EMCOR Group, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | 10-Q | ||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
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 1-8267
EMCOR Group, Inc. | ||
| (Exact Name of Registrant as Specified in Its Charter) | ||
| Delaware | 11-2125338 | ||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | ||||||||||
| 301 Merritt Seven | |||||||||||
| Norwalk, | Connecticut | 06851-1092 | |||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(203) | 849-7800 | ||||
| (Registrant’s Telephone Number, Including Area Code) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock | EME | 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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 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 | ☐ | ||||||||||
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 by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on April 22, 2022: 51,141,944 shares.
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EMCOR Group, Inc.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They generally contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” variations of such wording and other words or phrases of similar meaning. Forward-looking statements in this report include discussions of our future operating or financial performance and other forward-looking commentary regarding aspects of our business, including market share growth, gross profit, remaining performance obligations, project mix, projects with varying profit margins, selling, general and administrative expenses, and trends in our business, and other characterizations of future events or circumstances, such as the effects of the COVID-19 pandemic and supply chain disruptions and delays. Each forward-looking statement included in this report is subject to risks and uncertainties, including those identified in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, and other sections of this report, and in our Form 10-K for the year ended December 31, 2021, including, without limitation, the “Risk Factors” section of such Form 10-K. Such risks and uncertainties could cause actual results to differ materially from those that might be anticipated from, or projected or implied by, our forward-looking statements. The forward-looking statements contained in this report speak only as of the filing date of this report. We undertake no obligation to update any forward-looking statements. However, any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) should be consulted. We caution investors not to place undue reliance on forward-looking statements, due to their inherent uncertainty.
PART I. – FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| March 31, 2022 (Unaudited) | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 514,513 | $ | 821,345 | |||||||
Accounts receivable, less allowance for credit losses of $22,956 and $23,534, respectively | 2,303,449 | 2,204,519 | |||||||||
| Contract assets | 262,119 | 230,143 | |||||||||
| Inventories | 71,463 | 54,098 | |||||||||
| Prepaid expenses and other | 64,861 | 80,889 | |||||||||
| Total current assets | 3,216,405 | 3,390,994 | |||||||||
| Property, plant and equipment, net | 151,346 | 152,066 | |||||||||
| Operating lease right-of-use assets | 266,379 | 260,778 | |||||||||
| Goodwill | 891,536 | 890,268 | |||||||||
| Identifiable intangible assets, net | 574,614 | 589,365 | |||||||||
| Other assets | 130,874 | 157,975 | |||||||||
| Total assets | $ | 5,231,154 | $ | 5,441,446 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt and finance lease liabilities | $ | 16,017 | $ | 16,235 | |||||||
| Accounts payable | 719,792 | 734,275 | |||||||||
| Contract liabilities | 827,708 | 788,134 | |||||||||
| Accrued payroll and benefits | 411,668 | 490,867 | |||||||||
| Other accrued expenses and liabilities | 261,118 | 274,406 | |||||||||
| Operating lease liabilities, current | 60,267 | 57,814 | |||||||||
| Total current liabilities | 2,296,570 | 2,361,731 | |||||||||
| Long-term debt and finance lease liabilities | 245,416 | 245,450 | |||||||||
| Operating lease liabilities, long-term | 224,231 | 220,836 | |||||||||
| Other long-term obligations | 329,139 | 360,340 | |||||||||
| Total liabilities | 3,095,356 | 3,188,357 | |||||||||
| Equity: | |||||||||||
| EMCOR Group, Inc. stockholders’ equity: | |||||||||||
Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding | — | — | |||||||||
Common stock, $0.01 par value, 200,000,000 shares authorized, 60,832,337 and 60,737,006 shares issued, respectively | 608 | 607 | |||||||||
| Capital surplus | 62,374 | 61,874 | |||||||||
| Accumulated other comprehensive loss | (85,949) | (83,562) | |||||||||
| Retained earnings | 2,901,909 | 2,835,504 | |||||||||
Treasury stock, at cost 9,002,414 and 7,437,268 shares, respectively | (743,846) | (562,036) | |||||||||
| Total EMCOR Group, Inc. stockholders’ equity | 2,135,096 | 2,252,387 | |||||||||
| Noncontrolling interests | 702 | 702 | |||||||||
| Total equity | 2,135,798 | 2,253,089 | |||||||||
| Total liabilities and equity | $ | 5,231,154 | $ | 5,441,446 | |||||||
See Notes to Consolidated Financial Statements.
1
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues | $ | 2,592,549 | $ | 2,304,049 | |||||||
| Cost of sales | 2,239,994 | 1,962,976 | |||||||||
| Gross profit | 352,555 | 341,073 | |||||||||
| Selling, general and administrative expenses | 252,598 | 224,069 | |||||||||
| Operating income | 99,957 | 117,004 | |||||||||
| Net periodic pension (cost) income | 1,169 | 908 | |||||||||
| Interest expense, net | (1,289) | (1,363) | |||||||||
| Income before income taxes | 99,837 | 116,549 | |||||||||
| Income tax provision | 26,451 | 31,604 | |||||||||
| Net income including noncontrolling interests | 73,386 | 84,945 | |||||||||
| Net income attributable to noncontrolling interests | — | 171 | |||||||||
| Net income attributable to EMCOR Group, Inc. | $ | 73,386 | $ | 84,774 | |||||||
| Basic earnings per common share | $ | 1.39 | $ | 1.54 | |||||||
| Diluted earnings per common share | $ | 1.39 | $ | 1.54 | |||||||
| Dividends declared per common share | $ | 0.13 | $ | 0.13 | |||||||
See Notes to Consolidated Financial Statements.
2
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)(Unaudited)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income including noncontrolling interests | $ | 73,386 | $ | 84,945 | |||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Foreign currency translation adjustments | (2,842) | 585 | |||||||||
Post retirement plans, amortization of actuarial loss included in net income (1) | 455 | 804 | |||||||||
| Other comprehensive (loss) income | (2,387) | 1,389 | |||||||||
| Comprehensive income | 70,999 | 86,334 | |||||||||
| Comprehensive income attributable to noncontrolling interests | — | 171 | |||||||||
| Comprehensive income attributable to EMCOR Group, Inc. | $ | 70,999 | $ | 86,163 | |||||||
_________
(1)Net of tax of $0.2 million for each of the three months ended March 31, 2022 and 2021.
See Notes to Consolidated Financial Statements.
3
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows - operating activities: | |||||||||||
| Net income including noncontrolling interests | $ | 73,386 | $ | 84,945 | |||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 11,578 | 12,001 | |||||||||
| Amortization of identifiable intangible assets | 15,551 | 14,989 | |||||||||
| Non-cash share-based compensation expense | 3,438 | 3,193 | |||||||||
| Other reconciling items | (226) | (218) | |||||||||
| Changes in operating assets and liabilities, excluding the effect of businesses acquired | (199,541) | (203,899) | |||||||||
| Net cash used in operating activities | (95,814) | (88,989) | |||||||||
| Cash flows - investing activities: | |||||||||||
| Payments for acquisitions of businesses, net of cash acquired | (2,914) | (24,326) | |||||||||
| Proceeds from sale or disposal of property, plant and equipment | 462 | 766 | |||||||||
| Purchases of property, plant and equipment | (11,501) | (8,204) | |||||||||
| Net cash used in investing activities | (13,953) | (31,764) | |||||||||
| Cash flows - financing activities: | |||||||||||
| Repayments of finance lease liabilities | (979) | (1,145) | |||||||||
| Dividends paid to stockholders | (6,930) | (7,121) | |||||||||
| Repurchases of common stock | (181,810) | (12,917) | |||||||||
| Taxes paid related to net share settlements of equity awards | (4,944) | (3,750) | |||||||||
| Issuances of common stock under employee stock purchase plan | 1,955 | 1,731 | |||||||||
| Payments for contingent consideration arrangements | (805) | (693) | |||||||||
| Distributions to noncontrolling interests | — | (43) | |||||||||
| Net cash used in financing activities | (193,513) | (23,938) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (3,419) | 886 | |||||||||
| Decrease in cash, cash equivalents, and restricted cash | (306,699) | (143,805) | |||||||||
Cash, cash equivalents, and restricted cash at beginning of year (1) | 822,568 | 903,562 | |||||||||
Cash, cash equivalents, and restricted cash at end of period (2) | $ | 515,869 | $ | 759,757 | |||||||
_________
(1)Includes $1.2 million and $0.7 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.
(2)Includes $1.4 million and $0.9 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of March 31, 2022 and 2021, respectively.
See Notes to Consolidated Financial Statements.
4
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the three months ended March 31, 2021 and 2022
(In thousands)(Unaudited)
| EMCOR Group, Inc. Stockholders | |||||||||||||||||||||||||||||||||||||||||
| Total | Common stock | Capital surplus | Accumulated other comprehensive loss (1) | Retained earnings | Treasury stock | Noncontrolling interests | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 2,053,244 | $ | 606 | $ | 47,464 | $ | (109,233) | $ | 2,480,321 | $ | (366,490) | $ | 576 | |||||||||||||||||||||||||||
| Net income including noncontrolling interests | 84,945 | — | — | — | 84,774 | — | 171 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | 1,389 | — | — | 1,389 | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock issued under share-based compensation plans | 1 | 1 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Tax withholding for common stock issued under share-based compensation plans | (3,750) | — | (3,750) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 1,731 | — | 1,731 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock dividends | (7,121) | — | 55 | — | (7,176) | — | — | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (12,917) | — | — | — | — | (12,917) | — | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (43) | — | — | — | — | — | (43) | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 3,193 | — | 3,193 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | 2,120,672 | $ | 607 | $ | 48,693 | $ | (107,844) | $ | 2,557,919 | $ | (379,407) | $ | 704 | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 2,253,089 | $ | 607 | $ | 61,874 | $ | (83,562) | $ | 2,835,504 | $ | (562,036) | $ | 702 | |||||||||||||||||||||||||||
| Net income including noncontrolling interests | 73,386 | — | — | — | 73,386 | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (2,387) | — | — | (2,387) | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock issued under share-based compensation plans | 1 | 1 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Tax withholding for common stock issued under share-based compensation plans | (4,944) | — | (4,944) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan | 1,955 | — | 1,955 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock dividends | (6,930) | — | 51 | — | (6,981) | — | — | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (181,810) | — | — | — | — | (181,810) | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 3,438 | — | 3,438 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | 2,135,798 | $ | 608 | $ | 62,374 | $ | (85,949) | $ | 2,901,909 | $ | (743,846) | $ | 702 | |||||||||||||||||||||||||||
_________
(1)Represents cumulative foreign currency translation adjustments and post retirement liability adjustments.
See Notes to Consolidated Financial Statements.
5
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. References to the “Company,” “EMCOR,” “we,” “us,” “our,” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of those of a normal recurring nature) necessary to present fairly our financial position and the results of our operations.
Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.
The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
NOTE 2 - New Accounting Pronouncements
The Company is currently evaluating the impact of an accounting standards update issued by the Financial Accounting Standards Board (“FASB”), which provides temporary optional expedients and exceptions to existing U.S. GAAP. This guidance is aimed at easing the financial reporting burdens related to reference rate reform, including the expected market transition from LIBOR, or other interbank offered rates, to alternative reference rates. Such accounting pronouncement allows entities to account for and present certain contract modifications, which occur before December 31, 2022 and result from the transition to an alternative reference rate, as an event that does not require remeasurement at the modification date or reassessment of a previous accounting determination. While we are still evaluating the impact of this pronouncement, we do not anticipate that it will have a material impact on our financial position and/or results of operations, as we are not exposed to any contracts that reference LIBOR, other than our credit agreement dated as of March 2, 2020, which contains provisions that allow for the amendment of such agreement to use alternative reference rates in the event of the discontinuation of LIBOR.
In October 2021, an accounting pronouncement was issued by the FASB, that changes how an entity accounts for revenue contracts it acquires in a business combination. The pronouncement requires entities to apply the revenue recognition guidance within Accounting Standards Codification Topic 606 to recognize and measure contract assets and liabilities from contracts with customers in a business combination, creating an exception to the fair value recognition and measurement principle typically utilized when valuing acquired assets. The guidance is aimed at improving comparability by addressing when an acquirer should recognize a contract asset or contract liability, as well as how such assets and liabilities should be measured, and will generally result in companies recognizing contract assets and contract liabilities at amounts consistent with those recorded by the target entity prior to acquisition. This guidance is effective for public business entities for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the potential impact of this accounting pronouncement; however, we do not believe that its adoption will have a material impact on our financial position and/or results of operations.
6
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers
The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by applying the following five step model:
(1) Identify the contract with a customer
A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer.
(2) Identify the performance obligations in the contract
At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.
In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry.
Our contracts are often modified through change orders to account for changes in the scope and price of the goods or services we are providing. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of our change orders are for goods or services that are not distinct within the context of our original contract and, therefore, are not treated as separate performance obligations.
(3) Determine the transaction price
The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability-weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes.
7
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts.
Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied.
Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs.
For some transactions, the receipt of consideration does not match the timing of the transfer of goods or services to the customer. For such contracts, the Company evaluates whether this timing difference represents a financing arrangement within the contract. Although rare, if a contract is determined to contain a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money when determining the transaction price of such contract. Although our customers may retain a portion of the contract price until completion of the project and final contract settlement, these retainage amounts are not considered a significant financing component as the intent of the withheld amounts is to provide the customer with assurance that we will complete our obligations under the contract rather than to provide financing to the customer. In addition, although we may be entitled to advanced payments from our customers on certain contracts, these advanced payments generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract.
Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate. For the three months ended March 31, 2022 and 2021, there were no significant amounts of revenue recognized during the period related to performance obligations satisfied in prior periods. In addition, for the three months ended March 31, 2022 and 2021, there were no significant reversals of revenue recognized associated with the revision of transaction prices.
8
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
(4) Allocate the transaction price to performance obligations in the contract
For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation.
(5) Recognize revenue as performance obligations are satisfied
The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.
For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the number of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly and the customer receives and consumes the benefits of our performance throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping if certain recognition criteria are met.
For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.
9
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. Based on an evaluation of individual projects that had revisions to total estimated costs, which resulted in a reduction of profitability in excess of $1.0 million, our operating results were negatively impacted by approximately $10.0 million, during the three months ended March 31, 2022. Of this amount, approximately $4.6 million was recorded within our United States electrical construction and facilities services segment and approximately $5.4 million was recorded within our United States mechanical construction and facilities services segment. There were no changes in total estimated costs that had a significant impact on our operating results during the three months ended March 31, 2021.
Disaggregation of Revenues
Our revenues are principally derived from contracts to provide construction services relating to electrical and mechanical systems, as well as to provide a number of building services and industrial services to our customers. Our contracts are with many different customers in numerous industries. Refer to Note 14 - Segment Information of the notes to consolidated financial statements for additional information on how we disaggregate our revenues by reportable segment.
The following tables provide further disaggregation of our revenues, by categories we use to evaluate our financial performance within each of our reportable segments, for the three months ended March 31, 2022 and 2021 (in thousands):
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| United States electrical construction and facilities services: | |||||||||||||||||||||||
| Commercial market sector | $ | 270,315 | 52 | % | $ | 245,841 | 53 | % | |||||||||||||||
| Manufacturing market sector | 66,465 | 13 | % | 48,454 | 11 | % | |||||||||||||||||
| Healthcare market sector | 32,070 | 6 | % | 20,151 | 4 | % | |||||||||||||||||
| Institutional market sector | 31,766 | 6 | % | 43,639 | 9 | % | |||||||||||||||||
| Transportation market sector | 45,082 | 8 | % | 42,031 | 9 | % | |||||||||||||||||
| Water and wastewater market sector | 5,312 | 1 | % | 3,651 | 1 | % | |||||||||||||||||
| Hospitality market sector | 2,623 | 1 | % | 4,664 | 1 | % | |||||||||||||||||
Short duration projects (1) | 56,048 | 11 | % | 44,409 | 10 | % | |||||||||||||||||
| Service work | 13,329 | 2 | % | 7,765 | 2 | % | |||||||||||||||||
| 523,010 | 460,605 | ||||||||||||||||||||||
| Less intersegment revenues | (980) | (1,210) | |||||||||||||||||||||
| Total segment revenues | $ | 522,030 | $ | 459,395 | |||||||||||||||||||
________
(1)Represents those projects which generally are completed within three months or less.
10
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| United States mechanical construction and facilities services: | |||||||||||||||||||||||
| Commercial market sector | $ | 379,604 | 38 | % | $ | 366,477 | 40 | % | |||||||||||||||
| Manufacturing market sector | 149,571 | 15 | % | 121,686 | 13 | % | |||||||||||||||||
| Healthcare market sector | 120,051 | 12 | % | 112,656 | 12 | % | |||||||||||||||||
| Institutional market sector | 70,627 | 7 | % | 69,304 | 8 | % | |||||||||||||||||
| Transportation market sector | 16,053 | 2 | % | 18,417 | 2 | % | |||||||||||||||||
| Water and wastewater market sector | 61,744 | 6 | % | 43,848 | 5 | % | |||||||||||||||||
| Hospitality market sector | 8,079 | 1 | % | 8,529 | 1 | % | |||||||||||||||||
Short duration projects (1) | 62,294 | 6 | % | 86,765 | 9 | % | |||||||||||||||||
| Service work | 134,715 | 13 | % | 88,490 | 10 | % | |||||||||||||||||
| 1,002,738 | 916,172 | ||||||||||||||||||||||
| Less intersegment revenues | (2,268) | (1,671) | |||||||||||||||||||||
| Total segment revenues | $ | 1,000,470 | $ | 914,501 | |||||||||||||||||||
________
(1)Represents those projects which generally are completed within three months or less.
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| United States building services: | |||||||||||||||||||||||
| Mobile mechanical services | $ | 373,571 | 60 | % | $ | 351,317 | 62 | % | |||||||||||||||
| Commercial site-based services | 203,550 | 32 | % | 175,647 | 31 | % | |||||||||||||||||
| Government site-based services | 50,680 | 8 | % | 41,072 | 7 | % | |||||||||||||||||
| Total segment revenues | $ | 627,801 | $ | 568,036 | |||||||||||||||||||
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| United States industrial services: | |||||||||||||||||||||||
| Field services | $ | 271,418 | 87 | % | $ | 207,554 | 88 | % | |||||||||||||||
| Shop services | 39,333 | 13 | % | 27,828 | 12 | % | |||||||||||||||||
| Total segment revenues | $ | 310,751 | $ | 235,382 | |||||||||||||||||||
| Total United States operations | $ | 2,461,052 | $ | 2,177,314 | |||||||||||||||||||
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| United Kingdom building services: | |||||||||||||||||||||||
| Service work | $ | 64,817 | 49 | % | $ | 61,991 | 49 | % | |||||||||||||||
| Project work | 66,680 | 51 | % | 64,744 | 51 | % | |||||||||||||||||
| Total segment revenues | $ | 131,497 | $ | 126,735 | |||||||||||||||||||
| Total operations | $ | 2,592,549 | $ | 2,304,049 | |||||||||||||||||||
11
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized in the period we deliver goods and services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.
At March 31, 2022 and December 31, 2021, our allowance for credit losses was $23.0 million and $23.5 million, respectively. The decrease in our allowance for credit losses was predominantly attributable to the write-off of specific amounts deemed unrecoverable. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received. Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our credit losses.
The change in the allowance for credit losses for the three months ended March 31, 2022 was as follows (in thousands):
| Balance at December 31, 2021 | $ | 23,534 | |||
| Provision for credit losses | 15 | ||||
| Amounts written off against the allowance, net of recoveries | (593) | ||||
| Balance at March 31, 2022 | $ | 22,956 | |||
Contract Assets and Contract Liabilities
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts are not yet billable under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded as revenue is recognized in advance of billings.
Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets.
Contract liabilities from our construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets.
12
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
Net contract liabilities in the accompanying Consolidated Balance Sheets consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Contract assets, current | $ | 262,119 | $ | 230,143 | |||||||
| Contract assets, non-current | — | — | |||||||||
| Contract liabilities, current | (827,708) | (788,134) | |||||||||
| Contract liabilities, non-current | (1,663) | (2,505) | |||||||||
| Net contract liabilities | $ | (567,252) | $ | (560,496) | |||||||
The $6.8 million increase in net contract liabilities for the three months ended March 31, 2022 was primarily attributable to an increase in net contract liabilities on our uncompleted construction projects, partially as a result of the timing of invoicing to our customers. There was no significant impairment of contract assets recognized during the periods presented.
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentages of total remaining performance obligations as of March 31, 2022 (in thousands, except for percentages):
| March 31, 2022 | % of Total | ||||||||||
| Remaining performance obligations: | |||||||||||
| United States electrical construction and facilities services | $ | 1,297,086 | 22 | % | |||||||
| United States mechanical construction and facilities services | 3,384,089 | 57 | % | ||||||||
| United States building services | 995,003 | 16 | % | ||||||||
| United States industrial services | 116,496 | 2 | % | ||||||||
| Total United States operations | 5,792,674 | 97 | % | ||||||||
| United Kingdom building services | 160,207 | 3 | % | ||||||||
| Total operations | $ | 5,952,881 | 100 | % | |||||||
Our remaining performance obligations at March 31, 2022 were $5.95 billion. Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of the total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.
Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.
13
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 - Revenue from Contracts with Customers (Continued)
Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.
Refer to the table below for additional information regarding our remaining performance obligations, including an estimate of when we expect to recognize such remaining performance obligations as revenue (in thousands):
| Within one year | Greater than one year | ||||||||||
| Remaining performance obligations: | |||||||||||
| United States electrical construction and facilities services | $ | 1,150,600 | $ | 146,486 | |||||||
| United States mechanical construction and facilities services | 2,737,236 | 646,853 | |||||||||
| United States building services | 892,868 | 102,135 | |||||||||
| United States industrial services | 116,496 | — | |||||||||
| Total United States operations | 4,897,200 | 895,474 | |||||||||
| United Kingdom building services | 135,870 | 24,337 | |||||||||
| Total operations | $ | 5,033,070 | $ | 919,811 | |||||||
NOTE 4 - Acquisitions of Businesses
Acquisitions are accounted for utilizing the acquisition method of accounting and the prices paid for them are allocated to their respective assets and liabilities based upon the estimated fair value of such assets and liabilities at the dates of their respective acquisition by us.
During the first quarter of 2022, we acquired a company for an immaterial amount. This company provides fire protection services in the Northeastern region of the United States.
During calendar year 2021, we acquired eight companies for total consideration of $131.2 million. Such acquisitions include: (a) two companies, the results of operations of which have been included within our United States mechanical construction and facilities services segment, consisting of: (i) a company that provides mechanical services within the Southern region of the United States and (ii) a company that provides fire protection services in the Midwestern region of the United States, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) four companies, the results of operations of which have been included within our United States building services segment, consisting of: (i) a company that provides mobile mechanical services across North Texas and (ii) three companies that bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions. In connection with these acquisitions, we acquired working capital of $22.9 million and other net liabilities of $0.6 million, including certain deferred tax liabilities, and have preliminarily ascribed $38.3 million to goodwill and $70.6 million to identifiable intangible assets.
We expect that the majority of the goodwill acquired in connection with these acquisitions will be deductible for tax purposes. The purchase price allocations for the business acquired in 2022 and one of the businesses acquired in 2021 are preliminary and subject to change during their respective measurement periods. As we finalize such purchase price allocations, adjustments may be recorded relating to finalization of intangible asset valuations, tax matters, or other items. Although not expected to be significant, such adjustments may result in changes in the valuation of assets and liabilities acquired. The purchase price allocations for the other businesses acquired in 2021 have been finalized during their respective measurement periods with an insignificant impact.
14
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 5 - Earnings Per Share
Calculation of Basic and Diluted Earnings per Common Share
The following table summarizes our calculation of Basic and Diluted Earnings per Common Share (“EPS”) for the three months ended March 31, 2022 and 2021 (in thousands, except share and per share data):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net income attributable to EMCOR Group, Inc. common stockholders | $ | 73,386 | $ | 84,774 | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding used to compute basic earnings per common share | 52,713,005 | 54,896,548 | |||||||||
| Effect of dilutive securities—Share-based awards | 203,554 | 238,756 | |||||||||
| Shares used to compute diluted earnings per common share | 52,916,559 | 55,135,304 | |||||||||
| Basic earnings per common share | $ | 1.39 | $ | 1.54 | |||||||
| Diluted earnings per common share | $ | 1.39 | $ | 1.54 | |||||||
The number of share-based awards excluded from the computation of diluted EPS for the three months ended March 31, 2022 because they would be anti-dilutive were 62,481. There were no anti-dilutive share-based awards outstanding for the three months ended March 31, 2021.
NOTE 6 - Inventories
Inventories in the accompanying Consolidated Balance Sheets consisted of the following amounts as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Raw materials and construction materials | $ | 60,339 | $ | 46,186 | |||||||
| Work in process | 11,124 | 7,912 | |||||||||
| Inventories | $ | 71,463 | $ | 54,098 | |||||||
15
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 7 - Debt
Debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Term loan | $ | 256,688 | $ | 256,688 | |||||||
| Unamortized debt issuance costs | (2,800) | (3,040) | |||||||||
| Finance lease liabilities | 7,545 | 8,037 | |||||||||
| Total debt | 261,433 | 261,685 | |||||||||
| Less: current maturities | 16,017 | 16,235 | |||||||||
| Total long-term debt | $ | 245,416 | $ | 245,450 | |||||||
Credit Agreement
We have a credit agreement dated as of March 2, 2020, which provides for a $1.3 billion revolving credit facility (the “2020 Revolving Credit Facility”) and a $300.0 million term loan (the “2020 Term Loan”) (collectively referred to as the “2020 Credit Agreement”) expiring March 2, 2025. We may increase the 2020 Revolving Credit Facility to $1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries.
At the Company’s election, borrowings under the 2020 Credit Agreement bear interest at either: (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (0.46% at March 31, 2022) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of: (a) the prime commercial lending rate announced by Bank of Montreal from time to time (3.50% at March 31, 2022), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%. In the event of the discontinuation of LIBOR, our 2020 Credit Agreement contains provisions which allow for the use of alternate benchmark rates. The interest rate in effect at March 31, 2022 was 1.46%. A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on certain financial tests. The fee was 0.10% of the unused amount as of March 31, 2022. Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75% to 1.75% of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests.
As of March 31, 2022 and December 31, 2021, the balance of the 2020 Term Loan was $256.7 million. As of March 31, 2022 and December 31, 2021, there were no direct borrowings outstanding under the 2020 Revolving Credit Facility; however, we had $71.3 million of letters of credit outstanding, which reduce the available capacity under such facility. We capitalized an additional $3.1 million of debt issuance costs associated with the 2020 Credit Agreement. Debt issuance costs are amortized over the life of the agreement as part of interest expense.
Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness, and capital expenditures. We were in compliance with all such covenants as of March 31, 2022 and December 31, 2021.
We are required to make annual principal payments on the 2020 Term Loan. Any voluntary prepayments are applied against the outstanding balance of the loan and reduce our future scheduled payments on a ratable basis. Based on our outstanding balance, principal payments of $13.9 million are due on December 31 of each year until maturity, with any remaining unpaid principal and interest due on March 2, 2025.
16
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 8 - Fair Value Measurements
For disclosure purposes, we utilize a fair value hierarchy to categorize qualifying assets and liabilities into three broad levels based on the priority of the inputs used to determine their fair values. The hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs, is comprised of the following three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs, other than Level 1 inputs, that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions.
Recurring Fair Value Measurements
The following tables summarize the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):
| Assets at Fair Value as of March 31, 2022 | |||||||||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Cash and cash equivalents (1) | $ | 514,513 | $ | — | $ | — | $ | 514,513 | |||||||||||||||
Restricted cash (2) | 1,356 | — | — | 1,356 | |||||||||||||||||||
Deferred compensation plan assets (3) | 44,257 | — | — | 44,257 | |||||||||||||||||||
| Total | $ | 560,126 | $ | — | $ | — | $ | 560,126 | |||||||||||||||
| Assets at Fair Value as of December 31, 2021 | |||||||||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Cash and cash equivalents (1) | $ | 821,345 | $ | — | $ | — | $ | 821,345 | |||||||||||||||
Restricted cash (2) | 1,223 | — | — | 1,223 | |||||||||||||||||||
Deferred compensation plan assets (3) | 42,344 | — | — | 42,344 | |||||||||||||||||||
| Total | $ | 864,912 | $ | — | $ | — | $ | 864,912 | |||||||||||||||
________
(1)Cash and cash equivalents consist of deposit accounts and money market funds with original maturity dates of three months or less, which are Level 1 assets. At March 31, 2022 and December 31, 2021, we had $194.6 million and $336.0 million, respectively, in money market funds.
(2)Restricted cash is classified as “Prepaid expenses and other” in the Consolidated Balance Sheets. Restricted cash primarily represents cash held in account for use on customer contracts.
(3)Deferred compensation plan assets are classified as “Other assets” in the Consolidated Balance Sheets.
Nonrecurring Fair Value Measurements
We have recorded goodwill and identifiable intangible assets in connection with our business acquisitions. Such assets are measured at fair value at the time of acquisition based on valuation techniques that appropriately represent the methods which would be used by other market participants in determining fair value. In addition, goodwill and intangible assets are tested for impairment using similar valuation methodologies to determine the fair value of such assets. Periodically, we engage an independent third-party valuation specialist to assist with the valuation process, including the selection of appropriate methodologies and the development of market-based assumptions. The inputs used for these nonrecurring fair value measurements represent Level 3 inputs.
Fair Value of Financial Instruments
We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our debt associated with the 2020 Credit Agreement approximates its fair value due to the variable rate on such debt.
17
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 9 - Income Taxes
The following table presents our income tax provision and our income tax rate for the three months ended March 31, 2022 and 2021 (in thousands, except percentages):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Income tax provision | $ | 26,451 | $ | 31,604 | |||||||
| Income tax rate | 26.5 | % | 27.2 | % | |||||||
The difference between the U.S. statutory tax rate of 21% and our income tax rate for both the three months ended March 31, 2022 and 2021 was primarily a result of state and local income taxes and other permanent book to tax differences. The decrease in our income tax provision for the three months ended March 31, 2022 was a result of a reduction in taxable income as well as a decrease in our income tax rate during the period. The decrease in our income tax rate for the three months ended March 31, 2022 was attributable to: (a) a reduction in certain permanent book to tax differences, (b) the favorable impact of certain discrete tax items during the first quarter of 2022, including an increase in the income tax benefit recognized upon the issuance of common stock under our share-based compensation programs, and (c) a reduction in our state income tax rate due to a change in the allocation of earnings among the jurisdictions in which our income is taxed.
As of March 31, 2022 and December 31, 2021, we had no unrecognized income tax benefits.
We file a consolidated federal income tax return including all of our U.S. subsidiaries with the Internal Revenue Service. We additionally file income tax returns with various state, local, and foreign tax agencies. Our income tax returns are subject to audit by various taxing authorities and are currently under examination for the years 2017 through 2018.
NOTE 10 - Common Stock
As of March 31, 2022 and December 31, 2021, there were 51,829,923 and 53,299,738 shares of our common stock outstanding, respectively.
During the three months ended March 31, 2022 and 2021, we issued 95,331 and 91,243 shares of common stock, respectively. These shares were issued upon either the satisfaction of required conditions under our share-based compensation plans or the purchase of common stock pursuant to our employee stock purchase plan.
We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $0.13 per share.
In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount authorized for repurchases under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $1.45 billion of our outstanding common stock. During the three months ended March 31, 2022, we repurchased approximately 1.6 million shares of our common stock for approximately $181.8 million. Since the inception of the repurchase program through March 31, 2022, we have repurchased approximately 20.7 million shares of our common stock for approximately $1.28 billion. As of March 31, 2022, there remained authorization for us to repurchase approximately $168.6 million of our shares. Subsequent to March 31, 2022, the Board authorized us to repurchase up to an additional $200.0 million of our outstanding common stock. The repurchase program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be suspended, recommenced, or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2020 Credit Agreement placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.
NOTE 11 - Retirement Plans
The funded status of our defined benefit plans, which represents the difference between the fair value of plan assets and the projected benefit obligations, is recognized in the Consolidated Balance Sheets with a corresponding adjustment to accumulated other comprehensive income (loss). Gains and losses for the differences between actuarial assumptions and actual results are recognized through accumulated other comprehensive income (loss). These amounts will be subsequently recognized as net periodic pension cost (income) within the Consolidated Statements of Operations.
18
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 11 - Retirement Plans (Continued)
Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the “UK Plan”); however, no individual joining the company after October 31, 2001 may participate in the UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under such plan.
We also sponsor three domestic retirement plans in which participation by new individuals is frozen. Amounts related to these domestic retirement plans were immaterial for all periods presented.
Components of Net Periodic Pension Cost
The components of net periodic pension cost (income) of the UK Plan for the three months ended March 31, 2022 and 2021 were as follows (in thousands):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest cost | $ | 1,529 | $ | 1,336 | |||||||
| Expected return on plan assets | (3,244) | (3,192) | |||||||||
| Amortization of unrecognized loss | 556 | 913 | |||||||||
| Net periodic pension cost (income) | $ | (1,159) | $ | (943) | |||||||
Employer Contributions
For the three months ended March 31, 2022, our United Kingdom subsidiary contributed approximately $1.2 million to the UK Plan and anticipates contributing an additional $3.2 million during the remainder of 2022.
NOTE 12 - Commitments and Contingencies
Severance Agreements
We have agreements with our executive officers and certain other key management personnel providing for severance benefits for such employees upon termination of their employment under certain circumstances.
Guarantees
In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
Surety Bonds
The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts. These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf. As of March 31, 2022, based on the percentage-of-completion of our projects covered by surety bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.5 billion, which represents approximately 25% of our total remaining performance obligations.
Surety bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees. In addition, surety bonds may be issued as collateral for certain insurance obligations. As of March 31, 2022, we satisfied approximately $48.1 million of the collateral requirements of our insurance programs by utilizing surety bonds.
We are not aware of any losses in connection with surety bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.
Hazardous Materials
We are subject to regulation with respect to the handling of certain materials used in construction, which are classified as hazardous or toxic by federal, state, and local agencies. Our practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, when remediation is required as part of our contract performance, we believe we comply with all applicable regulations governing the discharge of hazardous materials into the environment or otherwise relating to the protection of the environment.
19
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12 - Commitments and Contingencies (continued)
Government Contracts
As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, which such audits may result in fines, penalties and compensatory and treble damages, and possible suspension or debarment from doing business with the government. Based on currently available information, we believe the outcome of ongoing government disputes and investigations will not have a material impact on our financial position, results of operations, or liquidity.
Legal Proceedings
We are involved in several legal proceedings in which damages and claims have been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. We record a loss contingency if the potential loss from a proceeding or claim is considered probable and the amount can be reasonably estimated or a range of loss can be determined. We provide disclosure when it is reasonably possible that a loss will be incurred in excess of any recorded provision. Significant judgment is required in these determinations. As additional information becomes available, we reassess prior determinations and may change our estimates. Additional claims may be asserted against us in the future. Litigation is subject to many uncertainties, and the outcome of litigation is not predictable with assurance. It is possible that a litigation matter for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decision could have a material adverse effect on our financial position, results of operations, or liquidity.
Insurance Liabilities
We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability, and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for the majority of these obligations. As of March 31, 2022 and December 31, 2021, the estimated current portion of such undiscounted insurance liabilities, included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets, were $55.6 million and $61.5 million, respectively. The estimated non-current portion of such undiscounted insurance liabilities included in “Other long-term obligations” as of March 31, 2022 and December 31, 2021 were $216.2 million and $242.4 million, respectively. The current portion of anticipated insurance recoveries of $18.4 million and $26.4 million as of March 31, 2022 and December 31, 2021, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $66.6 million and $99.0 million as of March 31, 2022 and December 31, 2021, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets. These balances decreased from December 31, 2021 as a result of the payment, by our insurers, of certain claims for which we previously maintained a reserve and corresponding insurance receivable.
NOTE 13 - Additional Cash Flow Information
The following table presents additional cash flow information for the three months ended March 31, 2022 and 2021 (in thousands):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | 1,264 | $ | 1,323 | |||||||
| Income taxes | $ | 33,489 | $ | 4,385 | |||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 21,286 | $ | 9,868 | |||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 552 | $ | 676 | |||||||
20
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14 - Segment Information
We are one of the largest specialty contractors in the United States and a leading provider of electrical and mechanical construction and facilities services, building services, and industrial services. Our services are provided to a broad range of commercial, industrial, utility, and institutional customers through approximately 90 operating subsidiaries, which specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operating, maintenance, and management of those facilities. Such operating subsidiaries are organized into the following reportable segments:
•United States electrical construction and facilities services;
•United States mechanical construction and facilities services;
•United States building services;
•United States industrial services; and
•United Kingdom building services.
For a more complete description of our operations, refer to Item 1. Business of our Form 10-K for the year ended December 31, 2021.
Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.
The following tables present financial information for each of our reportable segments for the three months ended March 31, 2022 and 2021 (in thousands):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues from unrelated entities: | |||||||||||
| United States electrical construction and facilities services | $ | 522,030 | $ | 459,395 | |||||||
| United States mechanical construction and facilities services | 1,000,470 | 914,501 | |||||||||
| United States building services | 627,801 | 568,036 | |||||||||
| United States industrial services | 310,751 | 235,382 | |||||||||
| Total United States operations | 2,461,052 | 2,177,314 | |||||||||
| United Kingdom building services | 131,497 | 126,735 | |||||||||
| Total operations | $ | 2,592,549 | $ | 2,304,049 | |||||||
| Total revenues: | |||||||||||
| United States electrical construction and facilities services | $ | 523,414 | $ | 460,775 | |||||||
| United States mechanical construction and facilities services | 1,004,856 | 916,722 | |||||||||
| United States building services | 652,231 | 590,445 | |||||||||
| United States industrial services | 324,501 | 245,928 | |||||||||
| Less intersegment revenues | (43,950) | (36,556) | |||||||||
| Total United States operations | 2,461,052 | 2,177,314 | |||||||||
| United Kingdom building services | 131,497 | 126,735 | |||||||||
| Total operations | $ | 2,592,549 | $ | 2,304,049 | |||||||
21
EMCOR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14 - Segment Information (continued)
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating income (loss): | |||||||||||
| United States electrical construction and facilities services | $ | 19,993 | $ | 40,252 | |||||||
| United States mechanical construction and facilities services | 58,674 | 63,176 | |||||||||
| United States building services | 23,922 | 31,120 | |||||||||
| United States industrial services | 13,258 | (2,443) | |||||||||
| Total United States operations | 115,847 | 132,105 | |||||||||
| United Kingdom building services | 10,588 | 9,411 | |||||||||
| Corporate administration | (26,478) | (24,512) | |||||||||
| Total operations | 99,957 | 117,004 | |||||||||
| Other items: | |||||||||||
| Net periodic pension (cost) income | 1,169 | 908 | |||||||||
| Interest expense, net | (1,289) | (1,363) | |||||||||
| Income before income taxes | $ | 99,837 | $ | 116,549 | |||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Total assets: | |||||||||||
| United States electrical construction and facilities services | $ | 847,786 | $ | 855,417 | |||||||
| United States mechanical construction and facilities services | 1,698,791 | 1,672,546 | |||||||||
| United States building services | 1,132,080 | 1,089,844 | |||||||||
| United States industrial services | 659,795 | 589,017 | |||||||||
| Total United States operations | 4,338,452 | 4,206,824 | |||||||||
| United Kingdom building services | 259,522 | 241,740 | |||||||||
| Corporate administration | 633,180 | 992,882 | |||||||||
| Total operations | $ | 5,231,154 | $ | 5,441,446 | |||||||
NOTE 15 - Subsequent Events
In April 2022, we acquired a company for an immaterial amount. This company provides fire protection services in the Southern region of the United States, and the results of its operations will be included in our United States mechanical construction and facilities services segment. The acquisition of this business will be accounted for by the acquisition method, and the amount paid will be allocated to its respective assets and liabilities, based upon the estimated fair value of such assets and liabilities on the date of acquisition by us.
22
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | ||||
Business Description
We are one of the largest specialty contractors in the United States and a leading provider of electrical and mechanical construction and facilities services, building services, and industrial services. Our services are provided to a broad range of commercial, industrial, utility, and institutional customers through approximately 90 operating subsidiaries, which specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance, and management of those facilities. Such operating subsidiaries are organized into the following reportable segments:
•United States electrical construction and facilities services;
•United States mechanical construction and facilities services;
•United States building services;
•United States industrial services; and
•United Kingdom building services.
For a more complete description of our operations, refer to Item 1. Business of our Form 10-K for the year ended December 31, 2021.
Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.
Market Update
Although our business continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions worsened in the first quarter of 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our United States construction segments and our United States building services segment, as described in further detail below. In response to these challenges, we continue to strive to more effectively manage our business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging our relationships with our suppliers and customers. However, the impact of these disruptions continues to evolve and the conflict in Ukraine has added another layer of uncertainty, especially with respect to energy costs. There can be no assurance that our actions will serve to mitigate such impacts in future periods. Further, while we believe our remaining performance obligations are firm, and our customers have not provided us with any indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in our customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.
Overview
The following table presents selected financial data for the three months ended March 31, 2022 and 2021 (in thousands, except percentages and per share data):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues | $ | 2,592,549 | $ | 2,304,049 | |||||||
| Revenues increase from prior year | 12.5 | % | 0.2 | % | |||||||
| Gross profit | $ | 352,555 | $ | 341,073 | |||||||
| Gross profit as a percentage of revenues | 13.6 | % | 14.8 | % | |||||||
| Operating income | $ | 99,957 | $ | 117,004 | |||||||
| Operating income as a percentage of revenues | 3.9 | % | 5.1 | % | |||||||
| Net income attributable to EMCOR Group, Inc. | $ | 73,386 | $ | 84,774 | |||||||
| Diluted earnings per common share | $ | 1.39 | $ | 1.54 | |||||||
23
Revenues of $2.59 billion for the quarter ended March 31, 2022 represent an increase of 12.5% from revenues of $2.30 billion for the quarter ended March 31, 2021. As described in further detail below, we experienced revenue growth within all of our reportable segments. In addition, during the first quarter of 2022, companies acquired in 2021 generated incremental revenues of approximately $49.5 million.
Despite the increase in revenues referenced above, operating income for the quarter ended March 31, 2022 of $100.0 million, or 3.9% of revenues, represents a decrease compared to operating income of $117.0 million, or 5.1% of revenues, for the quarter ended March 31, 2021. A decline in our consolidated gross profit margin negatively impacted our ability to convert such revenue growth into incremental operating profitability. Notably, we experienced a decline in gross profit margin within our United States electrical construction and facilities services segment, largely as a result of a change in project mix, including a reduction in revenues from telecommunication construction projects. Similarly, we experienced a decline in gross profit margin within our United States mechanical construction and facilities services segment, due to a greater number of projects within the manufacturing and water and wastewater market sectors for which we are acting as either the construction manager or general contractor and therefore carry lower than average gross profit margins. In addition to the change in project mix referenced above, our United States construction segments, as well as our United States building services segment, were negatively impacted by supply chain disruptions and delays, which, in certain instances, led to either: (a) reduced labor productivity and efficiency, (b) the under-absorption of labor costs in instances where projects were delayed pending the receipt of materials, or (c) material and commodity price escalations. These decreases in gross profit margin were partially offset by improved gross profit margins within our United States industrial services segment, which experienced a more normalized spring turnaround season compared to the prior year, and our United Kingdom building services segment.
Impact of Acquisitions
In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses, and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.
During the first quarter of 2022, we acquired a company for an immaterial amount. This company provides fire protection services in the Northeastern region of the United States.
We acquired eight companies during calendar year 2021 for total consideration of $131.2 million. Such acquisitions include: (a) two companies, the results of operations of which were de minimis, included within our United States mechanical construction and facilities services segment, consisting of: (i) a company that provides mechanical services within the Southern region of the United States and (ii) a company that provides fire protection services in the Midwestern region of the United States, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of: (i) a company that provides mobile mechanical services across North Texas and (ii) three companies, the results of operations of which were de minimis, that bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.
Results of Operations
Revenues
The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| United States electrical construction and facilities services | $ | 522,030 | 20 | % | $ | 459,395 | 20 | % | |||||||||||||||
| United States mechanical construction and facilities services | 1,000,470 | 39 | % | 914,501 | 40 | % | |||||||||||||||||
| United States building services | 627,801 | 24 | % | 568,036 | 25 | % | |||||||||||||||||
| United States industrial services | 310,751 | 12 | % | 235,382 | 10 | % | |||||||||||||||||
| Total United States operations | 2,461,052 | 95 | % | 2,177,314 | 95 | % | |||||||||||||||||
| United Kingdom building services | 131,497 | 5 | % | 126,735 | 5 | % | |||||||||||||||||
| Total operations | $ | 2,592,549 | 100 | % | $ | 2,304,049 | 100 | % | |||||||||||||||
24
As described below in more detail, as a result of revenue growth within all of our reportable segments, our revenues for the first quarter of 2022 increased to $2.59 billion compared to $2.30 billion for the first quarter of 2021.
Revenues of our United States electrical construction and facilities services segment were $522.0 million for the three months ended March 31, 2022 compared to revenues of $459.4 million for the three months ended March 31, 2021. This segment’s results for the 2022 period included $34.9 million of incremental revenues generated by companies acquired in 2021. Excluding the impact of acquisitions, revenues of this segment increased by $27.7 million, primarily as a result of an increase in revenues from: (a) the commercial market sector, (b) transmission and distribution projects, including those to support sustainable energy solutions such as solar and wind, (c) the transportation market sector, driven by large project activity within the Midwestern region of the United States, and (d) healthcare project activity throughout several of the regions in which we operate. Despite the increase in commercial market sector revenues, this segment experienced a reduction in telecommunication construction project revenues when compared to the prior year period, partially as a result of supply chain disruptions, which have resulted in a delay in the start-up of recently awarded projects as our customers await delivery of critical equipment. In addition, this segment’s results for the three months ended March 31, 2022 reflect a decrease in revenues from the institutional market sector, due to the completion or substantial completion of certain projects which were performed in the prior year.
Our United States mechanical construction and facilities services segment revenues for the three months ended March 31, 2022 were $1.0 billion, an $86.0 million increase compared to revenues of $914.5 million for the three months ended March 31, 2021. The increase in this segment’s revenues was attributable to revenue growth within the majority of the market sectors in which we operate, including: (a) the water and wastewater market sector, given increased project activity within the Southern region of the United States, (b) the manufacturing market sector, driven by certain large food processing projects, (c) the commercial market sector, given: (i) increased demand for our mechanical construction services by certain customers engaged in the design and manufacturing of semiconductors as well as customers within the biotech, life-sciences, and pharmaceutical industries, and (ii) the continued build-out of our customers’ e-commerce supply chains, which has resulted in increased demand for our fire protection services within their warehousing and distribution facilities, and (d) the healthcare market sector, due to increased mechanical system retrofits and installations as our healthcare customers seek to upgrade their existing facilities or build new facilities.
Revenues of our United States building services segment were $627.8 million for the three months ended March 31, 2022 compared to revenues of $568.0 million for the three months ended March 31, 2021. Excluding incremental acquisition revenues within this segment’s mobile mechanical services division of $14.6 million, this segment’s revenue growth during the 2022 period was attributable to: (a) its commercial site-based services and government services divisions, due to the award of facilities maintenance contracts with new customers, as well as scope expansion with existing customers, and (b) its mobile mechanical services division, due to: (i) greater service repair and maintenance volumes, partially as a result of incremental repair opportunities driven by supply chain delays, which have created a need to extend the life of existing equipment in instances when replacement equipment is not readily available, and (ii) an increase in demand for building automation and controls services, partially as our customers continue to seek ways to improve the energy efficiency of their facilities.
Revenues of our United States industrial services segment for the three months ended March 31, 2022 were $310.8 million, a $75.4 million increase compared to revenues of $235.4 million for the three months ended March 31, 2021. While there remains significant disruption and uncertainty within the broader oil and gas industry, most notably within the upstream and midstream energy sectors, we began to experience a resumption in demand within this segment during the second half of 2021. Such increased demand continued into the first quarter of 2022 and resulted in growth in revenues from: (a) this segment’s field services operations, due to a more normalized spring turnaround season when compared to the prior year, and (b) this segment’s shop services operations, as a result of greater new build heat exchanger sales and an increase in maintenance, repair, and hydro blast cleaning services.
Our United Kingdom building services segment revenues were $131.5 million for the three months ended March 31, 2022 compared to revenues of $126.7 million for the three months ended March 31, 2021. The increase in this segment’s revenues was predominantly a result of growth in project activities with existing customers, primarily within the commercial market sector, including certain telecommunication projects. Unfavorable exchange rates for the British pound versus the United States dollar negatively impacted this segment’s revenues for the first quarter of 2022 by $3.9 million.
25
Cost of sales and gross profit
The following table presents our cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) (in thousands, except for percentages):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of sales | $ | 2,239,994 | $ | 1,962,976 | |||||||
| Gross profit | $ | 352,555 | $ | 341,073 | |||||||
| Gross profit margin | 13.6 | % | 14.8 | % | |||||||
Our gross profit for the three months ended March 31, 2022 was $352.6 million, or 13.6% of revenues, compared to gross profit of $341.1 million, or 14.8% of revenues, for the three months ended March 31, 2021. The increase in gross profit was a result of increased revenue volume, which despite the decrease in gross profit margin discussed below, resulted in an increase in consolidated gross profit.
The decrease in gross profit margin for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to a reduction in gross profit margin within each of our United States construction segments, as well as our United States building services segment, both as a result of a less favorable project mix, as well as certain discrete impacts in the period, due in part to supply chain delays and disruptions. Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.
Selling, general and administrative expenses
The following table presents our selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) (in thousands, except for percentages):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Selling, general and administrative expenses | $ | 252,598 | $ | 224,069 | |||||||
| SG&A margin | 9.7 | % | 9.7 | % | |||||||
Our selling, general and administrative expenses for the three months ended March 31, 2022 were $252.6 million compared to selling, general and administrative expenses of $224.1 million for the three months ended March 31, 2021. Selling, general and administrative expenses for the 2022 period included $5.2 million of incremental expenses directly related to companies acquired in 2022 and 2021, including amortization expense attributable to identifiable intangible assets of $1.0 million. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $23.3 million for the three months ended March 31, 2022. The organic increase in selling, general and administrative expenses for the three months ended March 31, 2022 was primarily attributable to an increase in: (a) salaries and incentive compensation expense, as a result of an increase in headcount to support our organic revenue growth in the current period, (b) employee benefit costs, driven by greater medical claim activity, (c) computer hardware and software costs, partially as a result of various information technology and cybersecurity initiatives currently in process, and (d) travel and entertainment expenses, given a resumption in travel and business meals as COVID-19 related restrictions continue to ease.
Selling, general and administrative expenses as a percentage of revenues was 9.7% for each of the three months ended March 31, 2022 and 2021.
26
Operating income (loss)
The following table presents our operating income (loss) and operating margin (operating income (loss) as a percentage of segment revenues) (in thousands, except for percentages):
| For the three months ended March 31, | |||||||||||||||||||||||
| 2022 | % of Segment Revenues | 2021 | % of Segment Revenues | ||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| United States electrical construction and facilities services | $ | 19,993 | 3.8 | % | $ | 40,252 | 8.8 | % | |||||||||||||||
| United States mechanical construction and facilities services | 58,674 | 5.9 | % | 63,176 | 6.9 | % | |||||||||||||||||
| United States building services | 23,922 | 3.8 | % | 31,120 | 5.5 | % | |||||||||||||||||
| United States industrial services | 13,258 | 4.3 | % | (2,443) | (1.0) | % | |||||||||||||||||
| Total United States operations | 115,847 | 4.7 | % | 132,105 | 6.1 | % | |||||||||||||||||
| United Kingdom building services | 10,588 | 8.1 | % | 9,411 | 7.4 | % | |||||||||||||||||
| Corporate administration | (26,478) | — | (24,512) | — | |||||||||||||||||||
| Total operations | 99,957 | 3.9 | % | 117,004 | 5.1 | % | |||||||||||||||||
| Other items: | |||||||||||||||||||||||
| Net periodic pension (cost) income | 1,169 | 908 | |||||||||||||||||||||
| Interest expense, net | (1,289) | (1,363) | |||||||||||||||||||||
| Income before income taxes | $ | 99,837 | $ | 116,549 | |||||||||||||||||||
Operating income was $100.0 million, or 3.9% of revenues, for the three months ended March 31, 2022 compared to operating income of $117.0 million, or 5.1% of revenues, for the three months ended March 31, 2021. As described in further detail below, operating income and operating margin of each of our United States construction segments as well as our United States building services segment decreased when compared to the prior year period. These declines were only partially offset by increases in operating income and operating margin within our United States industrial services segment and our United Kingdom building services segment.
Operating income of our United States electrical construction and facilities services segment was $20.0 million, or 3.8% of revenues, for the three months ended March 31, 2022, compared to $40.3 million, or 8.8% of revenues, for the three months ended March 31, 2021. Companies acquired in 2021 contributed incremental operating income of $1.2 million, inclusive of $1.8 million of amortization expense associated with identifiable intangible assets, for the quarter ended March 31, 2022. Excluding such acquisition contribution, operating income of this segment decreased by $21.5 million during the 2022 period. The decrease in both operating income and operating margin was largely attributable to a decrease in gross profit and gross profit margin from: (a) the commercial market sector, primarily as a result of a change in project mix, including a reduction in revenues from telecommunication construction projects given the temporary project delays previously referenced, and (b) the institutional market sector, given the favorable progression or close-out of certain projects in the prior year period. In addition, labor productivity and efficiency within this segment was adversely impacted during the quarter as a result of supply chain disruptions and delays, which led to issues with respect to the sequencing of work on certain projects.
Our United States mechanical construction and facilities services segment’s operating income for the three months ended March 31, 2022 was $58.7 million, compared to operating income of $63.2 million for the three months ended March 31, 2021. Despite the aforementioned increase in this segment’s revenues, operating income decreased due to a 100 basis point contraction in operating margin, largely as a result of a decline in gross profit margin given a greater number of projects within the manufacturing and water and wastewater market sectors for which we are acting as either the construction manager or general contractor and therefore carry lower than average gross profit margins. In addition, the results of this segment for the first quarter of 2022 were negatively impacted by certain project write-downs resulting, in part, from supply chain disruptions and/or material price escalations, a portion for which we will seek recovery from our customers.
Based on an evaluation of individual projects that had revisions to total estimated costs, which resulted in a reduction of profitability in excess of $1.0 million, the operating results of our United States construction segments were negatively impacted by approximately $10.0 million during the three months ended March 31, 2022. Of this amount, approximately $4.6 million was recorded within our United States electrical construction and facilities services segment and approximately $5.4 million was recorded withing our United States mechanical construction and facilities services segment. These reductions in estimated project profitability negatively affected the operating margin of these segments for the first quarter of 2022 by 0.9% and 0.5%, respectively. There were no changes in total estimated costs that had a significant impact on the operating results of these segments during the three months ended March 31, 2021.
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Operating income of our United States building services segment was $23.9 million, or 3.8% of revenues, for the three months ended March 31, 2022 compared to $31.1 million, or 5.5% of revenues, for the three months ended March 31, 2021. Given a reduction in gross profit margin within this segment, increased gross profit, resulting from the previously referenced period over period revenue growth, was more than offset by an increase in selling, general and administrative expenses, resulting in the decrease in operating income and operating margin for the first quarter of 2022. Gross profit margin of this segment for the 2022 period was negatively impacted by: (a) a less favorable mix of work within this segment’s mobile mechanical services division, including a greater number of fixed price capital projects, which traditionally have lower gross profit margins than the other service and repair offerings of this segment, (b) a shift from add-on project work within this segment’s commercial site-based services division, to more traditional facilities maintenance type projects, which carry lower gross profit margins, (c) supply chain disruptions, including longer lead times for certain materials and equipment, which resulted in a greater amount of unabsorbed labor costs in instances where projects were delayed pending the receipt of materials, and (d) an escalation in fuel prices for its fleet of approximately 4,000 service vehicles, a portion of which we were unable to pass along to our customers.
Our United States industrial services segment reported operating income of $13.3 million, or 4.3% of revenues, for the three months ended March 31, 2022, compared to an operating loss of $2.4 million, or (1.0)% of revenues, for the three months ended March 31, 2021. The increase in both operating income and operating margin was due to an increase in gross profit and gross profit margin during the first quarter of 2022 from both our field services and shop services operations, given: (a) a more normalized demand pattern, which led to increased revenue and resulted in greater gross profit contribution, and (b) improved project mix, as pricing began to recover. In addition, operating margin of this segment benefited from a reduction in the ratio of selling, general administrative expenses to revenues as this segment was able to leverage its overhead cost structure during a period of revenue growth.
Operating income of our United Kingdom building services segment was $10.6 million, or 8.1% of revenues, for the three months ended March 31, 2022 compared to $9.4 million, or 7.4% of revenues, for the three months ended March 31, 2021. The increase in this segment’s operating income and operating margin for the 2022 period was primarily a result of: (a) the favorable close-out of a project within the institutional market sector and (b) an increase in gross profit and gross profit margin from projects within the commercial market sector, including the telecommunication projects referenced in the revenue commentary for this segment. This segment’s operating income for the first quarter of 2022 was negatively impacted by $0.3 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar.
Our corporate administration expenses for the three months ended March 31, 2022 were $26.5 million compared to $24.5 million for the three months ended March 31, 2021. The increase in corporate administration expenses was primarily due to an increase in employment costs, given an increase in headcount to support the revenue growth within our business as well as certain information technology and cybersecurity initiatives currently in process.
Other items
Net interest expense for the three months ended March 31, 2022 and 2021 was $1.3 million and $1.4 million, respectively.
For the three months ended March 31, 2022, our income tax provision was $26.5 million compared to an income tax provision of $31.6 million for the three months ended March 31, 2021. Our income tax rate for the three months ended March 31, 2022 was 26.5% compared to an income tax rate for the three months ended March 31, 2021 of 27.2%. The decrease in our income tax provision for the three months ended March 31, 2022 was a result of a reduction in taxable income as well as a decrease in our income tax rate during the period. The decrease in our income tax rate for the three months ended March 31, 2022 was attributable to: (a) a reduction in certain permanent book to tax differences, (b) the favorable impact of certain discrete tax items during the first quarter of 2022, including an increase in the income tax benefit recognized upon the issuance of common stock under our share-based compensation programs, and (c) a reduction in our state income tax rate due to a change in the allocation of earnings among the jurisdictions in which our income is taxed.
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Remaining Unsatisfied Performance Obligations
The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages):
| March 31, 2022 | % of Total | December 31, 2021 | % of Total | March 31, 2021 | % of Total | ||||||||||||||||||||||||||||||
| Remaining performance obligations: | |||||||||||||||||||||||||||||||||||
| United States electrical construction and facilities services | $ | 1,297,086 | 22 | % | $ | 1,224,577 | 22 | % | $ | 1,176,825 | 25 | % | |||||||||||||||||||||||
| United States mechanical construction and facilities services | 3,384,089 | 57 | % | 3,272,124 | 58 | % | 2,639,426 | 55 | % | ||||||||||||||||||||||||||
| United States building services | 995,003 | 16 | % | 872,550 | 16 | % | 688,636 | 14 | % | ||||||||||||||||||||||||||
| United States industrial services | 116,496 | 2 | % | 111,838 | 2 | % | 120,964 | 3 | % | ||||||||||||||||||||||||||
| Total United States operations | 5,792,674 | 97 | % | 5,481,089 | 98 | % | 4,625,851 | 97 | % | ||||||||||||||||||||||||||
| United Kingdom building services | 160,207 | 3 | % | 118,208 | 2 | % | 149,306 | 3 | % | ||||||||||||||||||||||||||
| Total operations | $ | 5,952,881 | 100 | % | $ | 5,599,297 | 100 | % | $ | 4,775,157 | 100 | % | |||||||||||||||||||||||
Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time as the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of the total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.
Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.
Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.
Our remaining performance obligations at March 31, 2022 were $5.95 billion compared to $5.60 billion at December 31, 2021 and $4.78 billion at March 31, 2021. The increase in remaining performance obligations at March 31, 2022, when compared to December 31, 2021, was primarily attributable to an increase in remaining performance obligations within all of our reportable segments. Most notably, we experienced an increase in remaining performance obligations within: (a) our United States construction segments, driven by the award of various construction projects within: (i) the commercial market sector, inclusive of certain telecommunications and semiconductor projects, and (ii) the institutional market sector, and (b) our United States building services segment given increased project opportunities within its mobile mechanical services division and the award of several facilities maintenance contracts within its commercial site-based services division. The increases within our United States construction segments were partially offset by a reduction in remaining performance obligations from the manufacturing and water and wastewater market sectors due to the progression on several projects within such market sectors during the first quarter of 2022.
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Liquidity and Capital Resources
The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash.
We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on our outstanding indebtedness, and shareholder return through dividend payments and share repurchases. We strive to maintain a balanced approach to capital allocation in order to achieve growth, deliver value, and minimize risk.
Management monitors financial markets and overall economic conditions for factors that may affect our liquidity and capital resources and adjusts our capital allocation strategy as necessary. Negative macroeconomic trends could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms, an increase in credit losses, or significant increases in the price of commodities or the materials and equipment utilized for our project and service work, beyond those experienced to date. In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Our liquidity is also impacted by: (a) the type and length of construction contracts in place, as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within our United States industrial services segment, as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within our United States and United Kingdom building services segments. While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers.
As of March 31, 2022, we had cash and cash equivalents, excluding restricted cash, of $514.5 million, which are maintained in highly liquid investments with original maturity dates of three months or less. Both our short-term and long-term liquidity requirements are expected to be met through our cash and cash equivalent balances, cash generated from our operations, and, if necessary, the borrowing capacity under our revolving credit facility. Our credit agreement provides for a $1.30 billion revolving credit facility, for which there is $1.23 billion of available capacity as of March 31, 2022. Refer to Note 7 - Debt of the notes to consolidated financial statements for further information regarding our credit agreement. Based upon our current credit rating and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives; however, no assurances can be made that such debt financing will be available on favorable terms. We believe that we have sufficient financial resources available to meet our short-term and foreseeable long-term liquidity requirements.
Cash Flows
The following table presents a summary of our operating, investing, and financing cash flows (in thousands):
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash used in operating activities | $ | (95,814) | $ | (88,989) | |||||||
| Net cash used in investing activities | $ | (13,953) | $ | (31,764) | |||||||
| Net cash used in financing activities | $ | (193,513) | $ | (23,938) | |||||||
| Decrease in cash, cash equivalents, and restricted cash | $ | (306,699) | $ | (143,805) | |||||||
During the three months ended March 31, 2022, our cash balance, including cash equivalents and restricted cash, decreased by approximately $306.7 million from $822.6 million at December 31, 2021 to $515.9 million at March 31, 2022. Changes in our cash position from December 31, 2021 to March 31, 2022 are described in further detail below.
Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities. Net cash used in operating activities for the three months ended March 31, 2022 was approximately $95.8 million compared to approximately $89.0 million of net cash used in operating activities for the three months ended March 31, 2021. Historically, our working capital needs are greater in the first quarter of each year, resulting in a use of cash to fund our operations during such period, as evidenced by the fairly consistent use of cash during each of the three months ended March 31, 2022 and 2021. As the year progresses, we anticipate the generation of positive operating cash flow.
Investing Activities – Investing cash flows consist primarily of payments for the acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment. Net cash used in investing activities for the three months ended March 31, 2022 decreased by approximately $17.8 million compared to the three months ended March 31, 2021 due to a decrease in payments for business acquisitions, partially offset by higher capital expenditures.
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Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payment of dividends to stockholders, and the issuance of common stock through certain equity plans. Net cash used in financing activities for the three months ended March 31, 2022 was $193.5 million compared to net cash used in financing activities for the three months ended March 31, 2021 of $23.9 million. The $169.6 million increase in cash used in financing activities was almost entirely due to an increase in funds used for the repurchase of our common stock. The timing of repurchases is at management’s discretion subject to securities laws and other legal requirements and will depend upon several factors, including market and business conditions, future liquidity, share price, and share availability, among others. The repurchase program has been and will be funded from our operations. For additional detail regarding our share repurchase program, refer to Note 10 - Common Stock of the notes to consolidated financial statements.
We currently pay a regular quarterly dividend of $0.13 per share. For the three months ended March 31, 2022 and 2021, cash payments related to dividends were $6.9 million and $7.1 million, respectively. Our credit agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay a quarterly dividend of $0.13 per share for the foreseeable future.
Material Cash Requirements from Contractual and Other Obligations
As of March 31, 2022, our short-term and long-term material cash requirements for known contractual and other obligations were as follows:
Outstanding Debt and Interest Payments – As of March 31, 2022, the amount outstanding under our term loan was $256.7 million. Based on our outstanding balance, we are required to make annual principal payments of $13.9 million on December 31 of each year until maturity. Any remaining unpaid principal is due on March 2, 2025, when the credit agreement governing our term loan expires. We have no direct borrowings outstanding under our revolving credit facility. In addition to annual principal payments, we are required to make quarterly interest payments on our outstanding indebtedness. Future interest payments will be determined based on prevailing interest rates during that time. Refer to Note 7 - Debt of the notes to consolidated financial statements for further detail of our debt obligations, including our term loan and revolving credit facility.
Operating and Finance Leases – In the normal course of business, we lease real estate, vehicles, and equipment under various arrangements which are classified as either operating or finance leases. Future payments for such leases, excluding leases with initial terms of one year or less, were $322.6 million at March 31, 2022, with $71.3 million payable within the next 12 months.
Open Purchase Obligations – As of March 31, 2022, we had $1.92 billion of open purchase obligations, of which payments totaling approximately $1.67 billion are expected to become due within the next 12 months. These obligations represent open purchase orders to suppliers and subcontractors related to our construction and services contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and are not expected to impact future liquidity as amounts should be recovered through customer billings.
Insurance Obligations – As described in further detail in Note 12 - Commitments and Contingencies of the notes to consolidated financial statements, we have loss payment deductibles and/or self-insured retentions for certain insurance matters. As of March 31, 2022, our insurance liabilities, net of estimated recoveries, were $186.9 million. Of this net amount, approximately $37.2 million is estimated to be payable within the next 12 months. Due to many uncertainties inherent in resolving these matters, it is not practical to estimate these payments beyond such period.
Retirement Plan Obligations – As of March 31, 2022, expected future payments relating to our defined benefit post retirement plans were approximately $4.5 million per year. We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations. In determining the minimum funding required, we utilize current actuarial assumptions and exchange rates to forecast amounts that may be payable. In our judgment, minimum funding estimates cannot be reliably estimated beyond a five-year time horizon. Refer to Note 11 - Retirement Plans of the notes to consolidated financial statements for further information about our post retirement plans.
Deferred Payroll Taxes – The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allowed U.S. companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020. Our first installment of these deferred social security taxes, totaling approximately $51 million, was paid in the fourth quarter of 2021 and our second installment of approximately $51 million is expected to be paid in the fourth quarter of 2022.
Contingent Consideration Liabilities – We have incurred liabilities related to contingent consideration arrangements associated with certain acquisitions, payable in the event discrete performance objectives are achieved by the acquired businesses during designated post-acquisition periods. The aggregate amount of these liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, changes in the fair value of amounts owed based on performance during such post-acquisition periods, and accretion in present value. As of March 31, 2022, the present value of expected future payments relating to these contingent consideration arrangements was $11.2 million. Of this amount, $5.1 million is estimated as being payable within the next 12 months, with the remainder due substantially during the following 12 months.
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In addition, material cash requirements for other potential obligations, for which we cannot reasonably estimate future payments, include the following:
Legal Proceedings – We are involved in several legal proceedings in which damages and claims have been asserted against us. While litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance, we do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. Refer to Note 12 - Commitments and Contingencies of the notes to consolidated financial statements for more information regarding legal proceedings.
Multiemployer Benefit Plans – In addition to our Company sponsored benefit plans, we participate in certain multiemployer pension and other post retirement plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining agreements. Our future contributions to the multiemployer plans are dependent upon a number of factors. Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated.
Off-Balance Sheet Arrangements and Other Commercial Commitments
The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts. These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf. As of March 31, 2022, based on the percentage-of-completion of our projects covered by surety bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.5 billion, which represents approximately 25% of our total remaining performance obligations.
Surety bonds expire at various times ranging from final completion of a project to a period extending beyond contract completion in certain circumstances. Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity. For example, public sector contracts require surety bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. Our estimated maximum exposure as it relates to the value of the surety bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a surety bond generally extinguishes concurrently with the expiration of its related contractual obligation.
Surety bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees. In addition, surety bonds or letters of credit may be issued as collateral for certain insurance obligations. As of March 31, 2022, we satisfied approximately $48.1 million and $71.2 million of the collateral requirements of our insurance programs by utilizing surety bonds and letters of credit, respectively. All such letters of credit were issued under our revolving credit facility, therefore reducing the available capacity of such facility.
We are not aware of any losses in connection with surety bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.
From time to time, we discuss with our current and other surety bond providers the amounts of surety bonds that may be available to us based on our financial strength and the absence of any default by us on any surety bond issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may: (a) seek to satisfy certain customer requests for surety bonds by posting other forms of collateral in lieu of surety bonds, such as letters of credit, parent company guarantees, or cash, in order to convince customers to forego the requirement for surety bonds, (b) increase our activities in our businesses that rarely require surety bonds, and/or (c) refrain from bidding for certain projects that require surety bonds.
There can be no assurance that we would be able to effectuate alternatives to providing surety bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require surety bonds. Accordingly, a reduction in the availability of surety bonds could have a material adverse effect on our financial position, results of operations, and/or cash flows.
In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.
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New Accounting Pronouncements
We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - New Accounting Pronouncements of the notes to consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements is based on the application of significant accounting policies, which require management to make estimates and assumptions. Our significant accounting policies are described further in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021. We base our estimates on historical experience, known or expected trends, third-party valuations, and various other assumptions that we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. There have been no significant changes to our critical accounting policies or methods for the three months ended March 31, 2022. We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition from Contracts with Customers
For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the number of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly and the customer receives and consumes the benefits of our performance throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping if certain recognition criteria are met.
For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.
The nature of our contracts gives rise to several types of variable consideration, including pending change orders and claims; contract bonuses and incentive fees; and liquidated damages and penalties. We recognize revenue for such variable consideration when it is probable, in our judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled.
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Due to uncertainties inherent in the estimation process, as well as the significant judgment involved in determining variable consideration, it is possible that estimates of costs to complete a performance obligation, and/or our estimates of transaction prices, will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, or changes in the estimate of transaction prices, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.
Based on an evaluation of individual projects that had revisions to total estimated costs, which resulted in a reduction of profitability in excess of $1.0 million, our operating results were negatively impacted by approximately $10.0 million, during the three months ended March 31, 2022. Of this amount, approximately $4.6 million was recorded within our United States electrical construction and facilities services segment and approximately $5.4 million was recorded within our United States mechanical construction and facilities services segment. There were no changes in total estimated costs that had a significant impact on our operating results during the three months ended March 31, 2021.
Due to the significant judgments utilized in the estimation process described above, if subsequent actual results and/or updated assumptions, estimates, or projections related to our underlying project positions were to change from those utilized at March 31, 2022, it could result in a material impact to our results of operations. For example, a 50 basis point increase or decrease in the estimated gross profit margin on our uncompleted construction projects, in the aggregate, as a result of a revision in estimated costs to complete a performance obligation or a revision in estimated transaction price, would have resulted in an increase or decrease to operating income of approximately $70 million for the three months ended March 31, 2022.
See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements for further disclosure regarding revenue recognition.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.
At March 31, 2022 and December 31, 2021, our accounts receivable of $2,303.4 million and $2,204.5 million, respectively, were recorded net of allowances for credit losses of $23.0 million and $23.5 million, respectively. The decrease in our allowance for credit losses was predominantly attributable to the write-off of specific amounts deemed unrecoverable. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received.
Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our allowances for credit losses. For example, if economic conditions were to significantly deteriorate, such as to those experienced during the last global financial crisis, the portion of our allowance for credit losses, which is estimated based on our historical credit loss experience, could increase by up to approximately $13.5 million.
Insurance Liabilities
We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability, and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on the Consolidated Balance Sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences, and effectiveness of safety and risk management programs. Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known. Our estimated net insurance liabilities for workers’ compensation, automobile liability, general
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liability, and property claims increased by $8.3 million at March 31, 2022 compared to December 31, 2021, partially as a result of greater potential exposures. If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims were to increase by 10%, it would have resulted in $18.7 million of additional expense for the three months ended March 31, 2022.
Income Taxes
As of March 31, 2022 and December 31, 2021, we had net deferred income tax liabilities of $51.1 million and $51.0 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets. Included within these net deferred income tax liabilities are $214.6 million and $212.3 million of deferred income tax assets as of March 31, 2022 and December 31, 2021, respectively. The total valuation allowance on deferred income tax assets was approximately $2.5 million as of both March 31, 2022 and December 31, 2021. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on our taxable income, which has generally exceeded the amount of our net deferred income tax asset balance, as well as current projections of future taxable income, we have determined that it is more likely than not that our net deferred income tax assets will be realized. However, revisions to our forecasts or declining macroeconomic conditions could result in changes to our assessment of the realization of these deferred income tax assets.
Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets
Goodwill
As of March 31, 2022 and December 31, 2021, we had goodwill of $891.5 million and $890.3 million, respectively, arising out of the acquisition of businesses. Goodwill is not amortized but instead allocated to its respective reporting unit and evaluated for impairment annually, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have determined that our reporting units are consistent with the reportable segments identified in Note 14 - Segment Information of the notes to consolidated financial statements. As of March 31, 2022, approximately 18.0% of our goodwill related to our United States electrical construction and facilities services segment, approximately 34.7% related to our United States mechanical construction and facilities services segment, approximately 34.5% related to our United States building services segment, and approximately 12.8% related to our United States industrial services segment.
Absent any earlier identified impairment indicators, we perform our annual goodwill impairment assessment on October 1 each fiscal year. Qualitative indicators that may trigger the need for interim quantitative impairment testing include, among others, a deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test may be triggered by a significant change in business climate, a loss of a significant customer, increased competition, or a sustained decrease in share price. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations.
As of the date of our most recent impairment test (October 1, 2021), the fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment exceeded their carrying values by approximately $1,516.1 million, $2,772.7 million, $784.2 million, and $40.6 million, respectively.
In completing our annual impairment assessment, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital. The weighted average cost of capital used in our annual impairment testing was 10.4% for our United States construction segments and our United States building services segment, and 11.3% for our United States industrial services segment. These weighted average cost of capital estimates were developed with the assistance of an independent third-party valuation specialist and reflect the overall level of inherent risk within the respective reporting unit and the rate of return a market participant would expect to earn.
Our cash flow projections were derived from our most recent internal forecasts of anticipated revenue growth rates and operating margins, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate used for our annual testing was 2.0% for all of our reporting units.
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Due to the inherent uncertainties involved in making estimates, our assumptions may change in future periods. Estimates and assumptions made for purposes of our goodwill impairment testing may prove to be inaccurate predictions of the future, and other factors used in assessing fair value, such as the weighted average cost of capital, are outside the control of management. Unfavorable changes in certain of these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average cost of capital would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $103.6 million, $185.5 million, $74.5 million, and $25.9 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $52.4 million, $95.9 million, $35.8 million, and $9.5 million, respectively. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests. Further, for each of our reporting units, other than our United States industrial services segment, a 10% decline in the estimated fair value of such reporting unit, due to other changes in our assumptions, including forecasted future cash flows, would not have significantly impacted the results of our impairment tests. In the case of our United States industrial services segment, however, a 10% decrease would cause the estimated fair value of this reporting unit to approximate its carrying value.
No impairment of our goodwill was recognized during the three months ended March 31, 2022 and 2021.
Identifiable Intangible Assets and Other Long-Lived Assets
As of March 31, 2022 and December 31, 2021, net identifiable intangible assets (primarily consisting of our customer relationships, subsidiary trade names, developed technology/vendor network, and contract backlog) arising out of the acquisition of businesses were $574.6 million and $589.4 million, respectively. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short- and long-term projections of future performance. These forecasts reflect assumptions regarding anticipated macroeconomic conditions as well as our ability to successfully integrate acquired businesses.
Absent earlier indicators of impairment, we test for impairment of subsidiary trade names that are not subject to amortization on an annual basis (October 1). In performing this test, we calculate the fair value of each trade name using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations.
As of October 1, 2021, we performed our annual impairment testing of all subsidiary trade names that are not subject to amortization and determined that there was no impairment of these assets. In performing this impairment assessment, we considered the sensitivity of the reported amounts to the methods, assumptions, and estimates underlying our testing. For example, we performed sensitivity analyses and concluded that, individually, none of the following changes in estimates or assumptions would have significantly impacted the results of our testing or resulted in an impairment of our subsidiary trade names: (a) a 50 basis point increase in the discount rate utilized in our testing, (b) a 50 basis point decline in the perpetual growth rate utilized in our testing, or (c) a 10% decrease in the estimated fair value of each trade name.
In addition, we review for impairment of identifiable intangible assets that are being amortized as well as other long-lived assets whenever facts and circumstances indicate that their carrying values may not be recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their discounted estimated future cash flows.
No impairment of our identifiable intangible assets or other long-lived assets was recognized during the three months ended March 31, 2022 and 2021.
Other Considerations
As referenced above, impairment testing is based upon assumptions and estimates determined by management from a review of our operating results and business plans as well as forecasts of anticipated growth rates and margins, among other considerations. In addition, estimates of weighted average costs of capital are developed with the assistance of an independent third-party valuation specialist. These assumptions and estimates may change in future periods. Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges, particularly with respect to our United States industrial services segment given that the fair value of this reporting unit more closely approximates its carrying value. It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not used any derivative financial instruments during the three months ended March 31, 2022, including trading or speculating on changes in interest rates or commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings under the 2020 Credit Agreement, which provides for a revolving credit facility and a term loan. Borrowings under the 2020 Credit Agreement bear interest at variable rates. For further information on our outstanding debt and borrowing rates, refer to Note 7 - Debt of the notes to consolidated financial statements. As of March 31, 2022, there were no direct borrowings outstanding under the 2020 Revolving Credit Facility; however, the balance of the 2020 Term Loan was $256.7 million. Based on the $256.7 million of borrowings outstanding under the 2020 Credit Agreement, if overall interest rates were to increase by 100 basis points, interest expense, net of income taxes, would increase by approximately $1.9 million in the next twelve months. Conversely, if overall interest rates were to decrease by 100 basis points, interest expense, net of income taxes, would decrease by approximately $1.9 million in the next twelve months. The 2020 Credit Agreement expires on March 2, 2025.
At the end of 2021, one-week and two-month LIBOR were discontinued. It is expected that the remaining maturities of LIBOR will continue to be published through June 2023. We believe our exposure to market risk associated with the discontinuation of LIBOR is limited as: (a) our 2020 Credit Agreement contains provisions which allow for the use of alternate benchmark rates, (b) we have not historically utilized the maturities that were discontinued in 2021 for any transaction, including borrowings under our 2020 Credit Agreement, and (c) we are not exposed to any other material contracts that reference LIBOR.
We are exposed to construction market risk and its potential related impact on accounts receivable or contract assets on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, we believe we take appropriate action to manage market and other risks, but there is no assurance that we will be able to reasonably identify all risks with respect to the collectability of these assets. See also the previous discussion of Accounts Receivable and Allowance for Credit Losses under the heading “Critical Accounting Policies and Estimates” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive (loss) income, a component of equity, in the Consolidated Balance Sheets. We believe our exposure to the effects that fluctuating foreign currencies may have on our consolidated results of operations is limited because our foreign operations primarily invoice customers and collect obligations in their respective local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in their same local currencies.
In addition, we are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in our construction, building services, and industrial services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 12,000 vehicles. While we believe we can increase our contract prices to adjust for some price increases in commodities, there can be no assurance that such price increases, if they were to occur, would be recoverable. Additionally, our fixed price contracts generally do not allow us to adjust our prices and, as a result, increases in material costs could reduce our profitability with respect to projects in progress. Refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding the impact of fluctuations in commodity and material prices on our results of operations for the three months ended March 31, 2022.
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ITEM 4. CONTROLS AND PROCEDURES.
Based on an evaluation of our disclosure controls and procedures (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934), our Chairman, President, and Chief Executive Officer, Anthony J. Guzzi, and our Executive Vice President and Chief Financial Officer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. – OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
We are involved in several legal proceedings in which damages and claims have been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. We record a loss contingency if the potential loss from a proceeding or claim is considered probable and the amount can be reasonably estimated or a range of loss can be determined. We provide disclosure when it is reasonably possible that a loss will be incurred in excess of any recorded provision. Significant judgment is required in these determinations. As additional information becomes available, we reassess prior determinations and may change our estimates. Additional claims may be asserted against us in the future. Litigation is subject to many uncertainties, and the outcome of litigation is not predictable with assurance. It is possible that a litigation matter for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decision could have a material adverse effect on our financial position, results of operations, or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table summarizes repurchases of our common stock made by us during the quarter ended March 31, 2022:
| Period | Total Number of Shares Purchased (1) (2) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| January 1, 2022 to January 31, 2022 | 532,327 | 118.47 | 532,327 | $287,345,976 | ||||||||||||||||||||||
| February 1, 2022 to February 28, 2022 | 307,918 | 113.92 | 307,918 | $252,268,157 | ||||||||||||||||||||||
| March 1, 2022 to March 31, 2022 | 724,901 | 115.42 | 724,901 | $168,599,335 | ||||||||||||||||||||||
| Total | 1,565,146 | 116.16 | 1,565,146 | |||||||||||||||||||||||
(1)In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount authorized for repurchases under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $1.45 billion of our outstanding common stock. As of March 31, 2022, there remained authorization for us to repurchase approximately $168.6 million of our shares. No shares have been repurchased by us since the program was announced other than pursuant to such program. Subsequent to March 31, 2022, the Board authorized us to repurchase up to an additional $200.0 million of our outstanding common stock. Refer to Note 10 - Common Stock of the notes to consolidated financial statements for further information regarding our share repurchase program.
(2)Excludes 42,265 shares surrendered to the Company by participants in our share-based compensation plans to satisfy minimum tax withholdings for common stock issued under such plans.
ITEM 4. MINE SAFETY DISCLOSURES.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this quarterly report.
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ITEM 6. EXHIBITS.
EXHIBIT INDEX
| Exhibit No. | Description | Incorporated By Reference to or Filed Herewith, as Indicated Below | ||||||||||||
| 3(a-1) | Restated Certificate of Incorporation of EMCOR filed December 15, 1994 | |||||||||||||
| 3(a-2) | Amendment dated November 28, 1995 to the Restated Certificate of Incorporation of EMCOR | |||||||||||||
| 3(a-3) | Amendment dated February 12, 1998 to the Restated Certificate of Incorporation of EMCOR | |||||||||||||
| 3(a-4) | Amendment dated January 27, 2006 to the Restated Certificate of Incorporation of EMCOR | |||||||||||||
| 3(a-5) | Amendment dated September 18, 2007 to the Restated Certificate of Incorporation of EMCOR | |||||||||||||
| 3(b) | Amended and Restated By-Laws and Amendments thereto | |||||||||||||
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Anthony J. Guzzi, the Chairman, President and Chief Executive Officer | |||||||||||||
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Mark A. Pompa, the Executive Vice President and Chief Financial Officer | |||||||||||||
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chairman, President and Chief Executive Officer | |||||||||||||
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer | |||||||||||||
| 95.1 | Information concerning mine safety violations or other regulatory matters | |||||||||||||
| 101 | The following materials from EMCOR Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) the Notes to Consolidated Financial Statements. | Filed | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed | ||||||||||||
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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.
Date: April 28, 2022
| EMCOR GROUP, INC. | |||||
| (Registrant) | |||||
BY: | /s/ ANTHONY J. GUZZI | ||||
| Anthony J. Guzzi | |||||
| Chairman, President and Chief Executive Officer (Principal Executive Officer) | |||||
BY: | /s/ MARK A. POMPA | ||||
| Mark A. Pompa | |||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
BY: | /s/ JASON R. NALBANDIAN | ||||
| Jason R. Nalbandian | |||||
| Vice President and Chief Accounting Officer (Principal Accounting Officer) | |||||
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