UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form ~~10‑Q~~10-Q


(Mark One)
~~(Mark One)~~☒
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


~~For the quarterly period ended September 30, 2017~~
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: ~~1‑13011~~1-13011

COMFORT SYSTEMS USA, INC.

(Exact name of registrant as specified in its charter)


~~DELAWARE~~Delaware (State or other jurisdiction of Incorporation or Organization)	~~76‑0526487~~76-0526487 (I.R.S. Employer Identification No.)
675 Bering Drive Suite 400 Houston, Texas77057 (Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: ~~(713) 830‑9600~~(713) 830-9600

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FIX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation ~~S‑T~~S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒⌧ No ☐◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐	Emerging growth company ☐
~~Large accelerated filer~~ ☒	~~Accelerated filer~~ ☐	~~Non‑accelerated filer~~ ☐ (Do not check if a smaller reporting company)	~~Smaller reporting company~~ ☐	~~Emerging growth company~~ ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule ~~12b‑2)~~12b-2). Yes ☐ No ☒⌧

The number of shares outstanding of the issuer’s common stock as of ~~October 19, 2017~~April 21, 2023 was ~~37,134,226~~35,767,519 (excluding treasury shares of ~~3,989,139)~~5,355,846).

Table of Contents

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2023


		Page
~~Part I—Financial Information~~
~~Item 1—Financial Statements~~
~~Consolidated Balance Sheets~~Part I—Financial Information		1 2
Item 1—Financial Statements		2
Consolidated Balance Sheets		2
Consolidated Statements of Operations		2 3
Consolidated Statements of Stockholders’ Equity		3 4
Consolidated Statements of Cash Flows		4 5
Condensed Notes to Consolidated Financial Statements		5 6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		13 19
Item 3—Quantitative and Qualitative Disclosures about Market Risk		23 29
Item 4—Controls and Procedures		23 29
Part II—Other Information		24 30
Item 1—Legal Proceedings		24 30
Item 1A—Risk Factors		24 30
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		24 30
Item 6—Exhibits		26 32
Signatures		27 33

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

September 30,

December 31,

2017

2016

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$
29,496

$
32,074

Accounts receivable, less allowance for doubtful accounts of $4,328 and $4,288, respectively

390,497

318,837

Other receivables

13,651

20,363

Inventories

10,778

9,208

Prepaid expenses and other

11,622

6,106

Costs and estimated earnings in excess of billings

39,333

29,369

Total current assets

495,377

415,957

PROPERTY AND EQUIPMENT, NET

74,883

68,195

GOODWILL

203,771

149,208

IDENTIFIABLE INTANGIBLE ASSETS, NET

78,527

42,435

DEFERRED INCOME TAX ASSETS

27,282

27,170

OTHER NONCURRENT ASSETS

4,747

5,938

Total assets

$
884,587

$
708,903

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$
618

$
600

Current maturities of long-term capital lease obligations

90

163

Accounts payable

122,203

103,440

Accrued compensation and benefits

68,294

61,712

Billings in excess of costs and estimated earnings

103,049

83,985

Accrued self-insurance

32,774

33,520

Other current liabilities

46,774

34,261

Total current liabilities

373,802

317,681

LONG-TERM DEBT

80,951

1,955

LONG-TERM CAPITAL LEASE OBLIGATIONS

33

93

DEFERRED INCOME TAX LIABILITIES

2,289

2,289

OTHER LONG-TERM LIABILITIES

15,583

10,252

Total liabilities

472,658

332,270

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, 3,989,139 and 3,914,251 shares, respectively

(64,312)

(57,387)

Additional paid-in capital

312,312

309,625

Retained earnings

163,518

123,984

Total stockholders’ equity

411,929

376,633

Total liabilities and stockholders’ equity

$
884,587

$
708,903

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

~~Table of Contents~~

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(In Thousands, Except Per Share Data)~~

~~(Unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

REVENUE

$
480,851

$
428,760

$
1,326,850

$
1,242,240

COST OF SERVICES

379,993

335,944

1,054,300

986,496

Gross profit

100,858

92,816

272,550

255,744

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

66,707

61,032

196,553

180,245

GOODWILL IMPAIRMENT

—

—

1,105

—

GAIN ON SALE OF ASSETS

(184)

(166)

(464)

(523)

Operating income

34,335

31,950

75,356

76,022

OTHER INCOME (EXPENSE):

Interest income

16

3

55

6

Interest expense

(961)

(563)

(2,392)

(1,870)

Changes in the fair value of contingent earn-out obligations

2,469

804

1,845

468

Other

10

80

57

455

Other income (expense)

1,534

324

(435)

(941)

INCOME BEFORE INCOME TAXES

35,869

32,274

74,921

75,081

INCOME TAX EXPENSE

13,585

11,803

27,188

27,052

NET INCOME

$
22,284

$
20,471

$
47,733

$
48,029

INCOME PER SHARE:

Basic

$
0.60

$
0.55

$
1.28

$
1.28

Diluted

$
0.59

$
0.54

$
1.27

$
1.27

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

37,232

37,360

37,259

37,380

Diluted

37,626

37,821

37,684

37,854

DIVIDENDS PER SHARE

$
0.075

$
0.070

$
0.220

$
0.205

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

~~Table of Contents~~

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(In Thousands, Except Share Amounts)~~

Additional

Non-

Total


Common Stock

Treasury Stock

Paid-In

Retained

Controlling

Stockholders’


Shares

Amount

Shares

Amount

Capital

Earnings

Interests

Equity

BALANCE AT DECEMBER 31, 2015

41,123,365

$
411

(3,696,781)

$
(46,845)

$
323,765

$
69,390

$
18,284

$
365,005

Cumulative effect of change in accounting principle

—

—

—

—

—

(38)

—

(38)

Net income

—

—

—

—

—

64,896

—

64,896

Issuance of Stock:

Issuance of shares for options exercised

—

—

111,761

1,568

10

—

—

1,578

Issuance of restricted stock & performance stock

—

—

172,727

2,282

(306)

—

—

1,976

Shares received in lieu of tax withholding payment on vested restricted stock

—

—

(41,788)

(1,304)

—

—

—

(1,304)

Stock-based compensation

—

—

—

—

3,502

—

—

3,502

Dividends

—

—

—

—

—

(10,264)

—

(10,264)

Acquisition of noncontrolling interest

—

—

—

—

(17,346)

—

(18,284)

(35,630)

Share repurchase

—

—

(460,170)

(13,088)

—

—

—

(13,088)

BALANCE AT DECEMBER 31, 2016

41,123,365

411

(3,914,251)

(57,387)

309,625

123,984

—

376,633

Net income (unaudited)

—

—

—

—

—

47,733

—

47,733

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

—

—

90,498

1,366

(70)

—

—

1,296

Issuance of restricted stock & performance stock (unaudited)

—

—

134,646

2,037

(421)

—

—

1,616

Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)

—

—

(39,335)

(1,419)

—

—

—

(1,419)

Stock-based compensation (unaudited)

—

—

—

—

3,178

—

—

3,178

Dividends (unaudited)

—

—

—

—

—

(8,199)

—

(8,199)

Share repurchase (unaudited)

—

—

(260,697)

(8,909)

—

—

—

(8,909)

BALANCE AT SEPTEMBER 30, 2017 (unaudited)

41,123,365

$
411

(3,989,139)

$
(64,312)

$
312,312

$
163,518

$
—

$
411,929

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

~~Table of Contents~~

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~


	March 31,		December 31,
	2023		2022
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	48,560	$	57,214
Billed accounts receivable, less allowance for credit losses of $9,718 and $10,640, respectively		1,176,378		1,024,082
Unbilled accounts receivable, less allowance for credit losses of $1,031 and $1,011, respectively		81,151		77,030
Other receivables, less allowance for credit losses of $518 and $510, respectively		41,912		38,369
Inventories		37,013		35,309
Prepaid expenses and other		47,190		48,456
Costs and estimated earnings in excess of billings, less allowance for credit losses of $52 and $80, respectively		26,820		27,211
Total current assets		1,459,024		1,307,671
PROPERTY AND EQUIPMENT, NET		155,021		143,949
LEASE RIGHT-OF-USE ASSET		134,755		130,666
GOODWILL		637,434		611,789
IDENTIFIABLE INTANGIBLE ASSETS, NET		296,070		273,901
DEFERRED TAX ASSETS		143,202		115,665
OTHER NONCURRENT ASSETS		13,965		13,837
Total assets	$	2,839,471	$	2,597,478
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	11,468	$	9,000
Accounts payable		351,509		337,385
Accrued compensation and benefits		115,606		127,765
Billings in excess of costs and estimated earnings and deferred revenue		717,294		548,293
Accrued self-insurance		23,865		27,644
Other current liabilities		186,917		120,715
Total current liabilities		1,406,659		1,170,802
LONG-TERM DEBT		197,761		247,245
LEASE LIABILITIES		115,018		111,744
OTHER LONG-TERM LIABILITIES		66,543		67,764
Total liabilities		1,785,981		1,597,555
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, 5,371,392 and 5,362,224 shares, respectively		(191,411)		(187,212)
Additional paid-in capital		338,884		332,080
Retained earnings		905,606		854,644
Total stockholders’ equity		1,053,490		999,923
Total liabilities and stockholders’ equity	$	2,839,471	$	2,597,478

~~(In Thousands)~~

~~(Unaudited)~~

Nine Months Ended

September 30,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
47,733

$
48,029

Adjustments to reconcile net income to net cash provided by operating activities—

Amortization of identifiable intangible assets

12,622

6,227

Depreciation expense

14,714

13,444

Goodwill impairment

1,105

—

Bad debt expense (benefit)

29

(177)

Deferred tax benefit

(112)

(606)

Amortization of debt financing costs

282

273

Gain on sale of assets

(464)

(523)

Changes in the fair value of contingent earn-out obligations

(1,845)

(468)

Stock-based compensation

4,317

3,868

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—

(Increase) decrease in—

Receivables, net

(38,051)

(4,301)

Inventories

(1,059)

(298)

Prepaid expenses and other current assets

(608)

(3,648)

Costs and estimated earnings in excess of billings

(7,348)

(3,726)

Other noncurrent assets

913

(128)

Increase (decrease) in—

Accounts payable and accrued liabilities

22,595

1,628

Billings in excess of costs and estimated earnings

10,309

(10,928)

Other long-term liabilities

560

1,088

Net cash provided by operating activities

65,692

49,754

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(16,830)

(17,257)

Proceeds from sales of property and equipment

784

847

Cash paid for acquisitions, net of cash acquired

(94,860)

(58,510)

Net cash used in investing activities

(110,906)

(74,920)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving line of credit

140,000

144,000

Payments on revolving line of credit

(74,000)

(129,000)

Payments on other debt

(798)

(567)

Payments on capital lease obligations

(133)

(194)

Debt financing costs

—

(789)

Payments of dividends to stockholders

(8,199)

(7,663)

Share repurchase

(8,909)

(10,977)

Shares received in lieu of tax withholding

(1,419)

(1,304)

Proceeds from exercise of options

1,296

733

Deferred acquisition payments

(2,802)

—

Payments for contingent consideration arrangements

(2,400)

(200)

Net cash provided by (used in) financing activities

42,636

(5,961)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(2,578)

(31,127)

CASH AND CASH EQUIVALENTS, beginning of period

32,074

56,464

CASH AND CASH EQUIVALENTS, end of period

$
29,496

$
25,337

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended
	March 31,
	2023		2022
REVENUE	$	1,174,640	$	885,216
COST OF SERVICES		969,235		732,072
Gross profit		205,405		153,144
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		135,032		117,776
GAIN ON SALE OF ASSETS		(512)		(323)
Operating income		70,885		35,691
OTHER INCOME (EXPENSE):
Interest income		1,397		3
Interest expense		(4,076)		(2,129)
Changes in the fair value of contingent earn-out obligations		(2,382)		4,088
Other		1		56
Other income (expense)		(5,060)		2,018
INCOME BEFORE INCOME TAXES		65,825		37,709
PROVISION (BENEFIT) FOR INCOME TAXES		8,609		(49,053)
NET INCOME	$	57,216	$	86,762

INCOME PER SHARE:
Basic	$	1.60	$	2.40
Diluted	$	1.59	$	2.40

SHARES USED IN COMPUTING INCOME PER SHARE:
Basic		35,812		36,076
Diluted		35,907		36,188

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)


	Three Months Ended
	March 31, 2022
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2021	41,123,365	$	411	(5,032,311)	$	(150,580)	$	327,061	$	628,774	$	805,666
Net income	—		—	—		—		—		86,762		86,762
Issuance of Stock:
Issuance of shares for options exercised	—		—	—		—		—		—		—
Issuance of restricted stock & performance stock	—		—	38,863		1,232		2,312		—		3,544
Shares received in lieu of tax withholding on vested stock	—		—	(15,348)		(1,399)		—		—		(1,399)
Stock-based compensation	—		—	—		—		2,605		—		2,605
Dividends ($0.13 per share)	—		—	—		—		—		(4,673)		(4,673)
Share repurchase	—		—	(161,614)		(14,097)		—		—		(14,097)
BALANCE AT MARCH 31, 2022	41,123,365	$	411	(5,170,410)	$	(164,844)	$	331,978	$	710,863	$	878,408


	Three Months Ended
	March 31, 2023
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2022	41,123,365	$	411	(5,362,224)	$	(187,212)	$	332,080	$	854,644	$	999,923
Net income	—		—	—		—		—		57,216		57,216
Issuance of Stock:
Issuance of shares for options exercised	—		—	1,000		36		(18)		—		18
Issuance of restricted stock & performance stock	—		—	31,960		1,131		3,384		—		4,515
Shares received in lieu of tax withholding on vested stock	—		—	(12,728)		(1,798)		—		—		(1,798)
Stock-based compensation	—		—	—		—		3,438		—		3,438
Dividends ($0.175 per share)	—		—	—		—		—		(6,254)		(6,254)
Share repurchase	—		—	(29,400)		(3,568)		—		—		(3,568)
BALANCE AT MARCH 31, 2023	41,123,365	$	411	(5,371,392)	$	(191,411)	$	338,884	$	905,606	$	1,053,490

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	57,216	$	86,762
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets		10,331		12,791
Depreciation expense		9,187		8,046
Change in right-of-use assets		5,357		4,734
Bad debt expense		946		25
Deferred tax provision (benefit)		(27,537)		2,328
Amortization of debt financing costs		169		133
Gain on sale of assets		(512)		(323)
Changes in the fair value of contingent earn-out obligations		2,382		(4,088)
Stock-based compensation		6,141		3,996
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net		(125,937)		(52,701)
Inventories		(1,386)		(3,104)
Prepaid expenses and other current assets		(911)		(2,803)
Costs and estimated earnings in excess of billings and unbilled accounts receivable		(2,281)		2,562
Other noncurrent assets		(298)		181
Increase (decrease) in—
Accounts payable and accrued liabilities		28,652		3,544
Billings in excess of costs and estimated earnings and deferred revenue		159,140		7,401
Other long-term liabilities		6,250		(5,755)
Net cash provided by operating activities		126,909		63,729
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(16,520)		(9,192)
Proceeds from sales of property and equipment		622		1,056
Cash paid for acquisitions, net of cash acquired		(53,047)		3
Payments for investments		—		(1,236)
Net cash used in investing activities		(68,945)		(9,369)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		85,000		50,000
Payments on revolving credit facility		(140,000)		(10,000)
Payments on term loan		—		(7,500)
Payments on other debt		(16)		(7,797)
Payments on finance lease liabilities		—		(253)
Payments of dividends to stockholders		(6,254)		(4,673)
Share repurchase		(3,568)		(14,097)
Shares received in lieu of tax withholding		(1,798)		(1,399)
Proceeds from exercise of options		18		—
Deferred acquisition payments		—		(50)
Payments for contingent consideration arrangements		—		(1,752)
Net cash provided by (used in) financing activities		(66,618)		2,479
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(8,654)		56,839
CASH AND CASH EQUIVALENTS, beginning of period		57,214		58,776
CASH AND CASH EQUIVALENTS, end of period	$	48,560	$	115,615

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023

(Unaudited)

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, ~~electrical,~~ monitoring and fire protection. We build, install, maintain, repair and replace ~~products~~mechanical, electrical and plumbing (“MEP”) systems throughout the United States. ~~Approximately 37% of our~~The terms “Comfort Systems,” “we,” “us,” or the “Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated ~~2017 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 63% attributable to maintenance, repair and replacement services.~~

~~Our consolidated 2017 revenue was derived from the following service activities, all of which are~~subsidiaries, as appropriate in the ~~mechanical services industry, the single industry segment we serve:~~context.

Revenue

Service Activity

$ in thousands

%

HVAC and Plumbing

$
1,207,434

91
%
Building Automation Control Systems

66,343

5
%
Other

53,073

4
%
Total

$
1,326,850

100
%

2. Summary of Significant Accounting Policies and Estimates

Basis of Presentation

These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, ~~2016~~2022 (the “Form 10-K”).

The accompanying unaudited consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the SEC. Accordingly, these financial statements do not include all the footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Form 10-K. We believe all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the full fiscal year. Certain amounts in prior periods 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, ~~the allowance for doubtful accounts,~~ self-insurance accruals, ~~deferred tax assets, warranty 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.

~~Table of Contents~~

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a framework that replaces the existing revenue recognition guidance. The guidance can be applied on a full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update on the adoption date. We plan to use the modified retrospective basis on the adoption date. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. While we are still evaluating the potential impact of this authoritative guidance on our consolidated financial statements, we currently believe the areas that may impact us the most include accounting for variable consideration, capitalization of incremental costs of obtaining a contract and the guidance on the number of performance obligations contained in a contract. The impact on our consolidated financial statements upon adoption of ASU 2014-09 will be determined in large part by the contracts in progress on our adoption date; however, we currently do not believe the adoption will have a material impact on our consolidated financial statements.

~~In February 2016,~~October 2021, the FASB issued ASU ~~No. 2016-02, “Leases~~2021-08, “Business Combinations (Topic ~~842)~~805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.”~~. The~~ This standard requires ~~lessees~~an acquirer to apply Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities ~~for most leases.~~in a business combination. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02’s transition provisions are applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements. Full retrospective application is prohibited. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This standard provides guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows and is intended to reduce diversity in practice with respect to these items. The standard is applied using a retrospective transition method and2021-08 is effective for fiscal years beginning after December 15, ~~2017, including~~2022 and interim periods within ~~those fiscal years. Early adoption is permitted.~~that year. We ~~currently do~~adopted this standard on January 1, 2023, and the impact was not ~~believe the adoption will have a~~ material ~~impact~~ on our consolidated financial statements.

Table of Contents

Revenue Recognition

~~In January 2017,~~

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 ~~FASB issued ASU No. 2017-04, “Intangibles – Goodwill and other (Topic 350): Simplifying~~right to bill the ~~Accounting~~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 ~~Goodwill Impairment”. This standard removes Step 2~~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 ~~goodwill impairment test,~~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 ~~required~~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 ~~hypothetical purchase price allocation. A goodwill impairment will~~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 ~~the amount by~~known, we generally use an input method to recognize revenue, which ~~a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Additionally, entities will be required to disclose~~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).

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

Table of Contents

tax rate. These items can also include the tax treatment for impairment of goodwill ~~at reporting units~~and other intangible assets, changes in fair value of acquisition-related assets and liabilities, uncertain tax positions, and accounting for losses associated with ~~zero or negative carrying amounts. The standard is applied prospectively~~underperforming operations.

Following an Internal Revenue Service survey of previously filed refund claims for the 2016, 2017 and ~~is effective~~2018 tax years, the Joint Committee on Taxation approved such refunds in late January 2022. As a result, our benefit for fiscal years beginning after December 15, 2019, including annual or interim goodwill impairment tests within those fiscal years. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted ASU 2017-04income taxes in the first quarter of ~~2017, which did not have~~2022 included a ~~material impact~~$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 ~~consolidated~~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 ~~statements.~~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. The impact of the excise tax is recorded in “Treasury Stock” within our Consolidated Balance Sheet. We currently believe these provisions will be immaterial to our overall financial results, financial position and cash flows.

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 ~~capital leases~~ and a revolving credit facility.

Unbilled Accounts Receivable

Unbilled Accounts Receivable are amounts due to us that we have earned under a contract where our right to payment is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of the consideration is due.

Investments

We ~~believe~~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 ~~carrying values~~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.

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

Table of Contents

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.

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.

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

Table of Contents

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 ~~instruments~~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 ~~accompanying balance sheets approximate their fair values.~~performance obligation is recognized in the period the loss is determined.

~~Segment Disclosure~~In the first three months of 2023 and 2022, net revenue recognized from our performance obligations satisfied in previous periods was not material.

Disaggregation of Revenue

Our consolidated 2023 revenue was derived from contracts to provide service activities ~~are within~~in the mechanical and electrical services ~~industry, which is the single industry segment~~segments we serve. ~~Each operating unit represents an operating segment~~Refer to Note 11 “Segment Information” for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and ~~these segments have been aggregated,~~service provided, as we believe it best depicts how the ~~operating units meet all~~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):


	Three Months Ended March 31,
Revenue by Service Provided	2023				2022
Mechanical Services	$	918,615	78.2	%	$	682,511	77.1	%
Electrical Services		256,025	21.8	%		202,705	22.9	%
Total	$	1,174,640	100.0	%	$	885,216	100.0	%

	Three Months Ended March 31,
Revenue by Type of Customer	2023				2022
Manufacturing	$	366,356	31.2	%	$	314,729	35.5	%
Technology		226,249	19.3	%		95,455	10.8	%
Healthcare		159,815	13.5	%		134,795	15.2	%
Education		110,253	9.4	%		89,446	10.1	%
Office Buildings		98,195	8.4	%		75,115	8.5	%
Retail, Restaurants and Entertainment		76,194	6.5	%		65,582	7.4	%
Government		64,415	5.5	%		57,465	6.5	%
Multi-Family and Residential		45,007	3.8	%		24,442	2.8	%
Other		28,156	2.4	%		28,187	3.2	%
Total	$	1,174,640	100.0	%	$	885,216	100.0	%

	Three Months Ended March 31,
Revenue by Activity Type	2023				2022
New Construction	$	627,952	53.5	%	$	429,418	48.5	%
Existing Building Construction		309,483	26.3	%		259,285	29.3	%
Service Projects		103,105	8.8	%		76,252	8.6	%
Service Calls, Maintenance and Monitoring		134,100	11.4	%		120,261	13.6	%
Total	$	1,174,640	100.0	%	$	885,216	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 ~~aggregation criteria.~~project. Contract assets are not considered to have 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

610

Table of Contents

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.

Contract assets and liabilities in the Consolidated Balance Sheet consisted of the following amounts as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Contract assets:
Costs and estimated earnings in excess of billings, less allowance for credit losses	$	26,820	$	27,211
Contract liabilities:
Billings in excess of costs and estimated earnings and deferred revenue	$	717,294	$	548,293

In the first three months of 2023 and 2022, we recognized revenue of $341.9 million and $220.6 million related to our contract liabilities at January 1, 2023 and January 1, 2022, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in the first three months of 2023 and 2022.

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 March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $4.44 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 three months ended March 31, 2022, we recognized a net loss of $0.1 million 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~~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

Table of Contents

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 ~~fall,~~are included, for assets and liabilities measured on a recurring basis as of ~~September 30, 2017~~March 31, 2023 and December 31, 2022 (in thousands):



	Balance		Fair Value Measurements at Reporting Date
	September 30,
	2017		Level 1		Level 2		Level 3

									Fair Value Measurements at March 31, 2023
									Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	29,496	$	29,496	$	—	$	—	$	48,560	$	—	$	—	$	48,560
Life insurance—cash surrender value	$	3,180	$	—	$	3,180	$	—	$	—	$	7,136	$	—	$	7,136
Contingent earn-out obligations	$	9,863	$	—	$	—	$	9,863	$	—	$	—	$	38,148	$	38,148

									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

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of ~~well‑known~~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. ~~The~~We believe the carrying value of our ~~borrowings~~debt associated with ~~the Revolving Credit Facility approximate~~our revolving credit facility approximates its fair value due to the variable rate on such debt.

~~One~~ We believe the carrying values of our ~~operations has~~notes to former owners approximate their fair values due to the relatively short remaining terms on these notes.

We have life insurance policies covering 44119 employees with a combined face value of ~~$37.3~~$81.5 million. The ~~policy is~~policies are invested in ~~mutual funds~~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 ~~was $3.2 million as of September 30, 2017 and $3.7 million as of December 31, 2016. These assets are~~is included in “Other Noncurrent Assets” in our ~~consolidated balance sheets.~~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 ~~discount rate.~~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 March 31, 2023, 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).:


Balance at beginning of year	$	2,531

			Three Months Ended		Year Ended
			March 31, 2023		December 31, 2022
Balance at beginning of period			$	32,317	$	34,114
Issuances		11,755		3,449		—
Settlements		(2,578)		—		(6,616)
Adjustments to fair value		(1,845)		2,382		4,819
Balance at September 30, 2017	$	9,863
Balance at end of period			$	38,148	$	32,317

We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the first quarter of 2017, we recorded a goodwill impairment charge of $1.1 million based on Level 3 measurements. See Note 5 “Goodwill” for further discussion. We

~~Table of Contents~~

~~did not recognize any other impairments, in the first nine months of 2017, on those assets required to be measured at fair value on a nonrecurring basis.~~

5. Acquisitions

~~4. Acquisitions~~

On ~~April~~February 1, ~~2017,~~2023, we acquired all of the issued and outstanding shares of capital stock of ~~BCH Holdings,~~Eldeco, Inc. ~~and each~~(“Eldeco”), headquartered in South Carolina, for a total preliminary purchase price of ~~its wholly-owned subsidiaries (collectively “BCH”) for $100~~$73.9 million, ~~comprised~~which included $60.8 million of ~~$85.7~~cash paid on the closing date, $8.0 million in ~~cash at closing and $14.3 million in a note~~notes payable to the former owners, ~~plus~~ an ~~earn‑out~~earn-out that we will ~~pay~~

Table of Contents

be paid if certain financial targets are met after the acquisition date and a working capital adjustment. The preliminary acquisition date fair value of consideration transferred for this acquisition was $122.6 million, of which $97.9 million was allocated to goodwill and identifiable intangible assets. Our consolidated operating results included revenue of $73.2 million for the six months from the acquisition date. BCH is an integrated, single-source provider of mechanical service, maintenanceEldeco performs electrical design and construction ~~with headquarters~~services in ~~Tampa, Florida and operations throughout~~ the ~~southeastern~~Southeastern region of the United ~~States,~~States. As a result of the acquisition, Eldeco is a wholly owned subsidiary of the Company reported in our electrical services segment.

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 purchase price of $48.1 million, which ~~reports as a separate operating location.~~

~~We completed two acquisitions in the first quarter~~included $34.1 million of ~~2016. We acquired the remaining 40% noncontrolling interest in Environmental Air Systems, LLC (“EAS”) on January 1, 2016 for $46.6 million, including $42.0 million funded~~cash paid on the closing date, ~~plus a holdback, an earn-out that will be earned if certain financial targets are met after the acquisition date~~$5.3 million in notes payable to former owners and a working capital adjustment. ~~Due to our majority ownership and control over EAS on~~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, ~~date,~~Atlantic is a wholly owned subsidiary of the ~~difference between the purchase price and the noncontrolling interest liability was recorded in Additional Paid-In Capital~~Company reported in our ~~Balance Sheet.~~electrical services segment.

Additionally in the first quarter of 2016, we acquired 100% of the ShoffnerKalthoff family of companies (collectively, “Shoffner”), which reports as a separate operating location in the Knoxville, Tennessee area. The acquisition date fair value of consideration transferred for this acquisition was $19.8 million, of which $14.8 million was allocated to goodwill and identifiable intangible assets. The purchase price included $15.5 million funded on the closing date plus a note payable to the former owners, an earn-out that we will pay if certain financial targets are met after the acquisition date and a working capital adjustment.

In addition to the BCH acquisition, we completed three additional acquisitions in the second quarter of 2017. We completed one acquisition in the third quarter of 2017. The total purchase price for these acquisitions, including earn-outs, was $9.6 million for the nine months ended September 30, 2017. These acquisitions were not material and were “tucked-in” with existing operations.

The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Our ~~consolidated balance sheet~~Consolidated Balance Sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for the applicable ~~acquisition~~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

~~5. Goodwill~~

Goodwill

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

September 30,

December 31,

2017

2016

Balance at beginning of year

$
149,208

$
143,874

Additions (See Note 4)

55,668

5,334

Impairment adjustment

(1,105)

—

Balance at end of period

$
203,771

$
149,208


	Mechanical Services		Electrical Services
	Segment		Segment		Total
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
Acquisitions and purchase price adjustments (See Note 5)		—		25,645		25,645
Balance at March 31, 2023	$	363,929	$	273,505	$	637,434

~~We recorded a goodwill impairment charge~~Identifiable Intangible Assets, Net

At March 31, 2023, future amortization expense of ~~$1.1 million during the first quarter of 2017. Based on changes to our market strategy that occurred in March 2017 related to our reporting unit based in California, we reevaluated our~~identifiable intangible assets is as follows (in thousands):


Year ending December 31—
2023 (remainder of the year)	$	32,256
2024		37,006
2025		34,525
2026		33,681
2027		31,699
Thereafter		126,903
Total	$	296,070

813

Table of Contents

projected future earnings for this operating location. 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. Based upon our projected future earnings for this location, we could no longer support the related goodwill balance and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.

6.7. Debt Obligations

Debt obligations consist of the following (in thousands):


	September 30,		December 31,
	2017		2016

					March 31,		December 31,
					2023		2022
Revolving credit facility	$	66,000	$	—	$	160,000	$	215,000
Notes to former owners		15,330		2,250		49,040		41,040
Other debt		239		305		189		205
Capital lease obligations		123		256
Total debt		81,692		2,811		209,229		256,245
Less—current portion		(708)		(763)		(11,468)		(9,000)
Total long-term portion of debt	$	80,984	$	2,048	$	197,761	$	247,245

Revolving Credit Facility

~~We have a $325.0 million~~On May 25, 2022, we amended our senior credit facility ~~(the~~(as amended, the “Facility”) arranged by Wells Fargo Bank, National Association, as administrative agent, and provided by a syndicate of banks, ~~with~~increasing our borrowing capacity to $850 million. As amended, the Facility is composed of a ~~$100~~revolving credit line guaranteed by certain of our subsidiaries, in the amount of $850.0 million, and the previous term loan has been eliminated. The amended Facility also provides for an accordion ~~option.~~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 ~~which is available for borrowings and letters of credit,~~ expires in ~~February 2021~~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 ~~September 30, 2017,~~March 31, 2023, we had ~~$66.0~~$160.0 million of outstanding borrowings ~~$39.6~~on the revolving credit facility, $51.9 million in letters of credit outstanding and ~~$219.4~~$638.1 million of credit available.

There are two interest rate options for borrowings under the Facility, the Base Rate Loan ~~Option~~(as defined in the Facility) option and the ~~Eurodollar~~Secured Overnight Financing Rate (“SOFR”) Loan ~~Option.~~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.~~rates:


	Net Leverage Ratio
	Less than 1.00		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	%

~~The following is a summary of the additional margins:~~

Consolidated Total Indebtedness to

Credit Facility Adjusted EBITDA


Less than 0.75

0.75 to 1.50

1.50 to 2.25

2.25 or greater

Additional Per Annum Interest Margin Added Under:

Base Rate Loan Option

0.25
%
0.50
%
0.75
%
1.00
%
Eurodollar Rate Loan Option

1.25
%
1.50
%
1.75
%
2.00
%

The weighted average interest rate applicable to the borrowings under the ~~Facility~~revolving credit facility was approximately ~~2.6%~~6.2% as of ~~September 30, 2017.~~March 31, 2023 and 5.7% as of December 31, 2022.

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~~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 ~~a fee. We have never had~~amounts they fund to honor the letter of credit holder’s claim. Absent a claim, ~~made against~~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 ~~that resulted in payments by a lender or~~would require immediate reimbursement by us ~~and believe such~~to our lenders,

Table of Contents

letters of credit are treated as a ~~claim is unlikely in the foreseeable future.~~use of Facility capacity. The letter of credit fees range from ~~1.25%~~1.00% to 2.00% per annum, based on the ~~ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.~~Net Leverage Ratio.

~~Table of Contents~~

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%~~0.15% to ~~0.35%~~0.25% per annum, based on the ~~ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.~~Net Leverage Ratio.

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.

~~The Facility’s principal financial covenants include:~~

~~Leverage Ratio~~—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed (i) 3.00 to 1.00 as of the end of each fiscal quarter through September 30, 2017, and (ii) 2.75 to 1.00 as of the end of each fiscal quarter thereafter through maturity. The leverage ratio as of September 30, 2017 was 0.5.

~~Fixed Charge Coverage Ratio~~—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA, less non-financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to (b) the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00 to 1.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of September 30, 2017 was 29.5.

~~Other Restrictions~~—The Facility permits acquisitions of up to $30.0 million per transaction, provided that the aggregate purchase price of all such acquisitions in the same fiscal year does not exceed $65.0 million. However, these limitations only apply when the Company’s Total Leverage Ratio is greater than 2.00 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 leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we currently have could be negatively impacted by the lenders.

We were in compliance with all of our financial covenants as of ~~September 30, 2017.~~March 31, 2023.

Notes to Former Owners


	Balance at		Range of Stated
	March 31, 2023		Interest Rates
2023	$	11,400	2.5 - 3.0	%
2024		4,800	2.5	%
2025		22,215	2.25 - 3.0	%
2026		10,625	2.5 - 3.75	%
Total	$	49,040

8. 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 ~~outstanding balance~~initial term of ~~$14.3~~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 $10.2 million ~~as of September 30, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due in equal installments in April 2020~~ and ~~2021. In conjunction with the Shoffner acquisition~~$4.1 million in the first ~~quarter~~three months of ~~2016,~~2023 and 2022, respectively. 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 ~~issued a subordinated note to former owners with an outstanding balance~~generally use our incremental borrowing rate based on the information available at commencement date in determining the present value of ~~$1.0 million~~lease payments. The weighted average discount rate for our operating leases as of ~~September 30, 2017~~March 31, 2023 and December 31, 2022 was 4.5% and 4.3%, 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 three months ended March 31, 2023 and 2022 was $17.3 million and $10.4 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 ~~bears interest, payable quarterly,~~we will exercise the option and such exercise is at aour sole discretion. The weighted average ~~interest rate of 3.0%. The principal is due in equal installments in February 2018~~remaining lease term for our operating leases was 7.9 years at March 31, 2023 and ~~2019.~~8.1 years at December 31, 2022.

~~Other Debt~~

~~As part~~A majority of the ~~Shoffner acquisition,~~Company’s real property leases are with individuals or entities with whom we ~~acquired debt~~have no other business relationship. However, in certain instances the Company enters into real property leases with ~~an outstanding balance at~~current or former employees. Rent paid to related parties for the ~~acquisition date~~three months ended March 31, 2023 and 2022 was approximately $2.0 million and $1.7 million, respectively.

If we decide to cancel or terminate a lease before the end of ~~$0.4 million with principal and interest due~~its term, we would typically owe the ~~last day of every month; ending on~~lessor the ~~December 30, 2019 maturity date. The interest rate is~~remaining lease payments under the ~~one month LIBOR rate plus 2.25%. As of September 30, 2017, $0.2 million~~term of the ~~note was outstanding, of which $0.1 million was considered current.~~

lease. Our lease agreements do not contain any material residual value

1015

Table of Contents

guarantees or material restrictive covenants. On rare occasions, we rent or sublease certain real estate assets that we no longer use to third parties.

~~In addition, with one~~

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



	March 31, 2023		December 31, 2022
Operating lease right-of-use assets	$	134,755	$	130,666
Operating lease liabilities:
Other current liabilities	$	21,487	$	21,151
Long-term operating lease liabilities		115,018		111,744
Total operating lease liabilities	$	136,505	$	132,895

The maturities of ~~our acquisitions we acquired capital~~operating lease ~~obligations. As of September 30, 2017, $0.1 million of capital lease obligations were outstanding, of which $0.1 million~~liabilities are as follows (in thousands):


Year ending December 31—
2023 (excluding the three months ended March 31, 2023)	$	20,511
2024		25,536
2025		24,269
2026		20,734
2027		16,543
Thereafter		55,679
Total Lease Payments		163,272
Less—Present Value Discount		(26,767)
Present Value of Operating Lease Liabilities	$	136,505

Supplemental information related to operating leases was ~~considered current.~~as follows (in thousands):


	Three Months Ended March 31,
	2023		2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	7,024	$	6,314
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	9,446	$	4,914

9. 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.

~~Surety~~During the first quarter of 2023, we recorded a pre-tax gain of $6.8 million from legal developments and settlements that primarily relate to disputes with customers regarding the outcome of completed projects as well as an obligation to perform subcontract work under two executed letters of intent for subsequent projects that we believed were not enforceable. The pre-tax gain of $6.8 million has been recorded as an increase in gross profit of $6.6 million, a reduction in SG&A of $0.7 million, an increase in interest income of $1.3 million and an increase in the change in fair value of contingent earn-out obligations expense of $1.8 million in our Consolidated Statements of Operations.

Table of Contents

As of March 31, 2023, 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. ~~To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and do not expect such losses to be incurred in the foreseeable future.~~

~~Surety~~Current market conditions ~~have seen some strengthening as the commercial construction~~for surety markets ~~have started to rebound. Bonding~~and bonding capacity ~~remains~~are adequate, ~~in the current market conditions along~~ with acceptable terms and conditions. Historically, approximately ~~20%~~10% to ~~30%~~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

We are substantially ~~self‑insured~~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~~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~~longer-developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a ~~third‑party~~third-party actuary quarterly.

8.10. Stockholders’ Equity

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.

~~Table of Contents~~

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 ~~less than 0.1 million anti-dilutive stock options for the three and nine months ended September 30, 2017. There were approximately 0.1 million~~zero anti-dilutive stock options excluded from the calculation of diluted EPS for the three ~~and nine~~ months ended ~~September 30, 2016.~~ March 31, 2023 and 2022, respectively.

Table of Contents

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):


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2017	2016	2017	2016

					Three Months Ended
					March 31,
					2023	2022
Common shares outstanding, end of period	37,134	37,230	37,134	37,230	35,752	35,953
Effect of using weighted average common shares outstanding	98	130	125	150	60	123
Shares used in computing earnings per share—basic	37,232	37,360	37,259	37,380	35,812	36,076
Effect of shares issuable under stock option plans based on the treasury stock method	293	319	312	331	26	43
Effect of restricted and contingently issuable shares	101	142	113	143	69	69
Shares used in computing earnings per share—diluted	37,626	37,821	37,684	37,854	35,907	36,188

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 ~~to acquire additional~~by increasing the shares authorized for repurchase by 0.7 million shares. Since the inception of the repurchase program, the Board has approved ~~8.1~~10.9 million shares to be repurchased. As of ~~September 30, 2017,~~March 31, 2023, we have repurchased a cumulative total of ~~7.6~~10.1 million shares at an average price of ~~$13.75~~$24.80 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 ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, we repurchased ~~0.3~~less than 0.1 million shares for approximately ~~$8.9~~$3.6 million at an average price of ~~$34.18~~$121.36 per share.

11. Segment Information

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. The following tables present information about our reportable segments (in thousands):


	Three Months Ended March 31, 2023
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	918,615	$	256,025	$	—	$	1,174,640
Gross Profit	$	164,067	$	41,338	$	—	$	205,405

	Three Months Ended March 31, 2022
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	682,511	$	202,705	$	—	$	885,216
Gross Profit	$	126,728	$	26,416	$	—	$	153,144

1218

Table of Contents

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~~10-Q and the Annual Report on Form ~~10‑K~~10-K filed with the Securities and Exchange Commission for the year ended December 31, ~~2016~~2022 (the “Form ~~10‑K”~~10-K”). This discussion contains ~~“forward‑looking~~“forward-looking statements” regarding our business and industry within the meaning of ~~the Private Securities Litigation Reform Act of 1995.~~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~~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.~~10-K. We undertake no obligation to revise or publicly release the results of any revision to these ~~forward‑looking~~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~~forward-looking statements. The terms “Comfort Systems,” “we,” “us,” or ~~“the Company,~~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 ~~industry.~~industries. We operate primarily in the commercial, industrial and institutional ~~HVAC~~ markets and perform most of our ~~services within office buildings, retail centers, apartment complexes,~~work in manufacturing, ~~plants, and~~ 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

~~Approximately 80% of~~In our ~~revenue is earned on a project basis for installation of~~ mechanical ~~systems in newly constructed facilities or for replacement of systems in existing facilities. Customers~~business segment, customers hire us to ensure ~~such~~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. ~~Our~~

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~~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 88.6% 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 ~~service~~ provider vary widely and include factors such as quality, technical expertise, ~~on‑time~~on-time performance, ~~post‑project~~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.

Table of Contents

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.

~~Table of Contents~~

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~~cost-plus or a time and materials basis, under which we are paid our costs incurred plus an ~~agreed‑upon~~agreed-upon profit margin, and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than ~~fixed‑price~~fixed-price contract margins because there is less risk of unrecoverable cost overruns in ~~cost‑plus~~cost-plus or time and materials work.

As of ~~September 30, 2017~~March 31, 2023, we had ~~5,210~~9,171 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately ~~$457,000.~~$1,100,000. 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 ~~believe is~~consider to be a ~~well‑diversified~~well-diversified distribution of revenue across ~~end‑use~~end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of ~~HVAC and related controls systems~~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 $2 million or more totaled $8.2 billion of aggregate contract value as of March 31, 2023, or approximately 84% of a total contract value for all projects in progress, totaling $9.7 billion. Generally, projects closer in size to $2 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 ~~September 30, 2017,~~March 31, 2023, by contract price, is as follows:

Aggregate

Contract

No. of

Price Value

Contract Price of Project

Projects

(millions)

Under $1 million

4,722

$
546.7

$1 million - $5 million

387

856.8

$5 million - $10 million

70

469.5

$10 million - $15 million

19

233.8

Greater than $15 million

12

273.7

Total

5,210

$
2,380.5


		Aggregate
		Contract
	No. of	Price Value
Contract Price of Project	Projects	(millions)
Under $2 million	8,324	$	1,566.0
$2 million - $10 million	621		2,718.2
$10 million - $20 million	116		1,678.4
$20 million - $40 million	85		2,433.3
Greater than $40 million	25		1,352.2
Total	9,171	$	9,748.1

In addition to project work, approximately ~~20%~~11.4% 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‑~~thirty- to ~~sixty‑day~~sixty-day cancellation notice periods.

Table of Contents

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 3643 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, safety, management and execution practices, labor utilization, ~~safety,~~

~~Table of Contents~~

training, and the ~~make‑up~~make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application, ~~and~~ facility type, ~~end‑use~~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~~non-competition protection where applicable.

Economic and Industry Factors

As a mechanical and ~~building controls~~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 ~~general~~ 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

~~Nonresidential~~During the five-year period from 2015 to 2019, there was an increase in nonresidential building construction and renovation activity ~~as reported by~~levels. In 2020, the ~~federal government, declined steeply over the four year period from 2009~~advent of a global pandemic led to ~~2012,~~some delays in service and ~~2013~~construction, including delayed project starts and ~~2014 activity levels were relatively stable at the low levels of the preceding years. During 2015~~air pockets or pauses during 2020 and ~~2016, there was an increase in overall activity levels~~2021. We believe that delays and ~~these improved levels~~air pockets have ~~continued~~now substantially abated; however, we expect to continue to experience supply chain constraints and reduced labor availability during ~~2017.~~2023.

~~As a result of our continued strong emphasis on cash flow, at September 30, 2017 we had a strong financial position, as discussed further in “Liquidity and Capital Resources” below.~~ We have a credit facility in place with ~~considerably less restrictive~~ terms ~~than those of our previous facilities; this facility~~we believe are favorable that does not expire until ~~February 2021.~~July 2027. As of March 31, 2023, we had $638.1 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 ~~solid current results~~operating history and financial position. We have generated positive free cash flow in each of the last ~~eighteen~~twenty-four calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our ~~balance sheet~~Balance Sheet and surety ~~support~~relationships, as compared to most companies in our industry, represent competitive advantages for us.

Table of Contents

As discussed at greater length in “Results of Operations” below, we expect price competition to continue as ~~our customers and~~ local and regional ~~competitors respond cautiously to improved market conditions.~~industry participants compete for customers. We will continue ~~our efforts~~ to invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional and national account business. Our primary emphasis for 2017 has been on execution and cost control, but we are seeking growth based on our belief that industry conditions will continue to be strong in the near term, and we believe that activity levels will permit us to earn improved profits while preserving and developing our workforce. We continue to focus on project qualification, estimating, pricing and management; and we are investing in growth and improved performance.

~~Table of Contents~~

Cyclicality and Seasonality

~~Historically, the~~The construction industry ~~has been highly cyclical.~~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 ~~HVAC industry is~~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 ~~HVAC~~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 Estimates

Management believes that there have been no significant changes during the three months ended March 31, 2023, to the items that we disclosed as our "Critical Accounting 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, 2022. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements are included in Note 2 “Summary of Significant Accounting Policies and Estimates”.

Results of Operations (dollars in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016

																	Three Months Ended March 31,
																	2023				2022
Revenue	$	480,851	100.0	%	$	428,760	100.0	%	$	1,326,850	100.0	%	$	1,242,240	100.0	%	$	1,174,640	100.0	%	$	885,216	100.0	%
Cost of services		379,993	79.0	%		335,944	78.4	%		1,054,300	79.5	%		986,496	79.4	%		969,235	82.5	%		732,072	82.7	%
Gross profit		100,858	21.0	%		92,816	21.6	%		272,550	20.5	%		255,744	20.6	%		205,405	17.5	%		153,144	17.3	%
Selling, general and administrative expenses		66,707	13.9	%		61,032	14.2	%		196,553	14.8	%		180,245	14.5	%		135,032	11.5	%		117,776	13.3	%
Goodwill impairment		—	—			—	—			1,105	0.1	%		—	—
Gain on sale of assets		(184)	—			(166)	—			(464)	—			(523)	—			(512)	—			(323)	—
Operating income		34,335	7.1	%		31,950	7.5	%		75,356	5.7	%		76,022	6.1	%		70,885	6.0	%		35,691	4.0	%
Interest income		16	—			3	—			55	—			6	—			1,397	0.1	%		3	—
Interest expense		(961)	(0.2)	%		(563)	(0.1)	%		(2,392)	(0.2)	%		(1,870)	(0.2)	%		(4,076)	(0.3)	%		(2,129)	(0.2)	%
Changes in the fair value of contingent earn-out obligations		2,469	0.5	%		804	0.2	%		1,845	0.1	%		468	—			(2,382)	(0.2)	%		4,088	0.5	%
Other income (expense)		10	—			80	—			57	—			455	—			1	—			56	—
Income before income taxes		35,869	7.5	%		32,274	7.5	%		74,921	5.6	%		75,081	6.0	%		65,825	5.6	%		37,709	4.3	%
Income tax expense		13,585				11,803				27,188				27,052
Provision (benefit) for income taxes																		8,609				(49,053)
Net income	$	22,284	4.6	%	$	20,471	4.8	%	$	47,733	3.6	%	$	48,029	3.9	%	$	57,216	4.9	%	$	86,762	9.8	%

We had 3542 operating locations as of December 31, ~~2016. We completed one acquisition in~~2022. In the ~~second~~first quarter of ~~2017, known as “BCH”~~2023, we completed the acquisition of Eldeco, Inc. (“Eldeco”), ~~that~~which reports as a separate ~~location in the Tampa, Florida area. Other than the addition of BCH, we did not make any changes to~~operating location. We had 43 operating locations ~~during the first nine months~~as of ~~2017. As of September 30, 2017, we had 36 operating locations.~~March 31, 2023. Acquisitions are included in our results of operations from the respective acquisition date. The ~~same‑store~~same-store comparison from ~~2017~~2023 to ~~2016,~~2022, as described below, excludes ~~six months of results for BCH,~~Eldeco, which was acquired ~~in April 2017 as well as the first month of 2017 for Shoffner,~~on February 1, 2023, and Atlantic Electric, LLC (“Atlantic”), which was acquired ~~in February 2016.~~on April 1, 2022. An operating location is included in the ~~same‑store~~same-store comparison on the first day it has comparable prior year operating ~~data.~~data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

Table of Contents

Revenue—Revenue for the first quarter of 2023 increased ~~$52.1~~$289.4 million, or ~~12.1%~~32.7%, to ~~$480.9 million for the third quarter of 2017~~$1.17 billion compared to the same period in ~~2016.~~2022. The increase included ~~an 8.0% increase related to the acquisition of BCH and~~ a ~~4.1%~~30.0% increase in revenue related to ~~same‑store activity.~~same-store activity and a 2.7% increase related to the Eldeco and Atlantic acquisitions. The ~~same‑store~~same-store revenue ~~increase is primarily due to an~~growth was largely driven by strong market conditions, including the increase in ~~activity at one~~our backlog, as well as the impact of inflation on our ~~Virginia operations ($9.3 million) and~~cost of goods sold that was passed on to our ~~Wisconsin operation ($4.8 million).~~customers.

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


	Three Months Ended March 31,
	2023				2022
Revenue:
Mechanical Services	$	918,615	78.2	%	$	682,511	77.1	%
Electrical Services		256,025	21.8	%		202,705	22.9	%
Total	$	1,174,640	100.0	%	$	885,216	100.0	%

Revenue for our mechanical services segment increased ~~$84.6~~$236.1 million, or ~~6.8%~~34.6%, to ~~$1.33 billion~~$918.6 million for the first ~~nine months~~quarter of ~~2017~~2023 compared to the same period in ~~2016.~~2022. The increase was broad-based and included ~~a 6.4% increase related to the acquisitions of BCH and Shoffner and a 0.4%~~an increase in ~~revenue related to same‑store activity. The same‑store revenue increase is primarily due to an increase~~activity in

~~Table~~ the technology sector at one of ~~Contents~~

~~activity at~~ our ~~New Hampshire operation~~Texas operations ($~~16.3~~84.4 million) and ~~our Wisconsin operation ($11.4 million). This was partially offset by a decrease at~~ our North Carolina operation ($~~11.7~~31.8 million), in the manufacturing sector at our Indiana operation ($24.4 million), in the healthcare sector at our Mississippi operation ($14.5 million) and ~~one of~~in the multi-family and residential sector at our ~~Virginia operations~~Colorado operation ($~~9.1~~13.8 million).

Revenue for our electrical services segment increased $53.3 million, or 26.3%,to $256.0 million for the first quarter of 2023 compared to the same period in 2022. The increase primarily resulted from the acquisitions of Eldeco ($17.6 million) and Atlantic ($6.7 million), as well as an increase in activity in the manufacturing sector at our Texas electrical operation ($20.7 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, ~~and~~ 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,
	2023				2022				2022
Backlog:
Mechanical Services	$	3,423,767	77.0	%	$	3,299,630	81.2	%	$	2,055,866	75.2	%
Electrical Services		1,021,177	23.0	%		764,113	18.8	%		677,110	24.8	%
Total	$	4,444,944	100.0	%	$	4,063,743	100.0	%	$	2,732,976	100.0	%

Backlog as of ~~September 30, 2017~~March 31, 2023 was ~~$901.2 million,~~$4.44 billion, a ~~3.9% decrease~~9.4% increase from ~~June 30, 2017~~December 31, 2022 backlog of ~~$937.8 million,~~$4.06 billion, and a ~~25.3%~~62.6% increase from ~~September 30, 2016~~March 31, 2022 backlog of ~~$719.3 million. Sequential~~$2.73 billion. The sequential backlog ~~decreased primarily due to~~included the acquisition of Eldeco ($80.2 million), as well as a same-store increase of $301.0 million, or 7.4%. Same-store sequential backlog growth was broad-based, including increased project bookings at our Texas electrical operation ($89.6 million), one of our Virginia operations ($74.8 million), our Tennessee electrical operation ($39.9 million), our Indiana operation ($30.9 million), and our Kentucky electrical operation ($28.5 million). The sequential backlog increase was partially offset by completion of project work at one of our Texas operations ($~~13.3 million), one of our Virginia operations ($10.4 million) and one of our Florida operations ($10.4~~30.1 million). The ~~year‑over‑year~~year-over-year backlog increase included the ~~acquisition~~acquisitions of ~~BCH~~Eldeco ($~~31.8~~80.2 million) and Atlantic ($44.1 million), as well as a same-store increase of ~~$150.1 million~~$1.59 billion, or ~~20.9%~~58.1%. Same-store year-over-year backlog ~~increased primarily due to~~growth was broad-based, including increased project bookings at ~~our Colorado operation ($50.6 million),~~ one of our ~~Virginia~~Texas operations ($~~41.4~~647.5 million), our North Carolina operation ($~~22.3~~388.6 million), our Indiana operation ($138.1 million), our Texas electrical operation ($86.6 million), and our ~~Arizona~~Kentucky electrical operation ($~~22.1~~77.6 million).

Table of Contents

Gross Profit—Gross profit increased ~~$8.0~~$52.3 million, or ~~8.7%~~34.1%, to ~~$100.9~~$205.4 million for the ~~third~~first quarter of ~~2017~~2023 as compared to the same period in ~~2016.~~2022. The increase included a ~~6.1%~~1.1% increase related to the ~~acquisition of BCH~~Eldeco and Atlantic acquisitions, as well as a ~~2.6%~~33.0% increase in ~~same‑store~~same-store activity. The ~~same‑store~~same-store increase in gross profit was broad-based and was primarily ~~due to~~driven by higher revenues in the current year, including increased volumes at one of our ~~Virginia~~Texas operations ($~~1.4~~13.9 million) ~~compared to the prior year as well as improved~~. Additionally, we achieved improvements in project execution at ~~one~~our Indiana operation ($7.3 million) and our Mississippi operation ($5.5 million). Furthermore, we recorded an increase of $6.6 million in gross profit related to positive developments on legal matters in the first quarter of 2023. The gross profit increases at our Texas and Indiana operations ~~($1.2 million).~~included the majority of the $6.6 million in benefits for legal matters in the first quarter of 2023. As a percentage of revenue, gross profit ~~decreased from 21.6% in 2016 to 21.0% in 2017 due to an increase in backlog amortization as a result of the BCH acquisition.~~

~~Gross profit increased $16.8 million, or 6.6%, to $272.6 million~~ for the first ~~nine months of 2017 as compared~~quarter increased from 17.3% in 2022 to ~~the same period~~17.5% in 2016. The increase included a 5.5% increase related to the acquisitions of BCH and Shoffner and a 1.1% increase in same‑store activity. The same‑store increase in gross profit was primarily due to increased volumes at our Wisconsin operation ($3.5 million). As a percentage of revenue, gross profit decreased slightly from 20.6% in 2016 to 20.5% in 2017 due to an increase in backlog amortization as a result of the BCH acquisition.2023.

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased ~~$5.7~~$17.3 million, or ~~9.3%~~14.7%, to ~~$66.7~~$135.0 million for the ~~third~~first quarter of ~~2017~~2023 as compared to ~~2016.~~2022. On a ~~same‑store~~same-store basis, excluding amortization expense, SG&A increased ~~$0.6~~$14.0 million, or ~~1.0%~~12.8%. ~~This~~The same-store increase is primarily due to ~~the increase in~~higher same-store revenue andincreased compensation costs largely attributable to increased headcount ($14.5 million). This increase was partially offset by a decrease in consulting fees and other expenses of $4.0 million as compared to the ~~current~~prior year, ~~period.~~related to the credit for increasing research activities (the “R&D tax credit”) for prior tax years. Amortization expense increased ~~$1.9 million during the period as a result of the BCH acquisition. As a percentage of revenue, SG&A decreased from 14.2% in 2016 to 13.9% in 2017.~~

SG&A increased $16.3 million, or 9.0%, to $196.6 million for the first nine months of 2017 as compared to 2016. On a same‑store basis, excluding amortization expense, SG&A increased $5.4 million, or 3.1%. This increase is primarily due to $0.8 million in compensation costs related to leadership changes, investments in service and an increase in bad debt expense of $0.2 million due to the collection of aged receivables in the prior year period. Additionally, we incurred $0.4 million in expenses in the first quarter of 2017 related to the acquisition of BCH completed on April 1, 2017. Amortization expense increased $3.4$0.5 million during the period, primarily as a result of the ~~BCH acquisition.~~Eldeco and Atlantic acquisitions. As a percentage of revenue, SG&A ~~increased~~for the first quarter decreased from ~~14.5%~~13.3% in ~~2016~~2022 to ~~14.8%~~11.5% in ~~2017 primarily due to the factors discussed above.~~2023.

We have included ~~same‑store~~same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, ~~same‑store~~same-store SG&A, excluding amortization, is not considered under

~~Table of Contents~~

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,
									2023		2022

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands)				(in thousands)
									(in thousands)
SG&A	$	66,707	$	61,032	$	196,553	$	180,245	$	135,032	$	117,776
Less: SG&A from companies acquired		(3,185)		—		(7,516)		—		(2,822)		—
Less: Amortization expense		(3,394)		(1,515)		(8,072)		(4,649)		(9,295)		(8,838)
Same-store SG&A, excluding amortization expense	$	60,128	$	59,517	$	180,965	$	175,596	$	122,915	$	108,938

~~Goodwill Impairment~~Interest Income—~~We recorded a goodwill impairment charge of $1.1~~Interest income increased $1.4 million, ~~during~~or 100.0%, to $1.4 million for the first quarter of 2017. Based on changes to our market strategy that occurred in March 2017 related to our reporting unit based in California, we reevaluated our projected future earnings for this operating location. 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. Based upon our projected future earnings for this location, we could no longer support the related goodwill balance and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.

~~Interest Expense—Interest expense increased $0.4 million, or 70.7%, to $1.0 million for the third quarter of 2017~~2023 as compared to the same period in ~~2016.~~ 2022. The increase in interest income for the first quarter of 2023 is due primarily to interest awarded to us related to a dispute with a customer.

Interest Expense—Interest expense increased ~~$0.5~~$1.9 million, or ~~27.9%~~91.5%, to ~~$2.4~~$4.1 million for the first ~~nine months~~quarter of ~~2017~~2023 as compared to the same period in ~~2016.~~2022. The increase ~~reflects~~in interest expense for the ~~increased borrowings on the revolving credit facility as well as notes to former owners used to fund the BCH acquisition during the second~~first quarter of ~~2017.~~2023 is due to an increase in our average interest rate on our outstanding borrowings in 2023 compared to the prior year.

Changes in the Fair Value of Contingent ~~Earn‑out~~Earn-out Obligations—The contingent ~~earn‑out~~earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. ~~Income~~Expense from changes in the fair value of contingent ~~earn‑out~~earn-out obligations for the ~~third~~first quarter of ~~2017~~2023 increased ~~$1.7~~$6.5 million as compared to the same period in ~~2016. This increase was~~2022. These changes in value were primarily the result of ~~reducing~~higher earn-out expenses associated with our ~~obligation related to the BCH acquisition primarily due to third quarter results being below the initial estimate as a result of the impact of Hurricane Irma~~electrical operations in Texas and ~~less project activity~~Kentucky, driven by strong earnings in the quarter than previously estimated. In the third quarter of 2016, based on updated measurements of estimated future cash flows for our contingent obligations, we reduced our obligation related to the EAS acquisition resultingcurrent year and strong market conditions. The increase in ~~a gain of $0.8 million.~~

~~Income from changes~~expense was also impacted by earn-out gains in the ~~fair value of contingent earn‑out obligations~~prior year period that did not recur in 2023.

Provision (Benefit) for Income Taxes—Our provision for income taxes for the first nine months of 2017 increased $1.4 million as compared to the same period in 2016. This increase was the result of reducing our obligation related to the BCH acquisition primarily due to third quarter results being below the initial estimate as a result of the impact of Hurricane Irma and less project activity in the quarter than previously estimated. In the third quarter of 2016, based on updated measurements of estimated future cash flows for our contingent obligations, we reduced our obligation related to the EAS acquisition resulting in a gain of $0.8 million.

~~Income Tax Expense~~—We perform work throughout the United States in virtually all fifty states. Our effective tax rate varies based on our relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items, judgments and legal structures can change our effective tax rate. These items can include the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions, accounting for losses associated with underperforming operations and noncontrolling interests.

~~For the nine~~three months ended ~~September 30, 2017, our income tax expense~~March 31, 2023 was ~~$27.2~~$8.6 million with an effective tax rate of ~~36.3%~~13.1% as compared to a benefit for income ~~tax expense~~taxes of ~~$27.1~~$49.1 million with ana negative effective tax rate of ~~36.0%~~130.1% for the same period in ~~2016.~~2022. The effective tax rate for ~~2017~~2023 was ~~higher~~lower than the ~~35.0%~~21% federal statutory rate primarily due to the current year R&D tax credit (9.7%) and an increase in the R&D tax credit for the 2022 tax year (5.1%). These R&D tax credit benefits were partially offset by net state income taxes ~~(3.6%~~(4.3%) and nondeductible expenses, ~~(1.1%~~including nondeductible expenses related to the TAS Energy Inc. (“TAS”) ~~partially offset by benefits from deductions for stock-based compensation (1.2%~~acquisition (2.6%) ~~and the domestic production activities deduction (1.9%)~~. The effective tax rate for ~~2016~~2022 was ~~higher~~significantly lower than the ~~35.0%~~21% federal statutory rate primarily due to a

Table of Contents

reduction in unrecognized tax benefits from settlement with the Internal Revenue Service for the 2016, 2017 and 2018 tax years (80.5%), our claiming the R&D tax credit for the 2019, 2020 and 2021 tax years (71.3%) and inclusion of the R&D tax credit for 2022 (4.5%). These benefits were partially offset by net state income taxes ~~(3.6%~~(4.3%) and nondeductible expenses, ~~(0.8%~~including nondeductible expenses related to TAS (1.3%).

~~Table~~If Congress were to restore immediate deductibility of ~~Contents~~

~~partially offset~~research and experimental (“R&E”) expenditures and rescind conforming amendments made to the R&D tax credit, in the period in which such restoration and rescission occurred we would lose the benefit of the increase in the R&D tax credit and our provision for income taxes would increase by $4.7 million, of which $3.4 million relates to 2022.

Outlook

We experienced strong ongoing demand in the ~~domestic production activities deduction (1.8%)~~first quarter of 2023, and ~~a decrease~~we believe that we have largely recovered from negative impacts to industry demand in ~~valuation allowances (0.4%).~~our business due to the business disruption caused by COVID-19. We ~~currently estimate~~continue to experience increased labor costs, and 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 ~~effective tax rate for~~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 ~~full year 2017 will be between 35% and 38%.~~effects of these challenges.

~~Outlook~~

We have ~~seen industry conditions improve during 2015~~a good pipeline of opportunities and ~~2016. Our emphasis~~potential backlog, and we have been generally successful in maintaining productivity and in procuring needed materials despite ongoing challenges. Considering all these factors, we currently anticipate solid earnings and cash flow in 2023. We continue to prepare for ~~2017 is on execution,~~a wide range of challenges and economic circumstances, including a ~~focus on cost discipline and efficient project performance, labor force development, and investing in growth, particularly in service and small projects. Based on our recent acquisitions,~~potential recession; however, despite challenges, we currently expect ~~that our 2017 revenues will be above levels we experienced in 2016. Additionally, in light of economic~~supportive conditions for our industry ~~we expect that profitability~~are likely to continue in ~~2017 will continue to be strong and at levels similar to what we experienced in 2016.~~2023.

Liquidity and Capital Resources (in thousands):


	Nine Months Ended
	September 30,
	2017		2016


					Three Months Ended
					March 31,
					2023		2022

Cash provided by (used in):
Operating activities	$	65,692	$	49,754	$	126,909	$	63,729
Investing activities		(110,906)		(74,920)		(68,945)		(9,369)
Financing activities		42,636		(5,961)		(66,618)		2,479
Net increase (decrease) in cash and cash equivalents	$	(2,578)	$	(31,127)	$	(8,654)	$	56,839
Free cash flow:
Cash provided by operating activities	$	65,692	$	49,754	$	126,909	$	63,729
Purchases of property and equipment		(16,830)		(17,257)		(16,520)		(9,192)
Proceeds from sales of property and equipment		784		847		622		1,056
Free cash flow	$	49,646	$	33,344	$	111,011	$	55,593

Cash Flow

Our business does not require significant amounts of investment in ~~long‑term~~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

Table of Contents

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 ~~$65.7~~$126.9 million during the first ~~nine~~three months of ~~2017~~2023 compared with ~~$49.8~~$63.7 million during the same period in ~~2016.~~2022. The ~~$15.9 million increase is primarily due to a $21.0~~$63.2 million increase in ~~accounts payable and accrued liabilities and~~cash provided was primarily driven by a ~~$21.2~~$151.7 million ~~increase in~~benefit from higher billings in excess of costs and ~~estimated earnings, primarily due~~deferred revenue, including the impact of large advance payments received in 2023 and higher pre-tax income. The benefit from these advance payments received in 2023 will reverse when project costs are incurred, except to the ~~timing of billings and various project work. The $21.0 million increase in accounts payable and accrued liabilities included approximately $6.0 million for postponed income tax~~extent that additional advanced payments ~~without penalty due to relief granted by the IRS for companies affected by Hurricane Harvey.~~are received. This benefit was partially offset by ~~$33.8~~a $73.2 million ~~increase~~change in receivables, ~~related to project work timing and the schedule for billings as well as~~net driven by the increase in revenue compared to the ~~same period~~prior year and $33.3 million of tax refunds received in ~~2016.~~the first quarter of 2022. We expect our 2023 operating cash flows will be negatively impacted by the deferral of tax deductions for R&E expenditures pursuant to the Tax Cuts and Jobs Act (2017). Assuming no action is taken by Congress to restore immediate deductibility of R&E expenditures, we estimate additional tax payments will reduce our cash flow during the last nine months of 2023 by approximately $120 million to $140 million.

~~Table of Contents~~

Cash Used in Investing Activities—During the first ~~nine~~three months of ~~2017,~~2023, cash used in investing activities was ~~$110.9~~$68.9 million compared to ~~$74.9~~$9.4 million during the same period in ~~2016.~~2022. The ~~$36.0~~$59.5 million increase in cash used primarily relates to a $53.1 million increase in cash paid ~~(net of cash acquired)~~ for ~~the BCH acquisition in 2017 of $86.1 million compared to the EAS and Shoffner~~ acquisitions in ~~2016 ($56.3 million).~~the current year.

Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $66.6 million for the first three months of 2023 compared to cash provided by financing activities ~~was $42.6 million for the first nine months~~ of ~~2017 compared to cash used in financing activities of $6.0~~$2.5 million during the same period in ~~2016.~~2022. The ~~$48.6~~$69.1 million increase in cash used is primarily due to a $95.0 million increase in net payments on our revolving credit facility, which was driven by an increase in cash provided by ~~financing~~operating activities ~~is primarily due~~in the current year. This increase was partially offset by a reduction of $10.5 million in share repurchases in the current year compared to ~~$51.0 million of additional net proceeds from the revolving line of credit during~~ the first ~~nine~~three months of ~~2017.~~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

Table of Contents

Debt

~~Debt~~

Revolving Credit Facility

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~~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~~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 ~~a fee. We have never had~~amounts they fund to honor the letter of credit holder’s claim. Absent a claim, ~~made against~~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 ~~that resulted in payments by a lender or~~would require immediate reimbursement by us ~~and believe such~~to our lenders, letters of credit are treated as a ~~claim is unlikely in the~~

~~Table~~use of ~~Contents~~

~~foreseeable future.~~Facility capacity. The letter of credit fees range from ~~1.25%~~1.00% to 2.00% per annum, based on the ~~ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.~~Net Leverage Ratio.

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.

~~The Facility’s principal financial covenants include:~~

~~Fixed Charge Coverage Ratio~~—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA, less non‑financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to (b) the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00 to 1.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of September 30, 2017 was 29.5.

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 leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we currently have could be negatively impacted by the lenders.

We were in compliance with all of our financial covenants as of ~~September 30, 2017.~~March 31, 2023.

Table of Contents

Notes to Former Owners

As part of the consideration used to acquire ~~two~~eleven companies, we have outstanding notes to the former owners. ~~These~~Together, these notes had an outstanding balance of ~~$15.3~~$49.0 million as of ~~September 30, 2017. In conjunction with the BCH acquisition in the second quarter~~March 31, 2023. At March 31, 2023, future principal payments of ~~2017, we issued a promissory note~~notes to former owners ~~with an outstanding balance of $14.3 million~~by maturity year are as ~~of September 30, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due~~follows (dollars in equal installments in April 2020 and 2021. In conjunction with the Shoffner acquisition in the first quarter of 2016, we issued a subordinated note to former owners with an outstanding balance of $1.0 million as of September 30, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due in equal installments in February 2018 and 2019.thousands):


	Balance at		Range of Stated
	March 31, 2023		Interest Rates
2023	$	11,400	2.5 - 3.0	%
2024		4,800	2.5	%
2025		22,215	2.25 - 3.0	%
2026		10,625	2.5 - 3.75	%
Total	$	49,040

Outlook

~~Other Debt~~

As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4 million with principal and interest due the last day of every month; ending on the December 30, 2019 maturity date. The

~~Table of Contents~~

~~interest rate is the one month LIBOR rate plus 2.25%. As of September 30, 2017, $0.2 million of the note was outstanding, of which $0.1 million was considered current.~~

In addition, with one of our acquisitions we acquired capital lease obligations. As of September 30, 2017, $0.1 million of capital lease obligations were outstanding, of which $0.1 million was considered current.

~~Outlook~~

We have generated positive net free cash flow for the last ~~eighteen~~twenty-four 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.

~~Off‑Balance Sheet Arrangements and~~ Other Commitments

As is common in our industry, we have entered into certain off‑balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our most significant off‑balance sheet transactions include liabilities associated with noncancelable operating leases. We also have other off‑balance sheet obligations involving letters of credit and surety guarantees.

We enter into noncancelable operating leases for many of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. At the end of the lease, we have no further obligation to the lessor. 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.

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~~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.

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 20% to 30% 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

~~Table of Contents~~

~~interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.~~

~~Contractual Obligations~~

As of ~~September 30, 2017,~~March 31, 2023, we have ~~$39.6~~$51.9 million in letter of credit commitments, of which ~~$11.3~~$25.9 million will expire in ~~2017~~2023 and ~~$28.3~~$26.0 million will expire in ~~2018.~~2024. 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~~self-insurance programs through ~~third‑party~~third-party insurers as we do. While ~~many~~some of these letter of credit commitments expire in ~~2017,~~the next twelve months, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

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 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 our sureties’ assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that

Table of Contents

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily related to potential adverse changes in interest rates, as discussed below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant financial market risks, including commodity price risk, or foreign currency exchange risk ~~or interest rate risks~~ from the use of derivative financial instruments. ~~We do not~~At times, we use derivative financial ~~instruments.~~instruments to manage our interest rate risk.

We have exposure to changes in interest rates under our revolving credit facility. ~~We have a modest level~~The weighted average interest rate applicable to the borrowings under the revolving credit facility was approximately 6.2% as of ~~indebtedness under our debt facility~~March 31, 2023 and ~~our indebtedness could increase in the future.~~5.7% as of December 31, 2022. Our debt with fixed interest rates consists of notes to former owners of acquired ~~companies.~~companies and acquired notes payable.

~~The weighted average interest rate applicable to borrowings under the Facility was approximately 2.6% as of September 30, 2017.~~

We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. ~~During the first quarter of 2017 we recorded a goodwill impairment charge of $1.1 million based on Level 3 measurements. See Note 5 “Goodwill” for further discussion.~~ We did not recognize any ~~other~~ impairments in the ~~first nine months of 2017,~~current year on those assets required to be measured at fair value on a nonrecurring basis.

The valuation of ~~our~~the Company’s contingent ~~earn‑out~~earn-out payments is determined using a probability weighted discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payment, length of ~~earn‑out~~earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our executive management is responsible for ensuring the effectiveness of the design and operation of our disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.

~~Table of Contents~~

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules ~~13a‑15(f)~~13a-15(f) and ~~15d‑15(f)~~15d-15(f) under the Securities Exchange Act of 1934) during the three months ended ~~September 30, 2017~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to certain legal and regulatory claims, ~~and~~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 our consolidated financial statements. While we cannot predict the outcome of these proceedings, in ~~our~~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.

During the first quarter of 2023, we recorded a pre-tax gain of $6.8 million from legal developments and settlements that primarily relate to disputes with customers regarding the outcome of completed projects as well as an obligation to perform subcontract work under two executed letters of intent for subsequent projects that we believed were not enforceable. The pre-tax gain of $6.8 million has been recorded as an increase in gross profit of $6.6 million, a reduction in SG&A of $0.7 million, an increase in interest income of $1.3 million and an increase in the change in fair value of contingent earn-out obligations expense of $1.8 million in our Consolidated Statements of Operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016,~~2022, which could materially affect our business, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

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 ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, we repurchased ~~0.3~~less than 0.1 million shares for approximately ~~$8.9~~ $3.6 million at an average price of ~~$34.18~~$121.36 per share.

2430

Table of Contents

During the quarter ended ~~September 30, 2017,~~March 31, 2023, we purchased our common shares in the following amounts at the following average prices:

Total Number of Shares

Maximum Number of

Purchased as Part of

Shares that May Yet Be

Total Number of

Average Price

Publicly Announced Plans

Purchased Under the Plans

Period

Shares Purchased

Paid Per Share

or Programs

or Programs

July 1 - July 31

—

$
—

7,449,784

662,709

August 1 - August 31

143,667

$
33.18

7,593,451

519,042

September 1 - September 30

9,737

$
33.56

7,603,188

509,305

153,404

$
33.20

7,603,188

509,305


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans
Period	Shares Purchased	Paid Per Share		or Programs (1)	or Programs
January 1 - January 31	17,100	$	116.89	10,133,946	810,179
February 1 - February 28	8,500	$	122.13	10,142,446	801,679
March 1 - March 31	3,800	$	139.69	10,146,246	797,879
	29,400	$	121.36	10,146,246	797,879

(1)

Purchased as part of a program announced on March 29, 2007 under which, since the inception of this program, 10.9 million shares have been approved for repurchase.

Under our stock incentive plans, employees may elect to have us withhold common shares to satisfy statutory federal, state and local tax withholding obligations arising on the vesting of restricted stock awards and exercise of options. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of the common shares by us on the date of withholding.

2531

Table of Contents

Item 6. Exhibits


		Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits	Exhibit Number	Filing or File Number
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant	3.1	333-24021
3.2	Certificate of Amendment dated May 21, 1998	3.2	1998 Form 10-K
3.3	Certificate of Amendment dated July 9, 2003	3.3	2003 Form 10-K
3.4	Certificate of Amendment dated May 20, 2016	3.1	May 20, 2016 Form 8-K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.	3.1	March 25, 2016 Form 8-K
10.1*	Form of Restricted Stock Unit Agreement with Revisions under the Company’s 2017 Omnibus Incentive Plan	10.1	First Quarter 2023 Form 10-Q
10.2*	Form of Dollar-denominated Performance Restricted Stock Unit Agreement with Revisions under the Company’s 2017 Omnibus Incentive Plan	10.2	First Quarter 2023 Form 10-Q
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	Inline XBRL Instance Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase
104	Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)

* Filed herewith.

** Furnished herewith.

~~Item 6.~~ ~~Exhibits~~

Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number

Description of Exhibits

Exhibit
Number

Filing or
File Number
3.1

Second Amended and Restated Certificate of Incorporation of the Registrant

3.1

333‑24021
3.2

Certificate of Amendment dated May 21, 1998

3.2

1998 Form 10‑K
3.3

Certificate of Amendment dated July 9, 2003

3.3

2003 Form 10‑K
3.4

Certificate of Amendment dated May 20, 2016

3.1

May 20, 2016
Form 8‑K
3.5

Amended and Restated Bylaws of Comfort Systems USA, Inc.

3.1

March 25, 2016 Form 8‑K
31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

Filed Herewith
31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

Filed Herewith
32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

Furnished Herewith
32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

Furnished Herewith
101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Comfort Systems USA, Inc.

~~October~~April 26, ~~2017~~2023	By:	/s/ Brian E. Lane
		Brian E. Lane
		President, Chief Executive Officer and Director

~~October~~April 26, ~~2017~~2023	By:	/s/ William George
		William George
		Executive Vice President and Chief Financial Officer

~~October~~April 26, ~~2017~~2023	By:	/s/ Julie S. Shaeff
		Julie S. Shaeff
		Senior Vice President and Chief Accounting Officer

2733


							Additional				Non-		Total
	Common Stock			Treasury Stock			Paid-In		Retained		Controlling		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Interests		Equity
BALANCE AT DECEMBER 31, 2015	41,123,365	$	411	(3,696,781)	$	(46,845)	$	323,765	$	69,390	$	18,284	$	365,005
Cumulative effect of change in accounting principle	—		—	—		—		—		(38)		—		(38)
Net income	—		—	—		—		—		64,896		—		64,896
Issuance of Stock:
Issuance of shares for options exercised	—		—	111,761		1,568		10		—		—		1,578
Issuance of restricted stock & performance stock	—		—	172,727		2,282		(306)		—		—		1,976
Shares received in lieu of tax withholding payment on vested restricted stock	—		—	(41,788)		(1,304)		—		—		—		(1,304)
Stock-based compensation	—		—	—		—		3,502		—		—		3,502
Dividends	—		—	—		—		—		(10,264)		—		(10,264)
Acquisition of noncontrolling interest	—		—	—		—		(17,346)		—		(18,284)		(35,630)
Share repurchase	—		—	(460,170)		(13,088)		—		—		—		(13,088)
BALANCE AT DECEMBER 31, 2016	41,123,365		411	(3,914,251)		(57,387)		309,625		123,984		—		376,633
Net income (unaudited)	—		—	—		—		—		47,733		—		47,733
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	90,498		1,366		(70)		—		—		1,296
Issuance of restricted stock & performance stock (unaudited)	—		—	134,646		2,037		(421)		—		—		1,616
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(39,335)		(1,419)		—		—		—		(1,419)
Stock-based compensation (unaudited)	—		—	—		—		3,178		—		—		3,178
Dividends (unaudited)	—		—	—		—		—		(8,199)		—		(8,199)
Share repurchase (unaudited)	—		—	(260,697)		(8,909)		—		—		—		(8,909)
BALANCE AT SEPTEMBER 30, 2017 (unaudited)	41,123,365	$	411	(3,989,139)	$	(64,312)	$	312,312	$	163,518	$	—	$	411,929


	Revenue
Service Activity	$ in thousands		%
HVAC and Plumbing	$	1,207,434	91	%
Building Automation Control Systems		66,343	5	%
Other		53,073	4	%
Total	$	1,326,850	100	%


	Consolidated Total Indebtedness to
	Credit Facility Adjusted EBITDA
	Less than 0.75		0.75 to 1.50		1.50 to 2.25		2.25 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option	0.25	%	0.50	%	0.75	%	1.00	%
Eurodollar Rate Loan Option	1.25	%	1.50	%	1.75	%	2.00	%


		Aggregate
		Contract
	No. of	Price Value
Contract Price of Project	Projects	(millions)
Under $1 million	4,722	$	546.7
$1 million - $5 million	387		856.8
$5 million - $10 million	70		469.5
$10 million - $15 million	19		233.8
Greater than $15 million	12		273.7
Total	5,210	$	2,380.5


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans
Period	Shares Purchased	Paid Per Share		or Programs	or Programs
July 1 - July 31	—	$	—	7,449,784	662,709
August 1 - August 31	143,667	$	33.18	7,593,451	519,042
September 1 - September 30	9,737	$	33.56	7,603,188	509,305
	153,404	$	33.20	7,603,188	509,305


		Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits	Exhibit Number	Filing or File Number
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant	3.1	333‑24021
3.2	Certificate of Amendment dated May 21, 1998	3.2	1998 Form 10‑K
3.3	Certificate of Amendment dated July 9, 2003	3.3	2003 Form 10‑K
3.4	Certificate of Amendment dated May 20, 2016	3.1	May 20, 2016 Form 8‑K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.	3.1	March 25, 2016 Form 8‑K
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002		Filed Herewith
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002		Filed Herewith
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002		Furnished Herewith
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002		Furnished Herewith
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase