Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our historical Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2021 (the “Form 10-K”). This discussion contains “forward-looking statements” regarding our business and industry within the meaning of applicable securities laws and regulations. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in “Item 1A. Risk Factors” included in our Form 10-K. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. 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.

Introduction and Overview

We are a national provider of comprehensive mechanical and electrical installation, renovation, maintenance, repair and replacement services within the mechanical and electrical services industries. We operate primarily in the commercial, industrial and institutional markets and perform most of our work in industrial, healthcare, education, office, technology, retail and government facilities. We operate our business in two business segments: mechanical and electrical.

Nature and Economics of Our Business

In our mechanical business segment, customers hire us to ensure HVAC systems deliver specified or generally expected heating, cooling, conditioning and circulation of air in a facility. This entails installing core system equipment such as packaged heating and air conditioning units, or in the case of larger facilities, separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elements such as piping and ducting.

In our electrical business segment, our principal business activity is electrical construction and engineering in the commercial and industrial field. We also perform electrical logistics services, electrical service work, and electrical construction and engineering services.

In both our mechanical and electrical business segments, our responsibilities usually require conforming the systems to pre-established engineering drawings and equipment and performance specifications, which we frequently participate in establishing. Our project management responsibilities include staging equipment and materials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any subcontractors we might use to deliver our portion of the work.

Approximately 86.4% of our revenue is earned on a project basis for installation services in newly constructed facilities or for replacement of systems in existing facilities. When competing for project business, we usually estimate the costs we will incur on a project, and then propose a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that we incur to support our operations but which are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the criteria on which customers select a provider vary widely and include factors such as quality, technical expertise, on-time performance, post-project support and service, and company history and financial strength, we believe that price for value is the most influential factor for most customers in choosing a mechanical or electrical installation and service provider.

After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customer via what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by the customer until after we have completed the work. Amounts withheld under this practice are known as retention or retainage.

Labor, materials and overhead costs account for the majority of our cost of service. Accordingly, labor management and utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can experience reduced profits or even significant losses on fixed price project work. We also perform some project work on a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed-upon profit margin, and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed-price contract margins because there is less risk of unrecoverable cost overruns in cost-plus or time and materials work.

As of March 31, 2022, we had 8,359 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $794,000. Our projects generally require working capital funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until late in the job. Our average project duration, together with typical retention terms as discussed above, generally allow us to complete the realization of revenue and earnings in cash within one year. We have what we consider to be a well-diversified distribution of revenue across end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of our services to most buildings, we have the legal right in almost all cases to attach liens to buildings or related funding sources when we have not been fully paid for installing systems, except with respect to some government buildings. The service work that we do, which is discussed further below, usually does not give rise to lien rights.

We also perform larger projects. Taken together, projects with contract prices of $1 million or more totaled $5.8 billion of aggregate contract value as of March 31, 2022, or approximately 87% of a total contract value for all projects in progress, totaling $6.6 billion. Generally, projects closer in size to $1 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

A stratification of projects in progress as of March 31, 2022, by contract price, is as follows:


		Aggregate
		Contract
	No. of	Price Value
Contract Price of Project	Projects	(millions)
Under $1 million	7,381	$	873.9
$1 million - $5 million	688		1,573.0
$5 million - $10 million	147		999.8
$10 million - $15 million	54		666.7
Greater than $15 million	89		2,526.6
Total	8,359	$	6,640.0

In addition to project work, approximately 13.6% of our revenue represents maintenance and repair service on already installed HVAC, electrical, and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to the customer are based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements typically are for one or more years and frequently contain thirty- to sixty-day cancellation notice periods.

A relatively small portion of our revenue comes from national and regional account customers. These customers typically have multiple sites and contract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance being subcontracted to third parties that meet our performance qualifications.

Profile and Management of Our Operations

We manage our 41 operating units based on a variety of factors. Financial measures we emphasize include profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, management and execution practices, labor utilization, safety, training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application, facility type, end-use customers and industries and location of the work.

Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit managers is an important factor in our business, particularly in view of the relative uniqueness of each market and operation, the importance of relationships with customers and other market participants, such as architects and consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote considerable attention to operating unit management quality, stability, and contingency planning, including related considerations of compensation and non-competition protection where applicable.

Economic and Industry Factors

As a mechanical and electrical services provider, we operate in the broader nonresidential construction services industry and are affected by trends in this sector. While we do not have operations in all major cities of the United States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing of our services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including trends in gross domestic product, interest rates, business investment, employment, demographics and the fiscal condition of federal, state and local governments.

Spending decisions for building construction, renovation and system replacement are generally made on a project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economic weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.

Operating Environment and Management Emphasis

During the five-year period from 2015 to 2019, there was an increase in nonresidential building construction and renovation activity levels. In 2020, the advent of a global pandemic led to some delays in service and construction, including delayed project starts and air pockets during 2020 and 2021. We believe that delays and air pockets have now substantially abated, however, we expect to continue to experience supply chain constraints and reduced labor availability during 2022.

We have a credit facility in place with terms we believe are favorable that does not expire until January 2025. As of March 31, 2022, we had $134.4 million of credit available to borrow under our credit facility. We have strong surety relationships to support our bonding needs, and we believe our relationships with the surety markets are strong and benefit from our operating history and financial position. We have generated positive free cash flow in each of the last twenty-three calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our Balance Sheet and surety relationships, as compared to most companies in our industry, represent competitive advantages for us.

As discussed at greater length in “Results of Operations” below, we expect price competition to continue as local and regional industry participants compete for customers. We will continue to invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional and national account business.

Cyclicality and Seasonality

The construction industry is subject to business cycle fluctuation. As a result, our volume of business, particularly in new construction projects and renovation, may be adversely affected by declines in new installation and replacement projects in various geographic regions of the United States during periods of economic weakness.

The mechanical and electrical contracting industries are also subject to seasonal variations. The demand for new installation and replacement is generally lower during the winter months (the first quarter of the year) due to reduced construction activity during inclement weather and less use of air conditioning during the colder months. Demand for our services is generally higher in the second and third calendar quarters due to increased construction activity and increased use of air conditioning during the warmer months. Accordingly, we expect our revenue and operating results generally will be lower in the first calendar quarter.

Critical Accounting Policies and Estimates

Management believes that there have been no significant changes during the three months ended March 31, 2022, to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements is included in Note 2 “Summary of Significant Accounting Policies and Estimates”.

Results of Operations (dollars in thousands):


	Three Months Ended March 31,
	2022				2021
Revenue	$	885,216	100.0	%	$	669,761	100.0	%
Cost of services		732,072	82.7	%		546,292	81.6	%
Gross profit		153,144	17.3	%		123,469	18.4	%
Selling, general and administrative expenses		117,776	13.3	%		88,214	13.2	%
Gain on sale of assets		(323)	—			(350)	(0.1)	%
Operating income		35,691	4.0	%		35,605	5.3	%
Interest income		3	—			3	—
Interest expense		(2,129)	(0.2)	%		(1,497)	(0.2)	%
Changes in the fair value of contingent earn-out obligations		4,088	0.5	%		1,186	0.2	%
Other income (expense)		56	—			(69)	—
Income before income taxes		37,709	4.3	%		35,228	5.3	%
Provision (benefit) for income taxes		(49,053)				8,737
Net income	$	86,762	9.8	%	$	26,491	4.0	%

We had 41 operating locations as of December 31, 2021 and March 31, 2022. We did not make any changes to operating locations during the first quarter. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2022 to 2021, as described below, excludes Amteck Holdco LLC (“Amteck”), which was acquired on August 1, 2021, Ivey Mechanical Company, LLC (“Ivey”), which was acquired on December 1, 2021 and MEP Holding Co., Inc. (“MEP Holdings”), which was acquired on December 31, 2021. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

Revenue—Revenue for the first quarter of 2022 increased $215.5 million, or 32.2%, to $885.2 million compared to the same period in 2021. The increase included a 15.6% increase in revenue related to same-store activity and a 16.6% increase related to the Amteck, Ivey and MEP Holdings acquisitions.

The following table presents our operating segment revenue (in thousands, except percentages):


	Three Months Ended March 31,
	2022				2021
Revenue:
Mechanical Services	$	682,511	77.1	%	$	565,620	84.5	%
Electrical Services		202,705	22.9	%		104,141	15.5	%
Total	$	885,216	100.0	%	$	669,761	100.0	%

Revenue for our mechanical services segment increased $116.9 million, or 20.7%, to $682.5 million for the first quarter of 2022 compared to the same period in 2021. The increase was broad-based and included the acquisition of Ivey ($38.7 million), as well as an increase in activity in the industrial sector at one of our Texas operations ($10.0 million), our North Carolina operation ($8.6 million) and one of our Tennessee operations ($5.8 million) and an increase in activity in the healthcare sector at another one of our Texas operations ($5.0 million).

Revenue for our electrical services segment increased $98.6 million, or 94.6%, to $202.7 million for the first quarter of 2022 compared to the same period in 2021. The increase primarily resulted from the acquisitions of Amteck ($51.3 million) and MEP Holdings ($21.2 million) as well as an increase in activity in the industrial sector at our Texas electrical operation ($23.6 million).

Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts less than one year. Service agreement revenue, service work and short duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters.

The following table presents our operating segment backlog (in thousands, except percentages):


	March 31,				December 31,				March 31,
	2022				2021				2021
Backlog:
Mechanical Services	$	2,055,866	75.2	%	$	1,753,340	75.8	%	$	1,377,335	83.0	%
Electrical Services		677,110	24.8	%		558,544	24.2	%		282,537	17.0	%
Total	$	2,732,976	100.0	%	$	2,311,884	100.0	%	$	1,659,872	100.0	%

Backlog as of March 31, 2022 was $2.73 billion, an 18.2% increase from December 31, 2021 backlog of $2.31 billion, and a 64.6% increase from March 31, 2021 backlog of $1.66 billion. The sequential backlog growth was broad-based and was primarily due to increased project bookings at our Texas electrical operation ($107.1 million), one of our Florida operations ($81.8 million), our North Carolina operation ($62.0 million), one of our Virginia operations ($47.6 million) and one of our Tennessee operations ($30.3 million). The year-over-year backlog increase included the acquisitions of Ivey ($128.1 million), Amteck ($59.4 million) and MEP Holdings ($41.4 million), as well as a same-store increase of $844.2 million, or 50.9%. Same-store year-over-year backlog was broad-based and increased primarily due to increased project bookings at our Texas electrical operation ($222.8 million), our North Carolina operation ($185.3 million), one of our Virginia operations ($75.4 million), our Wisconsin operation ($60.9 million), one of our Florida operations ($54.8 million) and our Colorado operation ($52.1 million).

Gross Profit—Gross profit increased $29.7 million, or 24.0%, to $153.1 million for the first quarter of 2022 as compared to the same period in 2021. The increase included a 12.5% increase related to the Amteck, Ivey and MEP Holdings acquisitions, as well as an 11.5% increase in same-store activity. The same-store increase in gross profit was

primarily due to improvements in project execution at our North Carolina operation ($3.7 million), one of our Florida operations ($2.3 million) and our Tennessee electrical operation ($2.2 million). Additionally, we had increased volumes at one of our Texas operations ($2.3 million). As a percentage of revenue, gross profit for the first quarter decreased from 18.4% in 2021 to 17.3% in 2022 primarily due to product mix differences including a higher percentage of electrical segment revenue and new construction revenue in the current year, as well as lower margins at our Texas electrical operation, one of our Tennessee operations and one of our Virginia operations as compared to the same period in the prior year.

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $29.6 million, or 33.5%, to $117.8 million for the first quarter of 2022 as compared to 2021. On a same-store basis, excluding amortization expense, SG&A increased $13.2 million, or 16.3%. The same-store increase is primarily due to higher same-store revenue, an increase in consulting fees and other expenses of $4.5 million related to the credit for increasing research activities (the “R&D tax credit”) related to prior tax years, increased compensation costs of $4.2 million and a $1.3 million increase in travel related expenses. Amortization expense increased $1.7 million during the period, primarily as a result of the Amteck, Ivey and MEP Holdings acquisitions. As a percentage of revenue, SG&A for the first quarter increased from 13.2% in 2021 to 13.3% in 2022.

We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not be considered an alternative to SG&A as shown in our consolidated statements of operations.


	Three Months Ended
	March 31,
	2022		2021

	(in thousands)
SG&A	$	117,776	$	88,214
Less: SG&A from companies acquired		(14,654)		—
Less: Amortization expense		(8,838)		(7,177)
Same-store SG&A, excluding amortization expense	$	94,284	$	81,037

Interest Expense—Interest expense increased $0.6 million, or 42.2%, to $2.1 million for the first quarter of 2022 as compared to the same period in 2021. The increase in interest expense is due to an increase in our average interest rate on our outstanding borrowings in 2022 compared to the prior year as well as a higher average outstanding debt balance as compared to the prior year.

Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. Income from changes in the fair value of contingent earn-out obligations for the first quarter of 2022 increased $2.9 million as compared to the same period in 2021. This change in value was primarily the result of an increase in the discount rate in the first quarter of 2022 driven by higher interest rates that impacted all the earn-out liabilities as well as our lowering the obligation related to Amteck due to a downward adjustment of their forecasts.

Provision (Benefit) for Income Taxes—Our benefit for income taxes for the three months ended March 31, 2022 was $49.1 million with a negative effective tax rate of 130.1% as compared to a provision for income taxes of $8.7 million with an effective tax rate of 24.8% for the same period in 2021. The effective tax rate for 2022 was significantly lower than the 21% federal statutory rate primarily due to a reduction in unrecognized tax benefits from settlement with the Internal Revenue Service for the 2016, 2017 and 2018 tax years (80.5%), our intention to claim the R&D tax credit for the 2019, 2020 and 2021 tax years (71.3%) and inclusion of the R&D tax credit for the current year 2022 (4.5%). These benefits were partially offset by net state income taxes (4.3%) and nondeductible expenses, including nondeductible expenses related to TAS (1.3%). The effective tax rate for 2021 was higher than the 21% federal statutory rate primarily due to net state income taxes (4.2%) and nondeductible expenses, including nondeductible expenses related to TAS (1.2%), partially offset by deductions for stock-based compensation (1.8%).

Outlook

We are experiencing strong demand in 2022 and we believe that we have largely recovered from negative impacts to industry demand in our business due to the business disruption caused by COVID-19. We continue to see instances of delayed starts, and we continue to experience increased labor costs. We also are experiencing supply constraints and cost increases, reduced availability, and delays in delivery of various materials and equipment. We are recognizing these challenges in our job planning and pricing, and we are working to order materials earlier than usual and seeking to collaborate with customers to share supply risks and to mitigate the effects of these challenges.

We have a good pipeline of opportunities and potential backlog, and we have been generally successful in maintaining activity levels and productivity and in procuring needed materials despite ongoing challenges. Considering all these factors, we currently anticipate solid earnings and cash flow in 2022. We continue to prepare for a wide range of challenges and economic circumstances; however, despite challenges, we currently expect supportive conditions for our industry are likely to continue in 2022.

Liquidity and Capital Resources (in thousands):


	Three Months Ended
	March 31,
	2022		2021

Cash provided by (used in):
Operating activities	$	63,729	$	84,647
Investing activities		(9,369)		(15,030)
Financing activities		2,479		(72,397)
Net increase (decrease) in cash and cash equivalents	$	56,839	$	(2,780)
Free cash flow:
Cash provided by operating activities	$	63,729	$	84,647
Purchases of property and equipment		(9,192)		(4,812)
Proceeds from sales of property and equipment		1,056		498
Free cash flow	$	55,593	$	80,333

Cash Flow

Our business does not require significant amounts of investment in long-term fixed assets. The substantial majority of the capital used in our business is working capital that funds our costs of labor and installed equipment deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld under this practice are known as retention or retainage. Our average project duration, together with typical retention terms, generally allow us to complete the realization of revenue and earnings in cash within one year.

Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during the late winter and spring months as we prepare and plan for the increased project demand when favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays or accelerations and other economic factors that may affect customer spending.

Cash provided by operating activities was $63.7 million during the first three months of 2022 compared with $84.6 million during the same period in 2021. This decrease was primarily driven by a $102.4 million change in receivables, net, including an increase in billed accounts receivable of $74.2 million attributable to strong collections in

the prior year and higher billings in the current year due to the increase in revenue. This decrease was partially offset by $33.3 million of tax refunds received in the first quarter of 2022 and higher earnings in the current year.

Cash Used in Investing Activities—During the first three months of 2022, cash used in investing activities was $9.4 million compared to $15.0 million during the same period in 2021. The $5.6 million decrease in cash used primarily relates to a reduction in cash paid (net of cash acquired) for acquisitions in 2022 compared to the same period in 2021, partially offset by an increase in purchases of property and equipment.

Cash Provided by (Used in) Financing Activities—Cash provided by financing activities was $2.5 million for the first three months of 2022 compared to cash used in financing activities of $72.4 million during the same period in 2021. The $74.9 million decrease in cash used in financing activities is primarily due to an increase in net proceeds from debt, including borrowings used to fund the Atlantic acquisition that closed in April 2022. This decrease was partially offset by an increase in share repurchases in 2022.

Free Cash Flow—We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the proceeds from asset sales. We believe free cash flow, by encompassing both profit margins and the use of working capital over our approximately one year working capital cycle, is an effective measure of operating effectiveness and efficiency. We have included free cash flow information here for this reason, and because we are often asked about it by third parties evaluating us. However, free cash flow is not considered under generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly free cash flow should not be considered an alternative to operating income, net income, or amounts shown in our consolidated statements of cash flows as determined under generally accepted accounting principles. Free cash flow may be defined differently by other companies.

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 December 8, 2020, 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 10.3 million shares to be repurchased. As of March 31, 2022, we have repurchased a cumulative total of 9.8 million shares at an average price of $22.77 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 three months ended March 31, 2022, we repurchased 0.2 million shares for approximately $14.1 million at an average price of $87.23 per share.

Debt

Revolving Credit Facility and Term Loan

We have a $600.0 million senior credit facility (the “Facility”) provided by a syndicate of banks. The Facility is composed of a revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility provides for a $150.0 million accordion or increase option for the revolving portion of the Facility. As of March 31, 2022, the Facility capacity was $562.5 million, as the term loan was paid down by $37.5 million since the inception of the Facility. The Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The Facility expires in January 2025 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 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. As of March 31, 2022, we had $260.0 million of outstanding borrowings on the revolving credit facility, $55.6 million in letters of credit outstanding and $134.4 million of credit available.

There are two interest rate options for borrowings under the Facility, the Base Rate Loan option and the Eurodollar Rate Loan option. These rates are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. Additional margins are then added to these two rates.

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. These fees range from 0.20% to 0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA.

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

Notes to Former Owners

As part of the consideration used to acquire nine companies, we have outstanding notes to the former owners. Together, these notes had an outstanding balance of $40.2 million as of March 31, 2022. At March 31, 2022, future principal payments of notes to former owners by maturity year are as follows (dollars in thousands):


	Balance at		Range of Stated
	March 31, 2022		Interest Rates
2022	$	407	2.5 - 3.5	%
2023		9,400	2.5	%
2024		10,800	2.5 - 3.0	%
2025		19,550	2.3 - 2.5	%
Total	$	40,157

Outlook

We have generated positive net free cash flow for the last twenty-three calendar years, much of which occurred during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our credit facility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.

Material Cash Requirements and Other Commitments

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. The letters of credit we provide are actually issued by our lenders through the Facility as described above. 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. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. 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 the Facility’s capacity just the same as actual borrowings. Claims against letters of credit are rare in our industry. To date, we have not had a claim made against a letter of credit that resulted in payments

by a lender or by us. We believe that it is unlikely that we will have to fund claims under a letter of credit in the foreseeable future.

As of March 31, 2022, we have $55.6 million in letter of credit commitments, of which $28.2 million will expire in 2022 and $27.4 million will expire in 2023. The substantial majority of these letters of credit are posted with insurers who disburse funds on our behalf in connection with our workers’ compensation, auto liability and general liability insurance program. These letters of credit provide additional security to the insurers that sufficient financial resources will be available to fund claims on our behalf, many of which develop over long periods of time, should we ever encounter financial duress. Posting of letters of credit for this purpose is a common practice for entities that manage their self-insurance programs through third-party insurers as we do. While some of these letter of credit commitments expire in the next twelve months, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

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 sureties for any expenses or outlays they incur. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and we do not expect such losses to be incurred in the foreseeable future.

Under standard terms in the surety market, sureties issue bonds on a project-by-project basis, and can decline to issue bonds at any time. Historically, approximately 15% to 25% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in our sureties’ assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that were to occur, our 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.

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