)(3,424)
Total deferred income tax liabilities(244,528)(171,089)
Net deferred income tax liabilities$(71,746)$(70,848)
(1)As discussed in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements, on January 1, 2019, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”), which required lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.

The components of the net deferred income tax liabilities in the accompanying Consolidated Balance Sheets are included in “Other assets” in the amount of $3.4 million and $4.7 million and “Other long-term obligations” in the amount of $75.2 million and $75.5 million, at December 31, 2019 and 2018, respectively.

Valuation allowances are established when necessary to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. As of December 31, 2019 and 2018, the total valuation allowance on deferred income tax assets was approximately $3.5 million and $3.9 million, respectively, related to state and local net operating losses. Although realization is not assured, we believe it is more likely than not that the deferred income tax assets, net of the valuation allowance discussed above, will be realized. The amount of the deferred income tax assets considered realizable, however, could be reduced if estimates of future income are reduced.

At December 31, 2019, there are no longer any trading losses available for United Kingdom income tax purposes. At December 31, 2018, we had trading losses for United Kingdom income tax purposes of approximately $4.2 million, which were utilized in 2019 and are subject to review by the United Kingdom taxing authority.

Realization of our deferred income tax assets is dependent on our generating sufficient taxable income in the jurisdictions in which such deferred tax assets will reverse. We believe that our deferred income tax assets will be realized through projected future income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - COMMON STOCK

As of December 31, 2019 and 2018, there were 56,219,831 and 55,983,763 shares of our common stock outstanding, respectively.

We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $0.08 per share.

On September 26, 2011, our Board of Directors (the “Board”) authorized us to repurchase up to $100.0 million of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $950.0 million of our outstanding common stock. No shares of our common stock were repurchased during the year ended December 31, 2019. Since the inception of the repurchase program through December 31, 2019, we have repurchased approximately 15.9 million shares of our common stock for approximately $791.5 million. As of December 31, 2019, there remained authorization for us to repurchase approximately $158.5 million of our shares. The repurchase program has no expiration date and does not obligate the Company to acquire any particular amount of common stock and may be suspended, recommenced or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2016 Credit Agreement placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.

NOTE 14 - SHARE-BASED COMPENSATION PLANS

We have an incentive plan under which stock options, stock awards, stock units and other share-based compensation may be granted to officers, non-employee directors and key employees of the Company. Under the terms of this plan, 3,250,000 shares were authorized, and 1,160,086 shares are available for grant or issuance as of December 31, 2019. Any issuances under this plan are valued at the fair market value of the common stock on the grant date. The vesting and expiration of any stock option grants and the vesting schedule of any stock awards or stock units are determined by the Compensation and Personnel Committee of our Board of Directors at the time of the grant. Forfeitures are recognized as they occur.

The following table summarizes activity regarding our stock options and awards of shares and stock units since December 31, 2016:

Stock OptionsRestricted Stock Units
SharesWeighted Average PriceSharesWeighted Average Price
Balance, December 31, 2016143,000$23.06Balance, December 31, 2016492,288$44.93
Granted——Granted198,179$68.33
Expired——Forfeited(1,200)$60.68
Exercised(50,000)$20.42Vested(180,395)$44.57
Balance, December 31, 201793,000$24.48Balance, December 31, 2017508,872$54.13
Granted——Granted135,259$80.37
Expired——Forfeited(1,250)$71.27
Exercised(53,000)$24.48Vested(166,295)$48.44
Balance, December 31, 201840,000$24.48Balance, December 31, 2018476,586$63.52
Granted——Granted169,766$64.34
Expired——Forfeited(2,545)$71.88
Exercised(20,000)$24.48Vested(226,229)$51.64
Balance, December 31, 201920,000$24.48Balance, December 31, 2019417,578$70.24

We recognized approximately $11.4 million, $11.0 million, and $9.9 million of compensation expense for stock units awarded to non-employee directors and employees pursuant to incentive plans for the years ended December 31, 2019, 2018, and 2017, respectively. We have approximately $8.7 million of compensation expense, net of income taxes, which will be recognized over the remaining vesting periods of up to approximately 3 years. In addition, an aggregate of 72,310 restricted stock units granted to non-employee directors vested as of December 31, 2019, but issuance has been deferred up to 5 years.

All outstanding stock options were fully vested; therefore, no compensation expense was recognized with respect to stock options for the years ended December 31, 2019, 2018, and 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - SHARE-BASED COMPENSATION PLANS - (Continued)

The income tax benefit derived in 2019, 2018, and 2017 as a result of stock option exercises and other share-based compensation was approximately $2.6 million, $3.6 million, and $3.9 million, respectively, of which approximately $1.0 million, $1.6 million, and $1.6 million, respectively, represented excess tax benefits. The total intrinsic value of options (the amounts by which the stock price exceeded the exercise price of the option on the date of exercise) that were exercised during 2019, 2018, and 2017 was approximately $1.2 million, $2.7 million, and $2.3 million, respectively.

At December 31, 2019, 2018, and 2017, 20,000 options, 40,000 options and 93,000 options were outstanding and exercisable, respectively. The weighted average exercise price for all such options was $24.48. The total aggregate intrinsic value of options outstanding and exercisable as of December 31, 2019, 2018, and 2017 were approximately $1.2 million, $1.4 million, and $5.3 million, respectively.

The following table summarizes information about our outstanding stock options as of December 31, 2019:

Stock Options Outstanding and Exercisable
Range of Exercise PricesNumberWeighted Average Remaining LifeWeighted Average Exercise Price
$24.4820,0000.45 Years$24.48

We have an employee stock purchase plan. Under the terms of this plan, the maximum number of shares of our common stock that may be purchased is 3,000,000 shares. Generally, our corporate employees and non-union employees of our United States subsidiaries are eligible to participate in this plan. Employees covered by collective bargaining agreements generally are not eligible to participate in this plan.

NOTE 15 - RETIREMENT PLANS

Defined Benefit Plans

Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the “UK Plan”); however, no individual joining the company after October 31, 2001 may participate in the UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under this plan.

We account for the UK Plan and other defined benefit plans in accordance with Accounting Standards Codification Topic 715, “Compensation-Retirement Benefits” (“ASC 715”). ASC 715 requires that (a) the funded status, which is measured as the difference between the fair value of plan assets and the projected benefit obligations, be recorded in our balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss) and (b) gains and losses for the differences between actuarial assumptions and actual results, and unrecognized service costs, be recognized through accumulated other comprehensive income (loss). These amounts will be subsequently recognized as net periodic pension cost.

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NOTE 15 - RETIREMENT PLANS - (Continued)

The change in benefit obligations and assets of the UK Plan for the years ended December 31, 2019 and 2018 consisted of the following components (in thousands):

20192018
Change in pension benefit obligation
Benefit obligation at beginning of year$281,776$332,618
Interest cost7,9618,085
Actuarial loss (gain)32,866(27,755)
Benefits paid(12,059)(14,318)
Foreign currency exchange rate changes12,222(16,854)
Benefit obligation at end of year322,766281,776
Change in pension plan assets
Fair value of plan assets at beginning of year264,194295,968
Actual return on plan assets38,808(6,489)
Employer contributions4,4284,742
Benefits paid(12,059)(14,318)
Foreign currency exchange rate changes11,630(15,709)
Fair value of plan assets at end of year307,001264,194
Funded status at end of year$(15,765)$(17,582)

Amounts not yet reflected in net periodic pension cost and included in accumulated other comprehensive loss were as follows (in thousands):

20192018
Unrecognized losses$94,211$86,768

The underfunded status of the UK Plan of $15.8 million and $17.6 million at December 31, 2019 and 2018, respectively, is included in “Other long-term obligations” in the accompanying Consolidated Balance Sheets. No plan assets are expected to be returned to us during the year ending December 31, 2020.

The weighted average assumptions used to determine benefit obligations as of December 31, 2019 and 2018 were as follows:

20192018
Discount rate2.1%2.9%

The weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2019, 2018, and 2017 were as follows:

201920182017
Discount rate2.9%2.5%2.7%
Annual rate of return on plan assets4.9%5.0%5.3%

The annual rate of return on plan assets has been determined by modeling possible returns using the actuary’s portfolio return calculator and the fair value of plan assets. This models the long term expected returns of the various asset classes held in the portfolio and takes into account the additional benefits of holding a diversified portfolio. For measurement purposes of the liability, the annual rates of inflation of covered pension benefits assumed for 2019 and 2018 were 2.0% and 2.1%, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - RETIREMENT PLANS - (Continued)

The components of net periodic pension cost (income) of the UK Plan for the years ended December 31, 2019, 2018, and 2017 were as follows (in thousands):

201920182017
Interest cost$7,961$8,085$8,622
Expected return on plan assets(12,165)(13,797)(13,508)
Amortization of unrecognized loss2,3422,6302,942
Net periodic pension cost (income)$(1,862)$(3,082)$(1,944)

Actuarial gains and losses are amortized using a corridor approach whereby cumulative gains and losses in excess of the greater of 10% of the pension benefit obligation or the fair value of plan assets are amortized over the average life expectancy of plan participants. The amortization period for 2019 was 25 years.

The reclassification adjustment, net of income taxes, for the UK Plan from accumulated other comprehensive loss into net periodic pension cost for the years ended December 31, 2019, 2018, and 2017 was approximately $1.9 million, $2.1 million, and $2.3 million, respectively. The estimated unrecognized loss for the UK Plan that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $2.0 million, net of income taxes.

UK Plan Assets

The investment policies and strategies for the assets of the UK Plan are established by its trustees (who are independent of the Company) to achieve a reasonable balance between risk, likely return, and administration expense, as well as to maintain funds at a level to meet minimum funding requirements. In order to ensure that an appropriate investment strategy is in place, an analysis of the UK Plan’s assets and liabilities is completed periodically. Target allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. The weighted average asset allocations and weighted average target allocations at December 31, 2019 and 2018 were as follows:

Asset CategoryTarget Asset AllocationDecember 31, 2019December 31, 2018
Debt65.0%70.6%71.2%
Equity15.0%10.5%13.4%
Cash10.0%10.5%6.1%
Real estate10.0%8.4%9.3%
Total100.0%100.0%100.0%

Plan assets of our UK Plan are invested through third-party fund managers in various investments with underlying holdings which consist of: (a) debt securities, which include United Kingdom government debt and United States, United Kingdom, European and emerging market corporate debt, (b) equity securities, which include marketable equity and equity like instruments across developed global equity markets, and (c) real estate assets, which represent trusts which invest directly or indirectly in various properties throughout the United Kingdom.

Assets of the UK Plan are allocated within the fair value hierarchy discussed in Note 11 - Fair Value Measurements, based on the nature of the investment. Level 1 assets represent cash. Level 2 assets consist of corporate debt funds, government bond funds, and equity funds whose underlying investments are valued using observable marketplace inputs. The fair value of the level 2 assets are generally determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields, and quoted prices.

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NOTE 15 - RETIREMENT PLANS - (Continued)

Investments valued using net asset value (“NAV”) as a practical expedient are excluded from the fair value hierarchy. These investments include: (a) funds which invest predominantly in senior secured debt instruments, targeting diversity across regions and sectors, as well as funds which invest in diversified credit vehicles that seek higher returns than traditional fixed income, primarily through investments in U.S. corporate debt, global credit, and structured debt, and (b) funds which aim to provide long-term income through investment in UK property assets. These investments are redeemable at NAV on a monthly or quarterly basis and have redemption notice periods of up to 90 days. In addition, certain of these investments are subject to a lockup period of up to 24 months.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes the valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following tables set forth the fair value of assets of the UK Plan as of December 31, 2019 and 2018 (in thousands):

Assets at Fair Value as of December 31, 2019
Asset CategoryLevel 1Level 2Level 3Total
Corporate debt funds$—$64,314$—$64,314
Government bond funds—49,164—49,164
Equity funds—32,356—32,356
Cash32,240——32,240
Total plan assets in fair value hierarchy$32,240$145,834$—178,074
Plan assets measured using NAV as a practical expedient: (1)
Debt funds103,188
Real estate funds25,739
Total plan assets at fair value$307,001
Assets at Fair Value as of December 31, 2018
Asset CategoryLevel 1Level 2Level 3Total
Corporate debt funds$—$37,703$—$37,703
Government bond funds—52,445—52,445
Equity funds—35,425—35,425
Cash16,097——16,097
Total plan assets in fair value hierarchy$16,097$125,573$—141,670
Plan assets measured using NAV as a practical expedient: (1)
Debt funds98,077
Real estate funds24,447
Total plan assets at fair value$264,194
(1)Certain investments measured using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets.

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NOTE 15 - RETIREMENT PLANS - (Continued)

Cash Flows:

Contributions

Our United Kingdom subsidiary expects to contribute approximately $4.8 million to the UK Plan in 2020.

Estimated Future Benefit Payments

The following estimated benefit payments are expected to be paid in the following years (in thousands):

Pension Benefit Payments
2020$12,887
2021$13,240
2022$13,603
2023$13,976
2024$14,358
Succeeding five years$77,912

The following table shows certain information for the UK Plan where the accumulated benefit obligation is in excess of plan assets as of December 31, 2019 and 2018 (in thousands):

20192018
Projected benefit obligation$322,766$281,776
Accumulated benefit obligation$322,766$281,776
Fair value of plan assets$307,001$264,194

We also sponsor three domestic retirement plans in which participation by new individuals is frozen. The benefit obligation associated with these plans as of December 31, 2019 and 2018 was approximately $9.2 million and $8.5 million, respectively. The estimated fair value of the plan assets as of December 31, 2019 and 2018 was approximately $5.7 million and $4.9 million, respectively. The plan assets are considered Level 1 assets within the fair value hierarchy and are predominantly invested in cash, equities, and equity and bond funds. The liability balances as of December 31, 2019 and 2018 are classified as “Other long-term obligations” in the accompanying Consolidated Balance Sheets. The measurement date for these plans is December 31 of each year. The major assumptions used in the actuarial valuations to determine benefit obligations as of December 31, 2019 and 2018 included discount rates of 3.00% to 4.00% for 2019 and 4.00% to 4.25% for 2018. Also, included was an expected rate of return of 7.00% for both 2019 and 2018. The net periodic pension cost associated with the domestic plans was approximately $0.3 million for each of the years ended December 31, 2019 and 2018. The reclassification adjustment, net of income taxes, from accumulated other comprehensive loss into net periodic pension cost was approximately $0.2 million for each of the years ended December 31, 2019, 2018, and 2017. The estimated loss for these plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $0.3 million, net of income taxes. The future estimated benefit payments expected to be paid from the plans for the next ten years is approximately $0.6 million per year.

Multiemployer Plans

We participate in approximately 200 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in an MEPP, we are potentially liable with the other participating employers for such plan's underfunding either through an increase in our required contributions, or in the case of our withdrawal from the plan, a payment based upon our proportionate share of the plan's unfunded benefits, in each case, as described below. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions.

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NOTE 15 - RETIREMENT PLANS - (Continued)

An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to: (a) an increase in our contribution rate as a signatory to the applicable CBA, (b) a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or (c) a reduction in the benefits to be paid to future and/or current retirees. In addition, the PPA requires that a 5% surcharge be levied on employer contributions for the first year commencing after the date the employer receives notice that the MEPP is in critical status and a 10% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.

We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information regarding the MEPP’s current financial situation, we are unable to determine (a) the amount and timing of a future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial position, results of operations or liquidity. We did not record any withdrawal liability for the years ended December 31, 2019, 2018, and 2017.

The following table lists all domestic MEPPs to which our contributions exceeded $2.0 million in 2019. Additionally, this table also lists all domestic MEPPs to which we contributed in 2019 in excess of $0.5 million for MEPPs in the critical status, “red zone,” and $1.0 million for MEPPs in the endangered status, “orange or yellow zones,” as defined by the PPA (in thousands):

Pension FundEIN/Pension Plan NumberPPA Zone Status (1)FIP/RP StatusContributionsContributions greater than 5% of total plan contributions (2)Expiration date or range of expiration dates of CBA(s)
20192018201920182017
National Electrical Benefit Fund53-0181657001GreenGreenNA$16,901$10,700$11,572NoJanuary 2020 to November 2022
National Automatic Sprinkler Industry Pension Fund52-6054620001RedRedImplemented15,92414,88814,228NoJune 2020 to June 2022
Plumbers & Pipefitters National Pension Fund52-6152779001YellowYellowImplemented13,82111,86812,550NoFebruary 2020 to August 2026
Sheet Metal Workers National Pension Fund52-6112463001YellowYellowImplemented11,71310,89512,895NoApril 2020 to June 2024
Pension, Hospitalization & Benefit Plan of the Electrical Industry-Pension Trust Account13-6123601001GreenGreenNA10,07510,4699,489NoApril 2020 to April 2022
Electrical Workers Local No. 26 Pension Trust Fund52-6117919001GreenGreenNA8,4345,4854,441YesJanuary 2020 to July 2021
Plumbers Pipefitters & Mechanical Equipment Service Local Union 392 Pension Plan31-0655223001RedRedImplemented6,4126,0476,084YesJune 2022
Southern California IBEW-NECA Pension Trust Fund95-6392774001YellowYellowImplemented6,2775,7543,669NoMay 2020 to November 2022
Central Pension Fund of the IUOE & Participating Employers36-6052390001GreenGreenNA6,2536,3846,070NoFebruary 2020 to December 2023
Sheet Metal Workers Pension Plan of Northern California51-6115939001RedRedImplemented6,2335,4886,023NoJune 2020 to June 2026
Arizona Pipe Trades Pension Trust Fund86-6025734001GreenGreenNA6,0712,6401,662YesJune 2020
Edison Pension Plan93-6061681001GreenGreenNA5,3613,1401,628YesDecember 2020
Pipefitters Union Local 537 Pension Fund51-6030859001GreenGreenNA4,7546,0384,057YesSeptember 2020 to August 2021

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NOTE 15 - RETIREMENT PLANS - (Continued)

Pension FundEIN/Pension Plan NumberPPA Zone Status (1)FIP/RP StatusContributionsContributions greater than 5% of total plan contributions (2)Expiration date or range of expiration dates of CBA(s)
20192018201920182017
Heating, Piping & Refrigeration Pension Fund52-1058013001GreenGreenNA4,1852,6192,437NoJune 2020 to July 2021
U.A. Local 393 Pension Trust Fund Defined Benefit94-6359772002GreenGreenNA3,8584,2981,540YesJune 2020 to June 2021
San Diego Electrical Pension Plan95-6101801001GreenGreenNA3,8433,0082,862YesMay 2020 to May 2022
Eighth District Electrical Pension Fund84-6100393001GreenGreenNA3,5903,4863,786YesMay 2020 to May 2022
Southern California Pipe Trades Retirement Fund51-6108443001GreenGreenNA3,2743,0953,907NoJune 2020 to August 2026
Electrical Contractors Association and Local Union 134, IBEW Joint Pension Trust of Chicago Pension Plan 251-6030753002GreenGreenNA3,2044,3085,537NoMay 2020
Northern California Pipe Trades Pension Plan94-3190386001GreenGreenNA3,0773,1042,963NoJune 2020 to June 2021
NECA-IBEW Pension Trust Fund51-6029903001GreenGreenNA2,5282,6503,060NoMay 2020 to December 2020
U.A. Plumbers Local 24 Pension Fund22-6042823001GreenGreenNA2,4603,4613,092YesApril 2020
Sheet Metal Workers Pension Plan of Southern California, Arizona & Nevada95-6052257001YellowYellowImplemented2,4231,9343,268NoJune 2020 to June 2024
Connecticut Plumbers & Pipefitters Pension Fund06-6050353001GreenGreenNA2,2312,1041,988YesJune 2021
U.A. Local 38 Defined Benefit Pension Plan94-1285319001GreenGreenNA2,0301,5512,097NoJune 2020 to June 2023
Plumbing & Pipe Fitting Local 219 Pension Fund34-6682376001RedRedImplemented1,9372,1971,335YesMay 2020
Boilermaker-Blacksmith National Pension Trust48-6168020001RedRedImplemented1,6811,4461,083NoSeptember 2020 to April 2022
Plumbers & Pipefitters Local Union No. 502 & 633 Pension Fund61-6078145001YellowYellowImplemented1,5961,167801NoMay 2020 to July 2022
Plumbers & Pipefitters Local 162 Pension Fund31-6125999001YellowYellowImplemented1,1241,273801YesMay 2020 to May 2022
Steamfitters Local Union No. 420 Pension Plan23-2004424001RedRedImplemented641706687NoMay 2020
Other Multiemployer Pension Plans53,56748,02643,604Various
Total Contributions$215,478$190,229$179,216
(1)The zone status represents the most recent available information for the respective MEPP, which may be 2018 or earlier for the 2019 year and 2017 or earlier for the 2018 year.
(2)This information was obtained from the respective plan’s Form 5500 (“Forms”) for the most current available filing. These dates may not correspond with our fiscal year contributions. The above noted percentages of contributions are based upon disclosures contained in the plans’ Forms. Those Forms, among other things, disclose the names of individual participating employers whose annual contributions account for more than 5% of the aggregate annual amount contributed by all participating employers for a plan year. Accordingly, if the annual contribution of two or more of our subsidiaries each accounted for less than 5% of such contributions, but in the aggregate accounted for in excess of 5% of such contributions, that greater percentage is not available and accordingly is not disclosed.

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NOTE 15 - RETIREMENT PLANS - (Continued)

The nature and diversity of our operations may result in volatility in the amount of our contributions to a particular MEPP for any given period. That is because, in any given market, a change in the mix, volume of, or size of our projects could result in a change in our direct labor force and a corresponding change in our contributions to the MEPP(s) dictated by the applicable CBA. Additionally, the amount of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. Our contributions to various MEPPs increased by approximately $4.8 million as a result of acquisitions made by us since 2017.

We also participated in an MEPP that is located within the United Kingdom for which we have contributed less than $0.1 million for each of the years ended December 31, 2019, 2018, and 2017. The information that we have obtained relating to this plan is not as readily available and/or as comparable as the information that has been ascertained in the United States. Based upon the most recently available information, the plan is 100% funded. This plan closed to future contributions and participants during 2019.

Additionally, we contribute to certain multiemployer plans that provide post retirement benefits such as health and welfare benefits and/or defined contribution/annuity plans, among others. Our contributions to these plans were approximately $153.5 million, $135.9 million, and $130.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. Our contributions to other post retirement benefit plans increased by approximately $11.0 million as a result of acquisitions made by us since 2017. The amount of contributions to these plans is also subject for the most part to the factors discussed above in conjunction with the MEPPs.

Defined Contribution Plans

We have defined contribution retirement and savings plans that cover eligible employees in the United States. Contributions to these plans are based on a percentage of the employee’s base compensation. The expenses recognized for the years ended December 31, 2019, 2018, and 2017 for these plans were approximately $32.4 million, $29.8 million, and $28.1 million, respectively. At our discretion and subject to applicable plan documents, we may make additional supplemental matching contributions to one of our defined contribution retirement and savings plans. The expenses recognized related to additional supplemental matching contributions for the years ended December 31, 2019, 2018, and 2017 were approximately $6.8 million, $6.1 million, and $5.5 million, respectively.

Our United Kingdom subsidiary also has defined contribution retirement plans. The expense recognized for the years ended December 31, 2019, 2018, and 2017 was approximately $6.1 million, $4.9 million, and $3.9 million, respectively.

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Contractual Guarantees

We have agreements with our executive officers and certain other key management personnel providing for severance benefits for such employees upon termination of their employment under certain circumstances.

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.

The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. 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. 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. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. As of December 31, 2019, based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.2 billion. We are not aware of any losses in connection with Surety Bonds, which have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.

We are subject to regulation with respect to the handling of certain materials used in construction, which are classified as hazardous or toxic by federal, state, and local agencies. Our practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, when remediation is required as part of our contract performance, we believe

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NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

we comply with all applicable regulations governing the discharge of hazardous materials into the environment or otherwise relating to the protection of the environment.

At December 31, 2019, we employed approximately 36,000 people, approximately 59% of whom are represented by various unions pursuant to approximately 400 collective bargaining agreements between our individual subsidiaries and local unions. We believe that our employee relations are generally good. Only two of these collective bargaining agreements are national or regional in scope.

Restructuring expenses, primarily related to employee severance obligations, were $1.5 million, $2.3 million, and $1.6 million for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, 2018, and 2017, the balance of our restructuring related obligations yet to be paid was $1.6 million, $1.6 million, and $0.5 million, respectively. The majority of obligations outstanding as of December 31, 2018 and 2017 were paid during 2019 and 2018, respectively. The obligations outstanding as of December 31, 2019 will be paid pursuant to our contractual obligations throughout 2020 and 2021. No material expenses in connection with restructuring from continuing operations are expected to be incurred during 2020.

The changes in restructuring activity by reportable segment during the years ended December 31, 2019 and 2018 were as follows (in thousands):

United States electrical construction and facilities services segmentUnited States building services segmentCorporate administrationTotal
Balance at December 31, 2017$452$40$—$492
Charges—8821,4242,306
Payments(422)(746)—(1,168)
Balance at December 31, 2018301761,4241,630
Charges4451,078—1,523
Payments(30)(842)(723)(1,595)
Balance at December 31, 2019$445$412$701$1,558

Government Contracts

As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, fines, penalties and compensatory and treble damages, and possible suspension or debarment from doing business with the government. Based on currently available information, we believe the outcome of ongoing government disputes and investigations will not have a material impact on our financial position, results of operations or liquidity.

Legal Matters

We are involved in several legal proceedings in which damages and claims have been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. Other potential claims may exist that have not yet been asserted against us. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity. Litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance. It is possible that some litigation matters for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial position, results of operations or liquidity.

NOTE 17 Leases

On January 1, 2019, we adopted Accounting Standards Codification Topic 842, “Leases” (“ASC 842”). This pronouncement requires lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminates the requirement that the new lease standard be applied to comparative periods presented in the year of adoption.

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NOTE 17 - LEASES (Continued)

As part of our adoption, we elected to utilize the package of practical expedients permitted under the new standard, which allowed us to not reassess: (a) whether an existing contract is or contains a lease, (b) the classification for existing leases, and (c) initial direct costs. Further, as permitted by the standard, we made an accounting policy election not to record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Instead, consistent with previous accounting guidance, we will recognize payments for such leases in the statement of operations on a straight-line basis over the lease term.

We lease real estate, vehicles and equipment under various arrangements which are classified as either operating or finance leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.

Many of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. Certain leases additionally include options to purchase the leased asset. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.

Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. As permitted by ASC 842, we have elected to account for these non-lease components together with the associated lease component. This election has been made for each of our asset classes.

The measurement of right-of-use assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for the majority of our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.

Our lease arrangements generally do not contain significant restrictions or covenants; however, certain of our vehicle and equipment leases include residual value guarantees, whereby we provide a guarantee to the lessor that the value of the underlying asset will be at least a specified amount at the end of the lease. Amounts probable of being owed under these guarantees are included within the measurement of the right-of-use asset and lease liability.

Lease Position as of December 31, 2019

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of December 31, 2019 (in thousands):

Classification on the Consolidated Balance SheetDecember 31, 2019
Assets
Operating lease assetsOperating lease right-of-use assets$245,471
Finance lease assetsProperty, plant and equipment, net9,609
Total lease assets$255,080
Liabilities
Current
OperatingOperating lease liabilities, current$53,144
FinanceCurrent maturities of long-term debt and finance lease liabilities4,088
Noncurrent
OperatingOperating lease liabilities, long-term204,950
FinanceLong-term debt and finance lease liabilities5,591
Total lease liabilities$267,773

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NOTE 17 - LEASES (Continued)

Lease Costs

The following table presents information related to lease expense for the year ended December 31, 2019 (in thousands):

2019
Finance lease expense:
Amortization expense$4,575
Interest expense427
Operating lease expense66,650
Short-term lease expense149,528
Variable lease expense4,924
Total lease expense$226,104

Rent expense for operating leases and other rental items, including short-term equipment rentals, for the years ended December 31, 2018 and 2017 was approximately $191.8 million and $166.5 million, respectively. For the years ended December 31, 2019, 2018, and 2017, sublease rental income was approximately $0.5 million, $0.6 million, and $0.6 million, respectively.

Lease Term and Discount Rate

The following table presents certain information related to lease terms and discount rates for leases as of December 31, 2019:

December 31, 2019
Weighted-average remaining lease term:
Operating leases6.7 years
Finance leases2.9 years
Weighed-average discount rate:
Operating leases4.04%
Finance leases4.16%

Other Information

The following table presents supplemental cash flow information related to leases for the year ended December 31, 2019 (in thousands):

2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases$65,757
Operating cash flows used for finance leases$427
Financing cash flows used for finance leases$4,571
Right-of-use assets obtained in exchange for new operating lease liabilities$84,089
Right-of-use assets obtained in exchange for new finance lease liabilities$5,311

For the years ended December 31, 2018 and 2017 (prior to the adoption of ASC 842), assets acquired under capital leases amounted to approximately $1.1 million and $1.3 million, respectively.

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NOTE 17 - LEASES (Continued)

Maturity of Lease Liabilities

The following table reconciles future minimum lease payments on an undiscounted cash flow basis to the lease liabilities reported in the Consolidated Balance Sheet as of December 31, 2019 (in thousands):

Operating LeasesFinance Leases
2020$62,457$4,391
202150,5053,039
202242,1551,807
202335,223743
202426,049138
Thereafter80,661129
Total minimum lease payments297,05010,247
Less: Amount of lease payments representing interest(38,956)(568)
Present value of future minimum lease payments$258,094$9,679
Current portion of lease liabilities$53,144$4,088
Noncurrent portion of lease liabilities204,9505,591
Present value of future minimum lease payments$258,094$9,679

NOTE 18 - ADDITIONAL CASH FLOW INFORMATION

The following presents information about cash paid for interest and income taxes for the years ended December 31, 2019, 2018, and 2017 (in thousands):

201920182017
Cash paid during the year for:
Interest$12,683$12,435$11,456
Income taxes$126,169$123,651$130,226

NOTE 19 - SEGMENT INFORMATION

Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services and our United States industrial services segments due to changes in our internal reporting structure.

We have the following reportable segments: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; process instrumentation in the refining, chemical processing, food processing and mining industries; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; controls and filtration; water and wastewater treatment and central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States building services; (d) United States industrial services; and (e) United Kingdom building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of customers’ facilities, including commercial and government site-based operations and maintenance; facility maintenance and services, including reception, security and catering services; outage services to utilities and industrial plants; military base operations support services; mobile mechanical maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - SEGMENT INFORMATION - (Continued)

and bodies; and small modification and retrofit projects, which services are not generally related to customers’ construction programs. The “United States industrial services” segment principally consists of those operations which provide industrial maintenance and services for refineries, petrochemical plants, and other customers within the oil and gas industry. Services of this segment include refinery turnaround planning and engineering; specialty welding; overhaul and maintenance of critical process units; specialty technical services; on-site repairs, maintenance and service of heat exchangers, towers, vessels and piping; design, manufacturing, repair, and hydro blast cleaning of shell and tube heat exchangers and related equipment; and construction, maintenance, and other support services for customers within the upstream and midstream sectors.

The following tables present information about industry segments and geographic areas for the years ended December 31, 2019, 2018, and 2017 (in thousands):

201920182017
Revenues from unrelated entities:
United States electrical construction and facilities services$2,216,600$1,954,323$1,829,567
United States mechanical construction and facilities services3,340,3372,962,8432,880,148
United States building services2,106,8721,875,4851,753,703
United States industrial services1,087,543923,109882,836
Total United States operations8,751,3527,715,7607,346,254
United Kingdom building services423,259414,871340,745
Total worldwide operations$9,174,611$8,130,631$7,686,999
Total revenues:
United States electrical construction and facilities services$2,220,582$1,959,978$1,836,985
United States mechanical construction and facilities services3,370,9602,998,9182,911,033
United States building services2,182,3901,942,6631,812,763
United States industrial services1,111,264930,724885,198
Less intersegment revenues(133,844)(116,523)(99,725)
Total United States operations8,751,3527,715,7607,346,254
United Kingdom building services423,259414,871340,745
Total worldwide operations$9,174,611$8,130,631$7,686,999

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - SEGMENT INFORMATION - (Continued)

201920182017
Operating income (loss):
United States electrical construction and facilities services$161,684$139,430$150,001
United States mechanical construction and facilities services225,040219,853192,167
United States building services114,75493,82781,720
United States industrial services44,34027,67139,313
Total United States operations545,818480,781463,201
United Kingdom building services18,32315,93012,905
Corporate administration(101,726)(90,415)(87,808)
Restructuring expenses(1,523)(2,306)(1,577)
Impairment loss on goodwill and identifiable intangible assets—(907)(57,819)
Total worldwide operations460,892403,083328,902
Other corporate items:
Net periodic pension (cost) income1,5532,7431,652
Interest expense(13,821)(13,544)(12,770)
Interest income2,2652,746965
Income from continuing operations before income taxes$450,889$395,028$318,749
Capital expenditures:
United States electrical construction and facilities services$5,876$5,993$4,797
United States mechanical construction and facilities services7,8907,5046,665
United States building services14,29110,41410,745
United States industrial services15,80218,3869,696
Total United States operations43,85942,29731,903
United Kingdom building services3,5988702,166
Corporate administration975312615
Total worldwide operations$48,432$43,479$34,684
Depreciation and amortization of property, plant and equipment:
United States electrical construction and facilities services$7,550$6,221$6,545
United States mechanical construction and facilities services8,7647,8037,504
United States building services12,72810,32411,051
United States industrial services11,1549,94310,589
Total United States operations40,19634,29135,689
United Kingdom building services2,9423,4473,371
Corporate administration807734855
Total worldwide operations$43,945$38,472$39,915

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - SEGMENT INFORMATION - (Continued)

201920182017
Contract assets:
United States electrical construction and facilities services$50,813$38,412$35,060
United States mechanical construction and facilities services61,22549,30250,302
United States building services30,42833,30426,028
United States industrial services9,82014,1173,715
Total United States operations152,286135,135115,105
United Kingdom building services25,54423,1087,516
Total worldwide operations$177,830$158,243$122,621
Contract liabilities:
United States electrical construction and facilities services$173,967$163,951$178,454
United States mechanical construction and facilities services317,083280,846288,699
United States building services97,58879,28148,481
United States industrial services12,40412,3074,615
Total United States operations601,042536,385520,249
United Kingdom building services22,60015,9053,907
Total worldwide operations$623,642$552,290$524,156
Long-lived assets:
United States electrical construction and facilities services$215,780$201,333$180,990
United States mechanical construction and facilities services530,561334,628340,030
United States building services458,915436,887409,718
United States industrial services615,233630,340643,124
Total United States operations1,820,4891,603,1881,573,862
United Kingdom building services9,6229,26411,729
Corporate administration1,4311,0721,494
Total worldwide operations$1,831,542$1,613,524$1,587,085
Total assets:
United States electrical construction and facilities services$834,802$702,112$617,471
United States mechanical construction and facilities services1,536,3251,081,0051,071,164
United States building services996,664846,221764,085
United States industrial services829,793864,446798,975
Total United States operations4,197,5843,493,7843,251,695
United Kingdom building services181,147146,379131,806
Corporate administration451,627448,644582,403
Total worldwide operations$4,830,358$4,088,807$3,965,904

During 2018, we recognized losses of $10.0 million on a transportation project within our United States electrical construction and facilities services segment, resulting in part from contract scope issues. During 2017, we recognized $18.1 million of gross profit associated with the recovery of certain contract costs previously disputed on a project completed in 2016 within our United States industrial services segment.

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EMCOR Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - SELECTED UNAUDITED QUARTERLY INFORMATION

(In thousands, except per share data)

Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.

March 31June 30Sept. 30Dec. 31
2019 Quarterly Results
Revenues$2,158,728$2,324,202$2,287,741$2,403,940
Gross profit$308,754$346,380$335,987$364,747
Net income attributable to EMCOR Group, Inc.$72,410$83,972$81,834$86,924
Basic EPS from continuing operations$1.29$1.49$1.46$1.54
Basic EPS from discontinued operation————
$1.29$1.49$1.46$1.54
Diluted EPS from continuing operations$1.28$1.49$1.45$1.54
Diluted EPS from discontinued operation————
$1.28$1.49$1.45$1.54
March 31June 30Sept. 30Dec. 31
2018 Quarterly Results
Revenues$1,900,388$1,953,886$2,047,049$2,229,308
Gross profit$269,119$290,844$309,339$336,151
Impairment loss on identifiable intangible assets$—$907$—$—
Net income attributable to EMCOR Group, Inc.$55,374$70,816$79,373$77,968
Basic EPS from continuing operations$0.95$1.22$1.37$1.39
Basic EPS from discontinued operation(0.00)(0.00)(0.01)(0.02)
$0.95$1.22$1.36$1.37
Diluted EPS from continuing operations$0.94$1.21$1.36$1.38
Diluted EPS from discontinued operation(0.00)(0.00)(0.01)(0.02)
$0.94$1.21$1.35$1.36

NOTE 21 - SUBSEQUENT EVENTS

In January 2020, we acquired a company for an immaterial amount. This company provides mobile mechanical services within the Northeastern region of the United States, and its results will be included in our United States building services segment. The acquisition of this business will be accounted for by the acquisition method, and the amount paid will be allocated to its respective assets and liabilities, based upon the estimated fair value of such assets and liabilities at the date of acquisition by us.

On February 15, 2020, we became aware of an infiltration and encryption of portions of our information technology network. This attack disrupted our operations that utilize the impacted portions of the network. We continue to assess the magnitude of the consequences and we are actively seeking to mitigate the effects. As of the date of this filing, we continue our efforts to restore the portions of such systems that remain impacted. We are unable to predict when the entire network will be functional. We are additionally unable to estimate precisely the total costs which will result from the attack and the remediation efforts. We maintain insurance coverage for these types of incidents, however, such policies may not completely provide coverage for, or offset the costs of, this infiltration.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of EMCOR Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Revenue Recognition from Long-term Construction Contracts
Description of the MatterAs described in Note 3 to the consolidated financial statements, the Company generally recognizes revenue from long-term construction contracts over time using a cost-to-cost input method in which the extent of progress is measured based on the ratio of costs incurred to date to the total estimated costs at completion. In addition, the revenue recognition process requires the Company to determine the transaction price that represents the amount of consideration to which the Company expects to be entitled. A significant portion of the Company’s revenues for the year ended December 31, 2019 were derived from long-term construction contracts. The determination of revenue recognized from long-term construction contracts commonly requires the Company to estimate variable consideration that arises from pending change orders, contract claims, contract bonuses, and penalties, as well as to prepare estimates of the costs to complete contracts. Factors inherent in the estimation processes include, among others, historical experience with customers, the potential long-term nature of dispute resolutions, actions of third parties as well as the Company’s experience with similar types of contracts. Due to uncertainties attributed to such factors, auditing revenue recognized from long-term construction contracts involved challenging, subjective, and complex judgments.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls related to revenue recognition from long-term construction contracts. For example, we tested controls over the Company’s determination and review of estimates of variable consideration, costs to complete, and the completeness and accuracy of data utilized in conjunction with such estimation processes. To test the amount of revenue recognized from long-term construction contracts in the current period, we selected a sample of contracts and performed procedures to test the project revenue and cost forecasts. For example, we obtained and inspected the related contract agreements, amendments, and change orders to test the existence of customer arrangements and understand the scope and pricing of the related projects; performed inquiries of management and project personnel regarding facts and circumstances relevant to the accounting for such contracts; tested key components of the estimated costs to complete, including materials, labor, and subcontractors costs; agreed actual costs incurred to supporting documentation; and recalculated revenues recognized based on the project's percentage of completion and management's estimate of transaction price. In addition, we performed certain retrospective review procedures to assess management’s historical ability to accurately estimate the transaction price and costs to complete contracts as well as to identify any significant or unusual changes in project revenue and cost forecasts during the period.

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Valuation of Goodwill and Indefinite Lived Intangible Assets
Description of the MatterAt December 31, 2019, the Company’s goodwill and indefinite lived trade name intangible assets were approximately $1,063.9 million and $199.2 million, respectively. As discussed in Note 9 to the consolidated financial statements, goodwill and trade names with indefinite lives are tested for impairment at least annually. Auditing management’s annual impairment tests was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units for goodwill and the fair value of trade name intangible assets. In particular, the fair value estimates for goodwill were sensitive to significant assumptions inherent in the Company’s discounted estimated future cash flows such as the weighted average cost of capital, revenue growth rates, and operating margins. The fair value estimates for trade name intangible assets were sensitive to significant assumptions inherent in the Company’s discounted estimated future cash flows such as the royalty rate, discount rate, and revenue growth rates. The fair value estimates for goodwill and trade name intangible assets are affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s impairment review processes for goodwill and trade name intangible assets. For example, we tested controls over management’s review of the valuation models and significant assumptions described above, including those developed by the Company's third-party valuation specialists. To test the estimated fair value of the Company’s reporting units and trade name intangible assets, with the support of a valuation specialist, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions and completeness and accuracy of the underlying data used by the Company in its analyses. For example, we compared the significant assumptions used by management to the historical financial results of the Company’s reporting units and to current industry and economic trends. We assessed the historical accuracy of management’s estimates by comparing past projections to actual performance and performed sensitivity analyses of significant assumptions to evaluate the changes in fair value that would result from changes in the assumptions. In addition, we reviewed the reconciliation of the aggregate fair value of the Company’s reporting units to the market capitalization of the Company.

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Valuation of Intangible Assets from the Acquisition of Batchelor & Kimball, Inc.
Description of the MatterAs further described in Note 4 to the consolidated financial statements, during the year ended December 31, 2019, the Company completed the acquisition of Batchelor & Kimball, Inc. (“BKI”) for total consideration of approximately $220.0 million. The transaction was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities. Auditing the Company’s accounting for its acquisition of BKI required complex auditor judgment due to the significant estimation uncertainty inherent in determining the fair value of identified intangible assets for acquired customer relationships and trade names. The significant estimation uncertainty was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the acquired intangible assets included discount rates, customer attrition rate, revenue growth rates, operating margins, and royalty rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the valuation of intangible assets from the BKI acquisition. For example, we tested controls over management’s review of the valuation models and the significant assumptions described above. To test the estimated fair value of the acquired customer relationships asset and trade name asset, we performed audit procedures that included, among others, assessing the appropriateness of the valuation methodologies and testing the significant assumptions discussed above and the completeness and accuracy of the underlying data used by the Company. For example, we compared the revenue growth rates, operating margins, and customer attrition rate to historical results of the acquired business and compared the royalty rate to current industry licensing agreements. We further performed sensitivity analyses to evaluate the changes in the fair value of the acquired intangible assets that would result from changes in the significant assumptions. In addition, we involved internal valuation specialists to assist in our evaluation of the valuation methodologies and certain significant assumptions used by the Company.
/s/ ERNST & YOUNG LLP

We have served as the Company’s auditor since 2002.

Stamford, Connecticut
February 27, 2020

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:

Opinion on Internal Control Over Financial Reporting

We have audited EMCOR Group, Inc. and subsidiaries’ control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, EMCOR Group, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Batchelor & Kimball, Inc. ("BKI"), which is included in the 2019 consolidated financial statements of the Company and constituted 1.9% of total assets as of December 31, 2019 and 0.4% of total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of BKI.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 27, 2020

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