Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

HIDDEN_ROW
		Page
Comfort Systems USA, Inc.
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)		42
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42)		44
Consolidated Balance Sheets		45
Consolidated Statements of Operations		46
Consolidated Statements of Stockholders’ Equity		47
Consolidated Statements of Cash Flows		48
Notes to Consolidated Financial Statements		49

Report of Independent Registered Public Accounting Firm

To the stockholders and the Board of Directors of Comfort Systems USA, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. and its consolidated subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also 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, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.

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 audits 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 Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue from Contracts with Customers–Refer to Notes 2 and 3 to the consolidated financial statements

Critical Audit Matter Description

The Company recognizes revenue based on the extent of progress towards completion of the performance obligation. The Company generally uses a cost-to-cost input method to measure progress for its contracts, as it depicts the transfer of assets to the customer that occurs as the Company incurs costs, which include labor, materials, subcontractors’ costs, other direct costs, and an allocation of indirect costs. 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. Revenue, including estimated fees or profits, is recorded proportionally as costs are incurred.

The cost-to-cost input method of accounting is also affected by changes in job performance, job conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments. Variations from estimated project costs could have a significant impact on operating results, depending on project size, and the recoverability of the variation from change orders collected from customers.

Given the judgments necessary to account for the Company’s contracts with customers, specifically the estimates of total costs that will be incurred at contract completion, which are complex and subject to many variables, auditing the corresponding balances and related accounting estimates required extensive audit effort due to the complexity of these estimates, and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to management’s estimates and judgments included within the Company’s estimated total costs at completion, included the following, among others:

●	We tested the operating effectiveness of controls over the recognition of revenue, including those over the determination of estimated costs at completion of the contracts (including the estimated progress toward completion).

●

We evaluated quarter-over-quarter changes in contract profit estimates for a selection of contracts by obtaining explanations from Company’s management regarding the timing and amount of the changes in estimates and corroborating these inquiries by inspecting documents, including management workplans, customer communications, change orders, vendor invoices, and supplier or subcontractor communications.

●	We developed an independent expectation of recorded revenue at certain operating units using analytical procedures and considering relevant current and historical information and compared our expectations to the recorded revenue for the operating unit.

●	For a sample of contracts with customers, we performed the following:

	o	Evaluated the reasonableness of management’s estimates of total costs and profit at completion by:

	◾	Evaluating management’s estimate of total costs at completion for each selected contract by performing corroborating inquiries with the Company’s project managers and personnel involved with the selected contracts, and comparing the estimates to management’s workplans, suppliers’ contracts, subcontract agreements, third-party invoices from suppliers, historical actual results, and/or engineering specifications.

	◾	Evaluating management’s ability to accurately estimate total costs and profits at completion by analyzing the comparison of actual costs and profits or current year estimates to prior year management’s estimates.

	◾	Evaluating changes in estimates and obtaining evidence regarding timing and amounts supporting these changes in estimates such as approved change order documents, communications with the customer, subcontract agreements and related amendments, recent actual costs, and other sources.

/s/ Deloitte & Touche LLP

Houston, Texas

February 22, 2023

We have served as the Company’s auditor since 2021.

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Comfort Systems USA, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Comfort Systems USA, Inc. (the Company) for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

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 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit provides a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We served as the Company’s auditor from 2002 to 2021.

Houston, Texas

February 25, 2021,

except for Note 16, as to which the date is

February 23, 2022

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)


	December 31,
	2022		2021

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	57,214	$	58,776
Billed accounts receivable, less allowance for credit losses of $10,640 and $8,808, respectively		1,024,082		773,716
Unbilled accounts receivable, less allowance for credit losses of $1,011 and $715, respectively		77,030		61,881
Other receivables, less allowance for credit losses of $510 and $503, respectively		38,369		57,491
Inventories		35,309		21,853
Prepaid expenses and other		48,456		23,704
Costs and estimated earnings in excess of billings, less allowance for credit losses of $80 and $84, respectively		27,211		29,900
Total current assets		1,307,671		1,027,321
PROPERTY AND EQUIPMENT, NET		143,949		128,554
LEASE RIGHT-OF-USE ASSET		130,666		124,756
GOODWILL		611,789		592,114
IDENTIFIABLE INTANGIBLE ASSETS, NET		273,901		304,781
DEFERRED TAX ASSETS		115,665		22,905
OTHER NONCURRENT ASSETS		13,837		8,683
Total assets	$	2,597,478	$	2,209,114
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	9,000	$	2,788
Accounts payable		337,385		254,788
Accrued compensation and benefits		127,765		129,971
Billings in excess of costs and estimated earnings		461,781		307,380
Accrued self-insurance		27,644		22,227
Deferred revenue		86,512		13,734
Other current liabilities		120,715		105,666
Total current liabilities		1,170,802		836,554
LONG-TERM DEBT, NET		247,245		385,242
LEASE LIABILITIES		111,744		107,701
DEFERRED TAX LIABILITIES		—		1,745
OTHER LONG-TERM LIABILITIES		67,764		72,206
Total liabilities		1,597,555		1,403,448
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365 shares issued, respectively		411		411
Treasury stock, at cost, 5,362,224 and 5,032,311 shares, respectively		(187,212)		(150,580)
Additional paid-in capital		332,080		327,061
Retained earnings		854,644		628,774
Total stockholders’ equity		999,923		805,666
Total liabilities and stockholders’ equity	$	2,597,478	$	2,209,114

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

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)



	Year Ended December 31,
	2022		2021		2020
REVENUE	$	4,140,364	$	3,073,636	$	2,856,659
COST OF SERVICES		3,398,756		2,510,429		2,309,676
Gross profit		741,608		563,207		546,983
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		489,344		376,309		357,777
GAIN ON SALE OF ASSETS		(1,585)		(1,540)		(1,445)
Operating income		253,849		188,438		190,651
OTHER INCOME (EXPENSE):
Interest income		46		24		103
Interest expense		(13,352)		(6,196)		(8,385)
Changes in the fair value of contingent earn-out obligations		(4,819)		7,820		9,119
Other		134		188		52
Other income (expense)		(17,991)		1,836		889
INCOME BEFORE INCOME TAXES		235,858		190,274		191,540
PROVISION (BENEFIT) FOR INCOME TAXES		(10,089)		46,926		41,401
NET INCOME	$	245,947	$	143,348	$	150,139

INCOME PER SHARE:
Basic	$	6.84	$	3.95	$	4.11
Diluted	$	6.82	$	3.93	$	4.09

SHARES USED IN COMPUTING INCOME PER SHARE:
Basic		35,932		36,285		36,542
Diluted		36,046		36,450		36,738

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

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)


							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2019	41,123,365	$	411	(4,465,448)	$	(103,960)	$	320,168	$	368,685	$	585,304
Net income	—		—	—		—		—		150,139		150,139
Cumulative-effect adjustment (1)	—		—	—		—		—		(515)		(515)
Issuance of Stock:
Issuance of shares for options exercised	—		—	113,731		2,811		(667)		—		2,144
Issuance of restricted stock & performance stock	—		—	128,889		3,102		(1,247)		—		1,855
Shares received in lieu of tax withholding payment on vested restricted stock	—		—	(27,724)		(1,076)		—		—		(1,076)
Stock-based compensation	—		—	—		—		4,197		—		4,197
Dividends ($0.425 per share)	—		—	—		—		—		(15,499)		(15,499)
Share repurchase	—		—	(684,634)		(30,120)		—		—		(30,120)
BALANCE AT DECEMBER 31, 2020	41,123,365	$	411	(4,935,186)	$	(129,243)	$	322,451	$	502,810	$	696,429
Net income	—		—	—		—		—		143,348		143,348
Issuance of Stock:
Issuance of shares for options exercised	—		—	195,724		5,399		235		—		5,634
Issuance of restricted stock & performance stock	—		—	101,360		2,681		(473)		—		2,208
Shares received in lieu of tax withholding payment on vested restricted stock	—		—	(31,413)		(2,363)		—		—		(2,363)
Stock-based compensation	—		—	—		—		4,848		—		4,848
Dividends ($0.48 per share)	—		—	—		—		—		(17,384)		(17,384)
Share repurchase	—		—	(362,796)		(27,054)		—		—		(27,054)
BALANCE AT DECEMBER 31, 2021	41,123,365	$	411	(5,032,311)	$	(150,580)	$	327,061	$	628,774	$	805,666
Net income	—		—	—		—		—		245,947		245,947
Issuance of Stock:
Issuance of shares for options exercised	—		—	34,187		1,174		(88)		—		1,086
Issuance of restricted stock & performance stock	—		—	113,955		3,657		(113)		—		3,544
Shares received in lieu of tax withholding payment on vested restricted stock	—		—	(36,006)		(3,247)		—		—		(3,247)
Stock-based compensation	—		—	—		—		5,220		—		5,220
Dividends ($0.56 per share)	—		—	—		—		—		(20,077)		(20,077)
Share repurchase	—		—	(442,049)		(38,216)		—		—		(38,216)
BALANCE AT DECEMBER 31, 2022	41,123,365	$	411	(5,362,224)	$	(187,212)	$	332,080	$	854,644	$	999,923

	(1)	Represents the adjustment to Retained Earnings as a result of adopting Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” on January 1, 2020.

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

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Year Ended December 31,
	2022		2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	245,947	$	143,348	$	150,139
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets		47,795		40,505		32,698
Depreciation expense		33,552		28,439		27,931
Change in right-of-use assets		21,557		17,592		16,692
Bad debt expense (benefit)		2,670		(1,452)		5,253
Deferred tax provision (benefit)		(94,505)		6,902		(7,953)
Amortization of debt financing costs		786		538		544
Gain on sale of assets		(1,585)		(1,540)		(1,445)
Changes in the fair value of contingent earn-out obligations		4,819		(7,820)		(9,119)
Stock-based compensation		10,532		10,593		6,934
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net		(223,178)		(58,046)		38,486
Inventories		(13,495)		(5,651)		(1,457)
Prepaid expenses and other current assets		(26,238)		(8,623)		(4,855)
Costs and estimated earnings in excess of billings and unbilled accounts receivable		(9,643)		(17,271)		2,706
Other noncurrent assets		(995)		(1,174)		(1,373)
Increase (decrease) in—
Accounts payable and accrued liabilities		165,888		4,004		11,087
Billings in excess of costs and estimated earnings		153,241		44,620		19,434
Other long-term liabilities		(15,617)		(14,813)		808
Net cash provided by operating activities		301,531		180,151		286,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(48,359)		(22,330)		(24,131)
Proceeds from sales of property and equipment		2,858		3,101		2,270
Cash paid for acquisitions, net of cash acquired		(49,217)		(227,493)		(185,941)
Payments for investments		(2,460)		—		—
Net cash used in investing activities		(97,178)		(246,722)		(207,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		555,000		275,000		268,000
Payments on revolving credit facility		(560,000)		(125,000)		(226,000)
Payments on term loan		(120,000)		(15,000)		(15,000)
Payments on other debt		(12,256)		(15,696)		(46,534)
Payments on finance lease liabilities		(899)		(3,805)		—
Debt financing costs		(2,297)		—		—
Payments of dividends to stockholders		(20,077)		(17,384)		(15,499)
Share repurchase		(38,216)		(27,054)		(30,120)
Shares received in lieu of tax withholding		(3,247)		(2,363)		(1,076)
Proceeds from exercise of options		1,086		5,634		2,144
Deferred acquisition payments		(50)		(400)		(650)
Payments for contingent consideration arrangements		(4,959)		(3,481)		(9,865)
Net cash provided by (used in) financing activities		(205,915)		70,451		(74,600)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,562)		3,880		4,108
CASH AND CASH EQUIVALENTS, beginning of period		58,776		54,896		50,788
CASH AND CASH EQUIVALENTS, end of period	$	57,214	$	58,776	$	54,896

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

COMFORT SYSTEMS USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We build, install, maintain, repair and replace mechanical, electrical and plumbing (“MEP”) systems throughout the United States. Approximately 48.6% of our consolidated 2022 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 51.4% attributable to renovation, expansion, maintenance, repair and replacement services in existing buildings. The terms “Comfort Systems,” “we,” “us,” or the “Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.

2. Summary of Significant Accounting Policies and Estimates

Principles of Consolidation

These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling interest. All intercompany accounts and transactions have been eliminated. Certain amounts in prior periods may have been reclassified to conform to the current period presentation. The effects of the reclassifications were not material to the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, self-insurance accruals, accounting for income taxes, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing.

Cash Flow Information

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Cash paid (in thousands) for:


	Year Ended December 31,
	2022		2021		2020
Interest	$	12,915	$	6,052	$	7,684
Income taxes, net of refunds	$	44,296	$	52,204	$	51,286

Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This standard requires an acquirer to apply Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and interim periods

within that year. Early adoption is permitted. We do not expect our adoption of this standard on January 1, 2023 to have a material impact on our consolidated financial statements.

Revenue Recognition

We recognize revenue over time for all of our services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process, as evidenced either by contractual termination clauses or by our rights to payment for work performed to date, plus a reasonable profit, for delivery of products or services that do not have an alternative use to the Company.

For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use a cost-to-cost input method to measure our progress towards satisfaction of the performance obligation for our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under the cost-to-cost input method, 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. Revenue, including estimated fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, subcontractors’ costs, other direct costs and an allocation of indirect costs.

For a small portion of our business in which our services are delivered in the form of service maintenance agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is to maintain the customer’s mechanical system for a specific period of time. Similar to construction jobs, we recognize revenue over time; however, for service maintenance agreements in which the full cost to provide services may not be known, we generally use an input method to recognize revenue, which is based on the amount of time we have provided our services out of the total time we have been contracted to perform those services. Our revenue recognition policy is further discussed in Note 3 “Revenue from Contracts with Customers.”

Accounts Receivable and Allowance for Credit Losses

We are required to estimate and record the expected credit losses over the contractual life of our financial assets measured at amortized cost, including billed and unbilled accounts receivable, other receivables and contract assets. Accounts receivable include amounts from work completed in which we have billed or have an unconditional right to bill our customers. Our trade receivables are contractually due in less than a year.

We estimate our credit losses using a loss-rate method for each of our identified portfolio segments. Our portfolio segments are construction, service and other. While our construction and service financial assets are often with the same subset of customers and industries, our construction financial assets will generally have a lower loss-rate than service financial assets due to lien rights, which we are more likely to have on construction jobs. These lien rights result in lower credit loss expenses on average compared to receivables that do not have lien rights. Financial assets classified as Other include receivables that are not related to our core revenue producing activities, such as receivables related to our acquisition activity from former owners, our vendor rebate program or receivables for estimated losses in excess of our insurance deductible, which are accrued with a corresponding accrued insurance liability.

Loss rates for our portfolios are based on numerous factors, including our history of credit loss expense by portfolio, the financial strength of our customers and counterparties in each portfolio, the aging of our receivables, our expectation of likelihood of payment, macroeconomic trends in the U.S. and the current and forecasted nonresidential construction market trends in the U.S.

In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables (e.g., when we hold concerns about a specific customer going bankrupt and no longer being able to pay the receivables due to us).

Activity in our allowance for credit losses consisted of the following (in thousands):


	Year Ended December 31,								Year Ended December 31,
	2022								2021
	Service		Construction		Other		Total		Service		Construction		Other		Total
Balance at beginning of year	$	3,294	$	6,758	$	58	$	10,110	$	4,637	$	6,028	$	44	$	10,709
Bad debt expense (benefit)		2,431		232		7		2,670		(970)		(496)		14		(1,452)
Deductions for uncollectible receivables written off, net of recoveries		(804)		(402)		—		(1,206)		(742)		(244)		—		(986)
Credit allowance of acquired receivables on the acquisition date		324		343		—		667		369		1,470		—		1,839
Balance at end of period	$	5,245	$	6,931	$	65	$	12,241	$	3,294	$	6,758	$	58	$	10,110

Inventories

Inventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business and are stated at the lower of cost or net realizable value using the average-cost method.

Property and Equipment

Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the expected life of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the remaining useful life of the equipment. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in “Gain on Sale of Assets” in the Consolidated Statements of Operations.

Recoverability of Goodwill and Identifiable Intangible Assets

Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.

When the carrying value of a given reporting unit exceeds its fair value, a goodwill impairment loss is recorded for this difference, not to exceed the carrying amount of goodwill. The requirements for assessing whether goodwill has been impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.

We perform our annual impairment testing as of October 1, and any impairment charges resulting from this process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our related management of them. We perform our annual goodwill impairment testing at the reporting unit level. We perform a goodwill impairment review for each of our operating units, as we have determined that each of our operating units are reporting units.

In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform any further testing. If we conclude otherwise, or if we elect to perform a quantitative assessment, then we calculate the fair value of the reporting unit and compare the fair value with the carrying value of the reporting unit.

We estimate the fair value of the reporting unit based on a market approach and an income approach, which utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long-term growth rates and the determination of terminal values. The market approach utilizes market multiples of invested capital from comparable publicly traded companies

(“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).

We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition may result in adjustments to recorded intangible asset balances or their useful lives.

Long-Lived Assets

Long-lived assets are comprised principally of identifiable intangible assets, property and equipment, lease right-of-use assets and deferred tax assets. We periodically evaluate whether events and circumstances have occurred that indicate that the remaining balances of these assets may not be recoverable. We use estimates of future undiscounted cash flows, as well as other economic and business factors, to assess the recoverability of these assets.

Acquisitions

We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimates as of the date of acquisition.

Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in income in the period of the change.

Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their acquisition date fair value when their respective fair values are determinable. Acquisition date fair value estimates are revised as necessary if, and when, additional information regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.

Self-Insurance Liabilities

We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health claims, in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and longer-developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly. Our self-insurance arrangements are further discussed in Note 13 “Commitments and Contingencies.”

Warranty Costs

We typically warrant labor for the first year after installation on new MEP systems that we build and install, and we pass through to the customer manufacturers’ warranties on equipment. We generally warrant labor for thirty days after servicing existing MEP systems. A reserve for warranty costs is estimated and recorded based upon the historical level of warranty claims and management’s estimate of future costs.

Income Taxes

We conduct business throughout the United States in virtually all fifty states. Our effective tax rate changes based upon our relative profitability, or lack thereof, in the federal and various state jurisdictions with differing tax rates and rules. In addition, discrete items such as tax law changes, judgments and legal structures, can impact our effective tax rate. These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, uncertain tax positions, and accounting for losses associated with underperforming operations.

Income taxes are provided for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial

statements. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, taxable income in prior carryback years and tax planning strategies. Management’s judgment is required in considering the relative weight of negative and positive evidence.

We record uncertain tax positions based on a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the relevant taxing authority.

To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income taxes, such amounts are accrued and classified as a component in the provision for income taxes in our Consolidated Statements of Operations.

Concentrations of Credit Risk

We provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables from a variety of customers including general contractors, property owners and developers, and commercial and industrial companies. We are subject to potential credit risk related to changes in business and economic factors throughout the United States within the nonresidential construction industry. However, we are entitled to payment for work performed and have certain lien rights related to that work. Further, we believe that our contract acceptance, billing and collection policies are adequate to manage potential credit risk. We regularly review our accounts receivable and estimate an allowance for credit losses. We have a diverse customer base, with our top customer representing 8% of consolidated 2022 revenue.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable and life insurance policies, for which we deem the carrying values approximate their fair value due to the short-term nature of these instruments, as well as notes to former owners and a revolving credit facility.

Investments

We have a $2.5 million investment with a fair value that is not readily determinable and is recorded at cost. This investment is included in “Other Noncurrent Assets” in our Consolidated Balance Sheet and is reviewed quarterly for impairment. We did not recognize any impairments in the current year related to this investment.

3. Revenue from Contracts with Customers

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Sales-based taxes are excluded from revenue.

We provide mechanical and electrical contracting services. Our mechanical segment principally includes HVAC, plumbing, piping and controls, as well as off‑site construction, monitoring and fire protection. Our electrical segment includes installation and servicing of electrical systems. We build, install, maintain, repair and replace products and systems throughout the United States. All of our revenue is recognized over time as we deliver goods and services to our customers. Revenue can be earned based on an agreed-upon fixed price or based on actual costs incurred, marked up at an agreed-upon percentage.

For fixed price agreements, we use the cost-to-cost input method of accounting under which contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process to obtain installation contracts, we estimate our contract costs, which include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption “Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed. Non‑labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications, normally installed shortly after receipt and is a value-added element to our work. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are generally recorded when delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments and judgments.

We account for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. We consider the start of a project to be when the above criteria have been met and we either have written authorization from the customer to proceed or an executed contract.

Selling, marketing and estimation costs incurred in relation to selling contracts are expensed as incurred. On rare occasions, we may incur significant expenses related to selling a contract that we only incurred because we sold that contract. If this occurs, we capitalize that cost and amortize it on a completion percentage basis over the life of the contract. We do not currently have any capitalized selling, marketing, or estimation costs in our Consolidated Balance Sheet and did not incur any impairment loss in the current year.

We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. On rare occasions, when significant pre contract costs are incurred, they are capitalized and amortized over the life of the contract using a cost-to-cost input method to measure progress towards contract completion. We do not currently have any capitalized obtainment or fulfillment costs in our Consolidated Balance Sheet and have not incurred any impairment loss on such costs in the current year.

Project contracts typically provide for a schedule of billings or invoices to the customer based on our job-to-date completion percentage of specific tasks inherent in the fulfillment of our performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in our Consolidated Statement of Operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in our Consolidated Balance Sheet under the caption “Costs and Estimated Earnings in Excess of Billings.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our Consolidated Balance Sheet under the caption “Billings in Excess of Costs and Estimated Earnings.”

Contracts in progress are as follows (in thousands):


	December 31,
	2022		2021
Costs incurred on contracts in progress	$	4,801,264	$	3,723,715
Estimated earnings, net of losses		796,260		589,286
Less—Billings to date		(5,953,973)		(4,527,801)
Less—Unbilled accounts receivable		(77,030)		(61,881)
Less—Unbilled accounts receivable credit allowance		(1,011)		(715)
	$	(434,490)	$	(277,396)

Costs and estimated earnings in excess of billings	$	27,211	$	29,900
Plus—Costs and estimated earnings in excess of billings credit allowance		80		84
Billings in excess of costs and estimated earnings		(461,781)		(307,380)
	$	(434,490)	$	(277,396)

Accounts receivable include amounts billed to customers under retention or retainage provisions in construction contracts. Such provisions are standard in our industry and usually allow for a small portion of progress billings or the contract price to be withheld by the customer until after we have completed work on the project, typically for a period of six months. Based on our experience with similar contracts in recent years, the majority of our billings for such retention balances at each Balance Sheet date are finalized and collected within the subsequent year. Retention balances at December 31, 2022 and 2021 were $193.6 million and $139.5 million, respectively, and are included in accounts receivable.

Accounts payable at December 31, 2022 and 2021 included $29.8 million and $24.0 million of retainage under terms of contracts with subcontractors, respectively. The majority of the retention balances at each Balance Sheet date are finalized and paid within the subsequent year.

The cost-to-cost input method of accounting is also affected by changes in job performance, job conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such conclusion is reached, regardless of the completion percentage of the contract.

Revisions to project costs and conditions can give rise to change orders under which there is an agreement between the customer and us that the customer pays an additional or reduced contract price. Revisions can also result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders with the customer. The amount of revenue associated with unapproved change orders and claims was immaterial for the year ended December 31, 2022.

Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation from change orders collected from customers.

We typically invoice our customers with payment terms of net due in 30 days. It is common in the construction industry for a contract to specify more lenient payment terms allowing the customer 45 to 60 days to make their payment. It is also common for the contract in the construction industry to specify that a general contractor is not required to submit payments to a subcontractor until it has received those funds from the owner or funding source. In most instances, we receive payment of our invoices between 30 to 90 days of the date of the invoice.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one performance obligation and whether the combined or single contract

should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract, in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In such cases, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized, customer-specific solution, and, in these cases, we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

We recognize revenue over time for all of our services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process, as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion (the process described below in more detail) is complex, subject to many variables and requires significant judgment. The consideration to which we are entitled on our long-term contracts may include both fixed and variable amounts. Variable amounts can either increase or decrease the transaction price. A common example of variable amounts that can either increase or decrease contract value are pending change orders that 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. Other examples of positive variable revenue include amounts awarded upon achievement of certain performance metrics, program milestones or cost of completion date targets and can be based upon customer discretion. Variable amounts can result in a deduction from contract revenue if we fail to meet stated performance requirements, such as complying with the construction schedule.

We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing performance obligation(s). The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catch-up basis.

We have a Company-wide policy requiring periodic review of the Estimate at Completion in which management reviews the progress and execution of our performance obligations and estimated remaining obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables.

Based on this analysis, any adjustments to revenue, cost of services, and the related impact to operating income are recognized as necessary in the quarter when they become known. These adjustments may result from positive program performance if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities and may result in an increase in operating income during the performance of individual performance obligations. Likewise, if we determine we will not be successful in mitigating these risks or realizing related opportunities, these adjustments may result in a decrease in operating income. Changes in estimates of revenue, cost of services and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, meaning we recognize in the current period the cumulative effect of the changes on current and prior periods based on our progress towards complete satisfaction of a performance obligation. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For projects in which estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

The Company typically does not incur any returns, refunds, or similar obligations after the completion of the performance obligation since any deficiencies are corrected during the course of the work or are included as a modification to revenue. The Company does offer an industry standard warranty on our work, which is most commonly for a one-year period. The vendors providing the equipment and materials are responsible for any failures in their product unless installed incorrectly. We include an estimated amount to cover estimated warranty expense in our Cost of Services and record a liability in our Consolidated Balance Sheet to cover our current estimated outstanding warranty obligations.

During the years ended December 31, 2022 and December 31, 2021, net revenue recognized from our performance obligations satisfied in previous periods was not material.

Disaggregation of Revenue

Our consolidated 2022 revenue was derived from contracts to provide service activities in the mechanical and electrical services segments we serve. Refer to Note 16 “Segment Information” for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and service provided, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the following tables (dollars in thousands):


	Year Ended December 31,
Revenue by Service Provided	2022				2021				2020
Mechanical Services	$	3,178,475	76.8	%	$	2,542,623	82.7	%	$	2,430,632	85.1	%
Electrical Services		961,889	23.2	%		531,013	17.3	%		426,027	14.9	%
Total	$	4,140,364	100.0	%	$	3,073,636	100.0	%	$	2,856,659	100.0	%

	Year Ended December 31,
Revenue by Type of Customer	2022				2021				2020
Industrial	$	1,973,252	47.7	%	$	1,356,688	44.1	%	$	1,112,075	38.9	%
Healthcare		584,023	14.1	%		417,901	13.6	%		371,105	13.0	%
Education		445,638	10.8	%		390,251	12.7	%		487,922	17.1	%
Office Buildings		349,235	8.4	%		308,799	10.1	%		319,426	11.2	%
Retail, Restaurants and Entertainment		311,697	7.5	%		213,386	6.9	%		239,541	8.4	%
Government		255,314	6.2	%		174,813	5.7	%		163,717	5.7	%
Multi-Family and Residential		126,339	3.0	%		112,779	3.7	%		86,799	3.0	%
Other		94,866	2.3	%		99,019	3.2	%		76,074	2.7	%
Total	$	4,140,364	100.0	%	$	3,073,636	100.0	%	$	2,856,659	100.0	%

	Year Ended December 31,
Revenue by Activity Type	2022				2021				2020
New Construction	$	2,011,992	48.6	%	$	1,421,784	46.3	%	$	1,333,739	46.7	%
Existing Building Construction		1,210,512	29.2	%		963,461	31.3	%		910,807	31.9	%
Service Projects		382,155	9.2	%		278,582	9.1	%		241,402	8.4	%
Service Calls, Maintenance and Monitoring		535,705	13.0	%		409,809	13.3	%		370,711	13.0	%
Total	$	4,140,364	100.0	%	$	3,073,636	100.0	%	$	2,856,659	100.0	%

Contract Assets and Liabilities

Contract assets include unbilled amounts typically resulting from sales under long term contracts when the cost-to-cost method of revenue recognition is used, revenue recognized exceeds the amount billed to the customer and right to payment is conditional or subject to completing a milestone, such as a phase of the project. Contract assets are not considered a significant financing component, as they are intended to protect the customer in the event that we do not perform our obligations under the contract. Contract assets are generally classified as current, as it is very unusual for us to have contract assets with a term of greater than one year.

Contract liabilities consist of advance payments and billings in excess of revenue recognized. It is very unusual for us to have advanced payments with a term of greater than one year; therefore, our contract liabilities are usually all current. Advanced payments from customers related to work not yet started are classified as “Deferred Revenue.” If we have advanced payments with a term greater than one year, the noncurrent portion of advanced payments would be included in “Other Long-term Liabilities” in our Consolidated Balance Sheets. Contract liabilities are not considered to have a significant financing component, as they are used to meet working capital requirements that are generally higher in the early stages of a contract and are intended to protect us from the other party failing to meet its obligations under the contract. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

The following table presents the changes in contract assets and contract liabilities (in thousands):


	Year Ended December 31,					Year Ended December 31,
	2022				2021
	Contract		Contract		Contract		Contract
	Assets		Liabilities		Assets		Liabilities
Balance at beginning of period	$	29,900	$	307,380	$	18,622	$	226,237
Change due to acquisitions / disposals		2,426		1,160		10,356		36,523
Change related to credit allowance		4		—		(5)		—
Other changes in the period		(5,119)		239,753		927		44,620
Balance at end of period	$	27,211	$	548,293	$	29,900	$	307,380

During the years ended December 31, 2022 and 2021, we recognized revenue of $286.5 million and $207.6 million related to our contract liabilities at January 1, 2021 and January 1, 2020, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in 2022 and 2021.

Remaining Performance Obligations

Remaining construction performance obligations represent the remaining transaction price of firm orders for which work has not been performed and exclude unexercised contract options. As of December 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $4.06 billion. The Company expects to recognize revenue on approximately 65-75% of the remaining performance obligations over the next 12 months, with the remaining recognized thereafter. Our service maintenance agreements are generally one-year renewable agreements. We have adopted the practical expedient that allows us to not include service maintenance contracts with a total term of one year or less; therefore, we do not report unfulfilled performance obligations for service maintenance agreements.

4. Fair Value Measurements

Interest Rate Risk Management and Derivative Instruments

In April 2020, we entered into interest rate swap agreements to reduce our exposure to variable interest rates on our revolving credit facility. The interest rate swap agreements terminated on September 30, 2022.

At times, we use derivative instruments to manage exposure to market risk, including interest rate risk. Unsettled amounts under our interest rate swaps, if any, are recorded in the Consolidated Balance Sheet at fair value in “Other Receivables” or “Other Current Liabilities.” Gains and losses on our interest rate swaps are recorded in the Consolidated Income Statement in “Interest Expense.” For the years ended December 31, 2022, 2021 and 2020, we recognized a net gain of $0.3 million, a net loss of $0.5 million and a net loss of $0.3 million, respectively, related to our interest rate swaps. We currently do not have any derivatives that are accounted for as hedges under ASC 815.

Fair Value Measurement

We classify and disclose assets and liabilities carried at fair value in one of the following three categories:

	●	Level 1—quoted prices in active markets for identical assets and liabilities;

	●	Level 2—observable market-based inputs or unobservable inputs that are corroborated by market data; and

	●	Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements are included, for assets and liabilities measured on a recurring basis as of December 31, 2022 and 2021 (in thousands):


	Fair Value Measurements at December 31, 2022
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	57,214	$	—	$	—	$	57,214
Life insurance—cash surrender value	$	—	$	9,315	$	—	$	9,315
Contingent earn-out obligations	$	—	$	—	$	32,317	$	32,317

	Fair Value Measurements at December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	58,776	$	—	$	—	$	58,776
Life insurance—cash surrender value	$	—	$	6,643	$	—	$	6,643
Contingent earn-out obligations	$	—	$	—	$	34,114	$	34,114

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity. We believe the carrying value of our debt associated with our revolving credit facility approximates its fair value due to the variable rate on such debt. We believe the carrying values of our notes to former owners approximate their fair values due to the relatively short remaining terms on these notes.

We have life insurance policies covering 120 employees with a combined face value of $82.1 million. The policies are invested in several investment vehicles, and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. The cash surrender value of these policies is included in “Other Noncurrent Assets” in our Consolidated Balance Sheets.

We value contingent earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes

assumptions with regard to future cash flows and operating income, probabilities of achieving such future cash flows and operating income and a weighted average cost of capital. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. As of December 31, 2022, cash flows were discounted using a weighted average cost of capital ranging from 11.0% - 17.0%.

The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands):


	December 31,
	2022		2021
Balance at beginning of year	$	34,114	$	25,979
Issuances		—		19,949
Settlements		(6,616)		(3,994)
Adjustments to fair value		4,819		(7,820)
Balance at end of year	$	32,317	$	34,114

We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are concluded to be other-than-temporarily impaired. No goodwill or other intangible asset impairments were recorded during the years ended December 31, 2022, 2021 and 2020. We did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis. See Note 6 “Goodwill and Identifiable Intangible Assets, Net” for further discussion.

5. Acquisitions

On April 1, 2022, we acquired Atlantic Electric, LLC and its related subsidiary (“Atlantic”), headquartered in Charleston, South Carolina, and with operations in South Carolina and Western North Carolina, for a total preliminary purchase price of $48.1 million, which included $34.1 million of cash paid on the closing date, $5.3 million in notes payable to former owners and a working capital adjustment. Atlantic performs electrical contracting for customers in various South Carolina markets, as well as installation of airport runway lighting in the Southeast. As a result of the acquisition, Atlantic is a wholly owned subsidiary of the Company reported in our electrical services segment.

On December 31, 2021, we acquired MEP Holding Co., Inc., and its related subsidiaries (collectively, “MEP Holdings”) for a total purchase price of $57.3 million, which included $45.2 million funded on the closing date, $7.6 million in notes payable to former owners, an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. As a result of the acquisition, MEP Holdings is a wholly owned subsidiary of the Company and reports as a separate operating location in our electrical services segment. Additionally, on December 31, 2021, we completed an acquisition of a service and controls business in Kentucky with a total purchase price of $20.5 million and a temporary staffing company based in Indiana with a total purchase price of $4.7 million, which are both reported in our mechanical services segment.

On December 1, 2021, we acquired Ivey Mechanical Company, LLC (“Ivey”) headquartered in Kosciusko, Mississippi for a total purchase price of $79.1 million, which included $64.1 million of cash paid on the closing date, a $0.4 million short term payable which was settled in the third quarter of 2022, $8.0 million in notes payable to former owners, plus an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. As a result of the acquisition, Ivey is a wholly owned subsidiary of the Company and reports as a separate operating location in our mechanical services segment.

On August 1, 2021, we acquired all of the issued and outstanding equity interests of Amteck Holdco LLC and each of its wholly owned subsidiaries (collectively “Amteck”). The total purchase price was $138.9 million of which $113.1 million was allocated to goodwill and identifiable intangible assets. The total purchase price included $107.4 million in cash, $8.6 million in working capital adjustment, $10.0 million in notes payable to former owners and a $12.9 million contingent earn-out obligation. Amteck provides electrical contracting solutions and services, including design and build, pre-fabrication and installation for core electric and low-voltage systems, as well as services for planned maintenance, retrofit and emergency work. Amteck is headquartered in Kentucky and primarily serves the greater

Southeastern United States, including Kentucky, Tennessee and the Carolinas. As a result of the acquisition, Amteck is a wholly owned subsidiary of the Company reported in our electrical services segment.

In the first quarter of 2021, we completed an acquisition of a mechanical contractor in Utah with a total purchase price of $18.1 million, which is reported in our mechanical services segment.

The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Our Consolidated Balance Sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for the applicable acquisitions pending the completion of the final valuation of intangible assets and accrued liabilities. The acquisitions completed in the current and prior year were not material, individually or in the aggregate. Additional contingent purchase price (“earn-out”) has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs, when they are not subject to the continued employment of the sellers, are estimated as of the purchase date and included as part of the consideration paid for the acquisition. If we have an earn-out under which continued employment is a condition to receipt of payment, then the earn-out is recorded as compensation expense over the period earned.

6. Goodwill and Identifiable Intangible Assets, Net

Goodwill

The changes in the carrying amount of goodwill are as follows (in thousands):


	Mechanical Services		Electrical Services
	Segment		Segment		Total
Balance at December 31, 2020	$	307,448	$	156,944	$	464,392
Acquisitions and purchase price adjustments (See Note 5)		52,771		74,951		127,722
Impact of segment reorganization		1,101		(1,101)		—
Balance at December 31, 2021		361,320		230,794		592,114
Acquisitions and purchase price adjustments (See Note 5)		2,609		17,066		19,675
Balance at December 31, 2022	$	363,929	$	247,860	$	611,789

The aggregate goodwill balance as of December 31, 2022 and 2021 includes $116.6 million of accumulated impairment charges, all of which relate to the mechanical services segment.

During our annual impairment testing on October 1, 2022, we performed a quantitative assessment where the fair value of each reporting unit was estimated using a discounted cash flow model combined with a market valuation approach. We assigned a weighting of 50% to the discounted cash flow analysis and 50% to the public company approach for the year ended December 31, 2022. Based on this assessment, we concluded that the fair value of each of the reporting units was greater than its carrying value. A 10% decline in the estimated fair value of each reporting unit due to a change in assumptions would not have resulted in us recording an impairment in 2022.

For the years ended December 31, 2022, 2021 and 2020, no impairment of our goodwill was recorded.

There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimates and assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in future periods.

Identifiable Intangible Assets, Net

Identifiable intangible assets consist of the following (dollars in thousands):


	Weighted-Average	December 31, 2022				December 31, 2021
	Remaining Useful Lives	Gross Book		Accumulated		Gross Book		Accumulated
	in Years	Value		Amortization		Value		Amortization
Customer Relationships	6.7	$	340,721	$	(161,049)	$	330,572	$	(130,098)
Backlog	0.8		3,200		(2,361)		32,300		(20,091)
Trade Names	18.4		121,561		(28,171)		114,795		(22,697)
Total		$	465,482	$	(191,581)	$	477,667	$	(172,886)

The amounts attributable to customer relationships and tradenames are amortized to “Selling, General and Administrative Expenses” based upon the estimated consumption of their economic benefits, or a straight-line method over periods from one to twenty-five years if the pattern of economic benefit cannot otherwise be reliably estimated. The amounts attributable to backlog are being amortized to “Cost of Services” on a proportionate method over the remaining backlog period. Amortization expense for the years ended December 31, 2022, 2021 and 2020 was $47.8 million, $40.5 million and $32.7 million, respectively.

As of December 31, 2022, future amortization expense of identifiable intangible assets was as follows (in thousands):


Year ending December 31—
2023	$	36,252
2024		34,063
2025		31,876
2026		31,032
2027		29,050
Thereafter		111,628
Total	$	273,901

7. Property and Equipment

Property and equipment consist of the following (dollars in thousands):


	Estimated
	Useful Lives	December 31,
	in Years	2022		2021
Land	—	$	6,792	$	6,792
Transportation equipment	1 - 7		153,587		132,792
Machinery and equipment	1 - 20		56,357		48,000
Computer and telephone equipment	1 - 10		23,551		23,065
Buildings and leasehold improvements	1 - 40		80,275		74,981
Furniture and fixtures	1 - 17		6,270		6,081
Construction in progress	—		6,717		1,668
			333,549		293,379
Less—Accumulated depreciation			(189,600)		(164,825)
Property and equipment, net		$	143,949	$	128,554

Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $33.6 million, $28.4 million and $27.9 million, respectively.

8. Detail of Other Current Liabilities

Other current liabilities consist of the following (in thousands):


	December 31,
	2022		2021
Accrued warranty costs	$	9,429	$	8,969
Current lease liability		21,151		19,050
Accrued job losses		3,650		8,962
Accrued sales and use tax		5,335		3,861
Liabilities due to former owners		31,510		27,613
Other current liabilities		49,640		37,211
	$	120,715	$	105,666

9. Debt Obligations

Debt obligations consist of the following (in thousands):


	December 31,
	2022		2021
Revolving credit facility	$	215,000	$	220,000
Term loan		—		120,000
Notes to former owners		41,040		47,954
Finance lease liabilities		—		266
Other debt		205		—
Total principal amount		256,245		388,220
Less—unamortized debt issuance costs		—		(190)
Total debt, net of unamortized debt issuance costs		256,245		388,030
Less—current portion		(9,000)		(2,788)
Total long-term portion of debt, net	$	247,245	$	385,242

At December 31, 2022, future principal payments of debt are as follows (in thousands):


Year ending December 31—
2023	$	9,000
2024		7,332
2025		22,269
2026		2,644
2027		215,000
	$	256,245

Interest expense included the following primary elements (in thousands):


	Year Ended December 31,
	2022		2021		2020
Interest expense on notes to former owners	$	1,139	$	1,052	$	1,354
Interest expense on borrowings and unused commitment fees		10,955		3,371		5,319
Interest expense (income) on interest rate swaps		(332)		499		338
Interest expense on finance leases		4		57		—
Letter of credit fees		800		679		830
Amortization of debt financing costs		786		538		544
Total	$	13,352	$	6,196	$	8,385

Revolving Credit Facility

On May 25, 2022, we amended our senior credit facility (as amended, the “Facility”) arranged by Wells Fargo Bank, National Association, as administrative agent, and provided by a syndicate of banks, increasing our borrowing capacity from $562.5 million (of which $450 million was a revolving credit facility) to $850 million. As amended, the Facility is composed of a revolving credit line guaranteed by certain of our subsidiaries, in the amount of $850.0 million. The amended Facility also provides for an accordion or increase option not to exceed the greater of (a) $250 million and (b) 1.0x Credit Facility Adjusted EBITDA (as defined below), as well as a sublimit of up to $175.0 million issuable in the form of letters of credit. The Facility expires in July 2027 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and the equity of, and assets held by, certain unrestricted subsidiaries and our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. In 2022, we incurred approximately $2.3 million in financing and professional costs in connection with the amendment to the Facility, which, combined with previously unamortized costs of $1.2 million, are being amortized on a straight-line basis as a non-cash charge to interest expense over the remaining term of the Facility. As of December 31, 2022, we had $215.0 million of outstanding borrowings on the revolving credit facility, $54.2 million in letters of credit outstanding and $580.8 million of credit available.

Collateral

A common practice in our industry is the posting of payment and performance bonds with customers. These bonds are offered by financial institutions known as sureties and provide assurance to the customer that in the event we encounter significant financial or operational difficulties, the surety will arrange for the completion of our contractual obligations and for the payment of our vendors on the projects subject to the bonds. In cooperation with our lenders, we granted our sureties a first lien on assets such as receivables, costs and estimated earnings in excess of billings, and equipment specifically identifiable to projects for which bonds are outstanding, as collateral for potential obligations under bonds. As of December 31, 2022, the book value of these assets was approximately $120.3 million.

Covenants and Restrictions

The Facility contains financial covenants defining various financial measures and the levels of these measures with which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is defined under the Facility for financial covenant purposes as consolidated net income for the four fiscal quarters ending as of any given quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision for income taxes; (c) depreciation and amortization; (d) stock or equity compensation; (e) other non-cash charges; and (f) pre-acquisition results of acquired companies. The Facility’s principal financial covenants include:

Net Leverage Ratio—The Facility requires that the ratio of (a) our Consolidated Total Indebtedness (as defined in the Facility) minus unrestricted cash and cash equivalents up to $100,000,000, to (b) our Credit Facility Adjusted EBITDA not exceed 3.50 to 1.00 as of the end of each fiscal quarter.

Interest Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA to (b) consolidated interest expense, defined as all interest paid or accrued on indebtedness during the period excluding amortization of debt incurrence expenses, original issue discount, and mark-to-market interest expense, be at least 3.00 to 1.00. Credit Facility Adjusted EBITDA and consolidated interest expense are calculated for purposes of this covenant for the four fiscal quarters ending as of any given quarterly covenant compliance measurement date.

Other Restrictions—The Facility (a) permits unlimited acquisitions when the Company’s Net Leverage Ratio is less than or equal to 3.25 to 1.00, (b) expands certain baskets for permitted indebtedness and liens, and (c) permits unlimited distributions, stock repurchases, and investments when the Net Leverage Ratio is less than or equal to 2.75 to 1.00.

While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter-end covenant compliance measurement date were to cause us to violate the Facility’s Net Leverage Ratio covenant, our borrowing capacity under the Facility and the favorable terms that we currently have could be negatively impacted.

We were in compliance with all of our financial covenants as of December 31, 2022.

Interest Rates and Fees

There are two interest rate options for borrowings under the Facility, the Base Rate Loan (as defined in the Facility) option and the Secured Overnight Financing Rate (“SOFR”) Loan option. Under the Base Rate Loan option, the interest rate is determined based on the highest of (a) the Federal Funds Rate (as defined in the Facility) plus 0.50%, (b) the prime lending rate established by Wells Fargo Bank, N.A., and (c) the one-month Adjusted Term SOFR (as defined in the Facility) plus 1.00%. Under the SOFR Loan option, the interest rate is determined based on Adjusted Term SOFR for a one, three, or six-month tenor at our election. Additional margins are then added to these two rates. The additional margins are determined based on our Net Leverage Ratio.

The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. For illustrative purposes, the following are the respective market rates as of December 31, 2022 relating to interest options under the Facility:


Base Rate Loan Option:
Federal Funds Rate plus 0.50%		4.83%
Wells Fargo Bank, N.A. Prime Rate		7.50%
One-month SOFR plus 1.00%		5.06%
SOFR Loan Option:
One-month SOFR		4.06%
Three-month SOFR		3.62%
Six-month SOFR		2.89%

Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the lenders for amounts they fund to honor the letter of credit holder’s claim. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders, letters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim made against a letter of credit that resulted in payments by a lender or by us and believe such a claim is unlikely in the foreseeable future.

Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters of credit at any given time. Letter of credit fees and commitment fees are based on the Net Leverage Ratio.


	Net Leverage Ratio
	Less than1.00		1.00 to less than 1.75		1.75 to less than 2.50		2.50 to less than 3.00		3.00 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option	0.00	%	0.25	%	0.50	%	0.75	%	1.00	%
SOFR Loan Option	1.00	%	1.25	%	1.50	%	1.75	%	2.00	%
Letter of credit fees	1.00	%	1.25	%	1.50	%	1.75	%	2.00	%
Commitment fees on any portion of the Revolving Loan capacity not in use for borrowings or letters of credit at any given time	0.15	%	0.175	%	0.20	%	0.225	%	0.25	%

The weighted average interest rate applicable to the borrowings under the revolving credit facility was approximately 5.7% as of December 31, 2022 and 1.4% as of December 31, 2021.

Notes to Former Owners

As part of the consideration used to acquire ten companies, we have outstanding notes to the former owners. Together, these notes had an outstanding balance of $41.0 million as of December 31, 2022. At December 31, 2022, future principal payments of notes to former owners by maturity year are as follows (dollars in thousands):


	Balance at		Range of Stated
	December 31, 2022		Interest Rates
2023	$	9,000	2.5	%
2024		7,200	2.5 - 3.0	%
2025		22,215	2.3 - 3.0	%
2026		2,625	2.5	%
Total	$	41,040

10. Leases

We lease certain facilities, vehicles and equipment primarily under noncancelable operating leases. The most significant portion of these noncancelable operating leases is for the facilities occupied by our corporate office and our operating locations. Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet. We do not separate lease components from their associated non-lease components pursuant to lease accounting guidance. We have certain leases with variable payments based on an index as well as some short-term leases on equipment and facilities. Variable lease expense and short-term lease expense were not material to our financial statements and aggregated to $19.1 million in 2022, $11.9 million in 2021 and $7.7 million in 2020. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate for our operating leases as of December 31, 2022 and 2021 was 4.3% and 4.0%, respectively. We recognize operating lease expense, including escalating lease payments and lease incentives, on a straight-line basis over the lease term. Operating lease expense for the years ended December 31, 2022, 2021 and 2020 was $46.0 million, $34.2 million and $28.2 million, respectively.

The lease terms generally range from three to ten years. Some leases include one or more options to renew, which may be exercised to extend the lease term. We include the exercise of lease renewal options in the lease term when it is reasonably certain that we will exercise the option and such exercise is at our sole discretion. The weighted average remaining lease term for our operating leases was 8.1 years at December 31, 2022 and 8.7 years at December 31, 2021.

A majority of the Company’s real property leases are with individuals or entities with whom we have no other business relationship. However, in certain instances the Company enters into real property leases with current or former employees. Rent paid to related parties for the years ended December 31, 2022, 2021 and 2020 was approximately $6.9 million, $4.9 million and $4.2 million, respectively.

If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. On rare occasions, we rent or sublease certain real estate assets that we no longer use to third parties.

The following table summarizes the operating lease assets and liabilities included in the Consolidated Balance Sheet as follows (in thousands):


	December 31,
	2022		2021
Operating lease right-of-use assets	$	130,666	$	124,756
Operating lease liabilities:
Other current liabilities	$	21,151	$	19,050
Long-term operating lease liabilities		111,744		107,701
Total operating lease liabilities	$	132,895	$	126,751

The maturities of operating lease liabilities as of December 31, 2022 are as follows (in thousands):


Year ending December 31—
2023	$	26,275
2024		23,743
2025		22,471
2026		19,172
2027		14,914
Thereafter		51,638
Total Lease Payments		158,213
Less—Present Value Discount		(25,318)
Present Value of Operating Lease Liabilities	$	132,895

Supplemental information related to operating leases was as follows (in thousands):


	Year Ended December 31,
	2022		2021
Cash paid for amounts included in the measurement of operating lease liabilities	$	26,740	$	22,232
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	27,467	$	47,621

We signed two lease agreements in the fourth quarter of 2022 and one in the first quarter of 2023 that do not commence until 2023 that have combined minimum lease payments of $64 million over the period from 2023 through 2033.

11. Income Taxes

Provision (Benefit) for Income Taxes

Our provision (benefit) for income taxes relating to continuing operations consists of the following (in thousands):


	December 31,
	2022		2021		2020
Current tax provision—
Federal	$	58,040	$	31,283	$	36,556
State		26,376		8,741		12,798
Total current		84,416		40,024		49,354
Deferred tax provision (benefit)—
Federal		(80,130)		6,197		(5,483)
State		(14,375)		705		(2,470)
Total deferred		(94,505)		6,902		(7,953)
Provision (benefit) for income taxes	$	(10,089)	$	46,926	$	41,401

The provision (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020 resulted in effective tax rates on continuing operations of (4.3%), 24.7% and 21.6%, respectively. The reasons for the differences between these effective tax rates and the federal statutory rates are as follows (in thousands, except percentages):


	December 31,
	2022			2021			2020
Federal statutory rate of—		21	%		21	%		21	%
Income taxes at the federal statutory rate	$	49,530		$	39,958		$	40,223
Increases (decreases) resulting from—
Net state income taxes		9,376			7,340			8,406
Valuation allowances		(95)			(39)			(254)
Net unrecognized tax benefits		(17,922)			640			18,557
Nondeductible expenses		4,045			2,381			2,470
R&D tax credit		(51,398)			—			(26,133)
179D deduction		(964)			(1,207)			(1,062)
Stock-based compensation deductions		(872)			(2,210)			(426)
Other		(1,789)			63			(380)
Provision (benefit) for income taxes	$	(10,089)		$	46,926		$	41,401

During the third quarter of 2020, the Internal Revenue Service (the “IRS”) completed their examination of our amended federal returns for 2014 and 2015 and issued a Revenue Agent Report (“RAR”) allowing the $8.9 million of refund claims in full. Subsequently, the Joint Committee on Taxation (the “JCT”) reviewed and approved the refund claims. As a result, our provision for income taxes was decreased by $8.3 million due to a reduction in unrecognized tax benefits.

In early October 2020, we filed amended federal returns for 2016, 2017 and 2018 primarily to claim the credit for increasing research activities (the “R&D tax credit”) requesting refunds of $9.8 million, $9.5 million and $11.9 million, respectively. The $31.2 million of refunds requested was offset by an increase in unrecognized tax benefits of $28.8 million due to the uncertainty of the outcome of an IRS examination. Because of the increase in unrecognized tax benefits, the refunds requested for 2016, 2017 and 2018 had no material impact on our effective tax rates in the 2020 and 2021 calendar years.

Following an IRS survey of the previously filed refund claims for the 2016, 2017 and 2018 tax years, the JCT approved such refunds in late January 2022. As a result, our benefit for income taxes in the first quarter of 2022 included a $28.8 million reduction in unrecognized tax benefits plus approximately $1.6 million of net interest income on the refunds.

Our benefit for income taxes in the first quarter of 2022 was further increased by $26.8 million for the expected refunds due to our intention to claim the R&D tax credit for the 2019, 2020 and 2021 tax years. In the third quarter of 2022, we claimed the R&D tax credit on our originally filed 2021 federal return and recognized an additional $1.7 million benefit for the 2019, 2020 and 2021 tax years. Additionally, in February 2023, we filed amended federal returns for 2019 and 2020 requesting refunds primarily from claiming the R&D tax credit.

The Inflation Reduction Act was enacted on August 16, 2022. This law, among other provisions, provides a corporate alternative minimum tax on adjusted financial statement income over $1 billion, which is effective for tax years beginning after December 31, 2022, and a 1% excise tax on net corporate stock repurchases after December 31, 2022. We currently believe these provisions will be immaterial to our overall financial results, financial position and cash flows.

Deferred Tax Assets (Liabilities)

Significant components of the deferred tax assets and deferred tax liabilities as reflected on the Consolidated Balance Sheets are as follows (in thousands):


	Year Ended
	December 31,
	2022		2021
Deferred tax assets—
Accounts receivable and allowance for credit losses	$	2,530	$	1,878
Stock-based compensation		3,809		3,392
Accrued liabilities and expenses		34,179		36,255
Lease liabilities		32,048		27,944
Net operating loss carryforwards		5,361		10,379
Intangible assets		9,204		3,851
Research and experimental expenditures		106,002		—
Other		539		758
Subtotal		193,672		84,457
Valuation allowances		(379)		(475)
Total deferred tax assets		193,293		83,982
Deferred tax liabilities—
Property and equipment		(18,882)		(15,534)
Lease right-of-use asset		(32,025)		(27,905)
Long-term contracts		(1,870)		(964)
Goodwill		(23,288)		(17,321)
Other		(1,563)		(1,098)
Total deferred tax liabilities		(77,628)		(62,822)
Net deferred tax assets	$	115,665	$	21,160

The deferred tax assets and deferred tax liabilities reflected above are included in the Consolidated Balance Sheets as follows (in thousands):


	December 31,
	2022		2021
Deferred tax assets	$	115,665	$	22,905
Deferred tax liabilities	$	—	$	1,745

As of December 31, 2022, our deferred tax assets were primarily attributable to research and experimental (“R&E”) expenditures, accrued liabilities and expenses, intangible assets and net operating loss (“NOL”) carryforwards. Beginning in 2022, R&E expenditures must be capitalized and amortized pursuant to the Tax Cuts and Jobs Act (2017). Of the $5.4 million deferred tax asset for NOL carryforwards, $4.8 million is related to $23.1 million of federal NOL carryforwards from the TAS Energy Inc. (“TAS”) acquisition. If not used, such carryforwards will begin to expire in 2032.

Pursuant to Section 382 of the Internal Revenue Code, utilization of our federal NOL carryforwards is subject to annual limitations due to the ownership change in TAS. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

Our management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. The most significant piece of objective evidence evaluated was three years of cumulative pretax income in the federal jurisdiction. Management determined there is sufficient positive evidence to conclude it is more likely than not our deferred tax assets are virtually all realizable.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):


	Year Ended
	December 31,
	2022		2021		2020
Balance at beginning of year	$	29,452	$	28,756	$	10,199
Additions based on tax positions related to current year		3,420		207		—
Additions based on tax positions related to prior years		7,427		489		26,858
Reductions for tax positions related to prior years		(13)		—		—
Reductions for settlements with taxing authorities		(28,756)		—		(8,301)
Balance at end of year	$	11,530	$	29,452	$	28,756

As of December 31, 2022, 2021 and 2020, we had $11.5 million, $29.5 million and $28.8 million, respectively, of unrecognized tax benefits, which if recognized in future periods, would impact our effective tax rates. We also accrued $0.3 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2022. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We are subject to taxation in the federal and various state jurisdictions. For the years ended December 31, 2022 and 2020, our unrecognized tax benefits were reduced by $28.8 million and $8.3 million, respectively, due to favorable settlements with the IRS for the 2014 through 2018 tax years. As of December 31, 2022, we remain open to IRS examination for the 2019 tax year forward.

State income tax returns are generally subject to examination for a period of three to four years after filing the returns. However, the state impact of any federal audit adjustments and/or amendments remains subject to examination by various states for up to one year after formal notification to the states. As of December 31, 2022, we generally remain open to examination by various state taxing authorities for the 2018 tax year forward.

We believe it is reasonably possible that a reduction of up to $5.3 million in unrecognized tax benefits could occur within the next twelve months. Any reductions in our unrecognized tax benefits, due to the future recognition of those tax benefits, would affect our effective tax rates.

12. Employee Benefit Plans

We and certain of our subsidiaries sponsor various retirement plans for most full-time and some part-time employees. These plans primarily consist of defined contribution plans. The defined contribution plans generally provide for contributions up to 2.5% of covered employees’ salaries or wages. These contributions totaled $19.8 million in 2022, $16.1 million in 2021 and $16.3 million in 2020. Of these amounts, approximately $0.5 million and $0.6 million were payable to the plans at December 31, 2022 and 2021, respectively.

Certain of our subsidiaries also participate or have participated in various multi-employer pension plans for the benefit of employees who are union members. As of December 31, 2022 and 2021, we had 12 and 5 employees, respectively, who were union members. There were no contributions made to multi-employer pension plans in 2022, 2021 or 2020. The data available from administrators of other multi-employer pension plans is not sufficient to determine the accumulated benefit obligations, nor the net assets attributable to the multi-employer plans in which our employees participate or previously participated.

Certain individuals at one of our operating units are entitled to receive fixed annual payments that reach a maximum amount, as specified in the related agreements, for a 15 year period following retirement or, in some cases, the attainment of 65 years of age. We recognize the unfunded status of the plan as a non-current liability in our Consolidated Balance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vested after 20 years of service. We had an unfunded benefit liability of $3.7 million and $4.0 million recorded as of December 31, 2022 and 2021, respectively.

13. Commitments and Contingencies

Claims and Lawsuits

We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in the accompanying consolidated financial statements. While we cannot predict the outcome of these proceedings, in management’s opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financial condition, after giving effect to provisions already recorded.

In 2022, we recorded a net gain of $5.1 million related to legal matters that merited changes to our assessments of the related accruals in the ordinary course of our business based on information received in 2022. The largest change resulted from favorable developments related to a dispute with a customer regarding the outcome of a completed project as well as the obligation to perform subcontract work under two executed letters of intent for subsequent projects that we believed were not enforceable. The net gain of $5.1 million was recorded primarily as an increase in gross profit in our Consolidated Statements of Operations.

As of December 31, 2022, we recorded an accrual for unresolved matters, which is not material to our financial statements, based on our analysis of likely outcomes related to the respective matters; however, it is possible that the ultimate outcome and associated costs will deviate from our estimates and that, in the event of an unexpectedly adverse outcome, we may experience additional costs and expenses in future periods.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs.

Current market conditions for surety markets and bonding capacity are adequate, with acceptable terms and conditions. Historically, approximately 10% to 20% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in the sureties’ assessment of our operating and financial risk could cause the sureties to decline to issue bonds for our work. If that were to occur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance, such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Self-Insurance

Our self-insurance arrangements as of December 31, 2022 were as follows:

_Workers’ Compensation—_The per-incident deductible for workers’ compensation is $250,000. Losses above $250,000 are determined by statutory rules on a state-by-state basis and are fully covered by excess workers’ compensation insurance.

_Employer’s Liability—_For employer’s liability, the per-incident deductible is $250,000 and then we have several layers of excess loss insurance policies that cover losses up to $175.0 million in aggregate across this risk area (as well as general liability and auto liability noted below).

_General Liability—_For general liability, the per-incident deductible is $250,000. We are fully insured for the next $10.0 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $175.0 million in aggregate across this risk area (as well as employer’s liability noted above and auto liability noted below).

_Auto Liability—_For auto liability, the per-incident deductible is $250,000. We are fully insured for the next $10.0 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $175.0 million in aggregate across this risk area (as well as employer’s liability and general liability noted above).

_Employee Medical—_We have three medical plans. The deductible for employee group health claims is $350,000 per person, per policy (calendar) year for each plan. Insurance then covers any responsibility for medical claims in excess of the deductible amount.

Our $175.0 million of aggregate excess loss coverage above applicable per-incident deductibles represents one policy limit that applies to all lines of risk; we do not have a separate $175.0 million of excess loss coverage for each of general liability, employer’s liability and auto liability.

14. Stockholders’ Equity

Stock Incentive Plans

In May 2017, our stockholders approved our 2017 Omnibus Incentive Plan (the “2017 Plan”), which provides for the granting of incentive or non-qualified stock options, stock appreciation rights, restricted or deferred stock, dividend equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and reserved for issuance under the 2017 Plan is 2.9 million shares. As of December 31, 2022, there were 1.6 million shares available for issuance under this plan. The 2017 Plan will expire in May 2027. We have outstanding and exercisable stock options under our 2012 Equity Incentive Plan, which was superseded by the 2017 Plan.

Share Repurchase Program

On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the number of shares that may be acquired under the program and approved extensions of the program. On May 17, 2022, the Board approved an extension to the program by increasing the shares authorized for repurchase by 0.7 million shares. Since the inception of the repurchase program, the Board has approved 10.9 million shares to be repurchased. As of December 31, 2022, we have repurchased a cumulative total of 10.1 million shares at an average price of $24.52 per share under the repurchase program.

The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the year ended December 31, 2022, we repurchased 0.4 million shares for approximately $38.2 million at an average price of $86.45 per share.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed considering the dilutive effect of stock options, restricted stock, restricted stock units and performance stock units. The vesting of unvested, contingently issuable performance stock units is based on the achievement of certain earnings per share targets and total shareholder return. These shares are considered contingently issuable shares for purposes of calculating diluted earnings per share. These shares are not included in the diluted earnings per share denominator until the performance criteria are met, if it is assumed that the end of the reporting period was the end of the contingency period.

Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per share, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock units and performance stock units are included in basic earnings per share weighted outstanding from the vesting date.

There were zero anti-dilutive stock options excluded from the calculation of diluted EPS for the years ended December 31, 2022 and 2021 and less than 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2020.

The following table reconciles the number of shares outstanding with the number of shares used in computing basic and diluted earnings per share for each of the periods presented (in thousands):



	Year Ended December 31,
	2022	2021	2020
Common shares outstanding, end of period	35,761	36,091	36,188
Effect of using weighted average common shares outstanding	171	194	354
Shares used in computing earnings per share—basic	35,932	36,285	36,542
Effect of shares issuable under stock option plans based on the treasury stock method	36	89	123
Effect of restricted and contingently issuable shares	78	76	73
Shares used in computing earnings per share—diluted	36,046	36,450	36,738

15. Stock-Based Compensation

Grants of restricted stock and restricted stock units and performance share units have been determined and administered by the compensation committee of the Board of Directors. Total stock-based compensation expense was $10.5 million, $10.6 million and $6.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. Stock-based compensation expense is recognized using the straight-line method over the vesting period and generally vests over a three-year vesting period. Certain awards provide for accelerated vesting when the sum of an employee's age and years of service is at least 75. We recognize forfeitures as they occur. Total income tax benefit recognized for stock-based compensation arrangements was $2.2 million, $2.2 million and $1.5 million for each of the years ended December 31, 2022, 2021 and 2020.

We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not available. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to meet their statutory tax withholding requirements. These shares are accounted for as treasury stock based upon the value of the stock on the date of vesting.

Restricted Stock and Restricted Stock Units

The following table summarizes activity under our restricted stock plans (shares in thousands):


	Year Ended
	December 31, 2022
		Weighted
		Average Grant
Restricted Stock and Restricted Stock Units	Shares	Date Fair Value
Unvested at beginning of year	115	$	57.74
Granted	69	$	90.17
Vested	(75)	$	61.68
Forfeited	(5)	$	56.77
Unvested at end of year	104	$	76.39

Approximately $2.1 million of compensation expense related to restricted stock and restricted stock units will be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during the year ended December 31, 2022 was $4.6 million. The weighted-average fair value per share of restricted stock shares and units awarded during 2022, 2021 and 2020 was $90.17, $76.73 and $39.03, respectively. The aggregate intrinsic value of restricted stock vested during the years ended December 31, 2022, 2021 and 2020 was $6.6 million, $5.5 million and $2.9 million, respectively.

Performance Stock Units

Under the 2017 Plan, we granted dollar-denominated performance vesting restricted stock units (“PSUs”), which cliff vest at the end of a three-year performance period. The PSUs are subject to two performance measures; 50% of the PSUs are based on the annual performance of our stock price relative to a group of our peers (total shareholder return) and 50% of the PSUs are measured based on meeting or exceeding a pre-determined annual earnings per share target as set by our Board of Directors (EPS). Depending on the Company’s performance in relation to the established performance measures, the awards may vest at zero to a maximum of 2.0 times the dollar-denominated award granted at target. Upon achievement of the necessary performance metrics, the award will be determined in dollars and may be settled in cash or stock based on the market price of the Company’s common stock at the end of the performance period, at our discretion.

Compensation expense for dollar-denominated performance units will ultimately be equal to the final dollar value awarded to the grantee upon vesting, settled either in cash or stock. However, throughout the performance period we must record and accrue expense based on an estimate of that future payout. For units determined by EPS performance, the awards are evaluated quarterly against established targets in order to estimate the liability throughout the vesting period. For units determined by total shareholder return performance, a Monte Carlo simulation model was used to estimate accruals throughout the vesting period. The model simulates our total shareholder return and compares it against our peer group over the three-year performance period to produce a predicted distribution of relative share performance. This is applied to the reward criteria to give an expected value of the total shareholder return element. The calculated fair market value as of December 31, 2022 was $12.2 million. Of this amount, $4.5 million relates to the PSUs granted in 2020 whose performance period ended December 31, 2022. These awards will be settled within the upcoming year either in cash or stock. The expense related to performance stock units for the years ended December 31, 2022, 2021 and 2020 was $5.3 million, $5.7 million and $2.7 million, respectively. At the December 31, 2022 calculated fair market value, approximately $1.4 million of compensation expense related to performance stock units will be recognized over a weighted-average period of 1.4 years.

16. Segment Information

We have two reportable segments: (a) our mechanical segment, which includes HVAC, plumbing, piping, and controls, as well as off-site construction, monitoring and fire protection; and (b) our electrical segment, which includes installation and servicing of electrical systems. We consider these two lines of business to be separate segments because they require different skill sets, and the business models for providing services have some differences, as a mechanical system requires ongoing maintenance and monitoring and an electrical system generally does not. However, the business model for installation of new systems or retrofitting existing systems is very similar between the two segments. Segment

information is prepared on the same basis that our management reviews financial information for operational decision-making purposes.

Our activities are within the mechanical services industry and the electrical services industry, which represent our two reportable segments. We aggregate our operating segments into two reportable segments, as the operating segments meet all of the aggregation criteria. Substantially all of our revenue is generated, and all of our assets are located, in the United States, our country of domicile. The following tables present information about our reportable segments (in thousands):


	Mechanical Services		Electrical Services		Corporate		Consolidated
Total Assets at December 31, 2022	$	1,741,135	$	790,040	$	66,303	$	2,597,478
Total Assets at December 31, 2021	$	1,452,527	$	690,364	$	66,223	$	2,209,114

	Year Ended December 31, 2022
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	3,178,475	$	961,889	$	—	$	4,140,364
Gross Profit	$	580,619	$	160,989	$	—	$	741,608
Capital Expenditures	$	43,532	$	4,101	$	726	$	48,359

	Year Ended December 31, 2021
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	2,542,623	$	531,013	$	—	$	3,073,636
Gross Profit	$	486,346	$	76,861	$	—	$	563,207
Capital Expenditures	$	19,408	$	2,413	$	509	$	22,330

	Year Ended December 31, 2020
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	2,430,632	$	426,027	$	—	$	2,856,659
Gross Profit	$	513,760	$	33,223	$	—	$	546,983
Capital Expenditures	$	22,561	$	944	$	626	$	24,131

17. Subsequent Event

Effective as of February 1, 2023, we acquired all of the issued and outstanding shares of capital stock of Eldeco, Inc. (“Eldeco”), an industrial contractor founded in 1972 and headquartered in South Carolina, which performs electrical design and construction services in the Southeastern region of the United States. We expect this acquisition to initially contribute annualized revenues of approximately $130 million to $140 million.

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