2020 ANNUAL REPORTfor more information visit comfortsystemsusa.comCOMFORT SYSTEMS USA • 2020 ANNUAL REPORT COMFORT SYSTEMS USA is a leading provider of commercial, industrial and
institutional heating, ventilation, air conditioning and electrical contracting services.
SELECTED FINANCIAL INFORMATION FROM FORM 10-K
(in thousands, except per share amounts)
Revenue
Operating income
Net income
Net income per diluted share
Operating cash fl ow
Debt
Year-ending cash balance
Stockholders’ equity
Total assets
2020
$ 2,856,659
190,651
150,139
4.09
286,510
235,733
54,896
696,429
1,757,355
2019
2018
$ 2,615,277
$ 2,182,879
163,639
114,324
3.08
142,028
226,135
50,788
150,238
112,903
3.00
147,190
76,918
45,620
585,304
498,047
1,505,012
1,062,564
DEAR FELLOW STOCKHOLDERS
2020
was a year of challenge
and triumph for the
essential workers of
Comfort Systems USA.
The biggest accomplishment of the year was the astounding
courage and resilience of our brave teams across the
country. Day after day, our plumbers, electricians, welders,
service technicians, pipefitters, sheet metal workers,
designers, programmers, quality specialists, safety
professionals and countless others put on a mask, picked
up their tools, and worked to provide the crucial services
that our country needs. As a result of their tireless efforts,
unremitting courage, and commitment to perform essential
work safely, 2020 was our best year ever.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 1
Thanks to their dedicated efforts, we earned net income
of $150 million ($4.09 per diluted share), compared with
net income of $114 million ($3.08 per diluted share) in
2019. Despite stopped jobs and closed buildings, our total
revenue grew by 9 percent, to $2.9 billion in 2020.
Our positive cash generation, long an unbroken string of
success, shattered all previous levels as we achieved cash
flow from operations of $287 million, 102 percent higher
than our strong 2019 cash results.
Our 2020 results were made possible by the
extraordinary commitment of our best-in-class
craftspeople and professionals. The crucible of
2020 demonstrated that our relentless
commitment to find and invest in the best people
has produced durable advantages.
Our commitment to safety was key to our
accomplishments in 2020. We have a strong
culture of care and accountability, and as a result
our people quickly understood and embraced the
care and precautions that the pandemic made
necessary. Despite the challenges of 2020,
we improved on our already excellent safety
performance this year through a 15 percent
reduction in recordable injuries and a 24 percent
reduction in days away and restricted duty cases.
Comfort Systems USA is committed to
improving our communities and our
environment. We seek diversity and inclusion
in our workforce, and we deploy unmatched
planning and engineering to help our
customers make existing buildings more
energy efficient, and to help owners minimize
their energy demands while providing a
healthy work environment for the occupants of
new buildings. We are experts in optimizing
energy efficiency and internal air quality, and
we are increasing that capability.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 2
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 3
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 4
Our positive cash generation,
long an unbroken string
of success, shattered
all previous levels
as we achieved
cash flow from operations
of $287 million,
102 percent higher
than our strong
2019 cash results.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 5
Despite
stopped jobs
and
closed buildings,
our total revenue
actually grew
by 9 percent,
to $2.9 billion
in 2020.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 6
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 7
2020 Financial Highlights
3,000
2,500
2,000
1,500
1,000
500
’18
’17
’16
Revenue
’19 ’20
($ millions)
300
250
200
150
100
50
’17
’18
’16
Operating Cash Flow
’19 ’20
($ millions)
’18
’17
’16
Gross Profit
’19 ’20
600
500
400
300
200
100
($ millions)
1,500
1,000
500
’18
’17
’16
Backlog
’19
’20
($ millions)
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 8
We use our cash flow to improve the company and to
return capital to our loyal investors.
Our first use of capital is always to invest in our existing
business and workforce. These ongoing investments are
creating sustainable advantages for Comfort Systems
USA. In our construction services, we invest in the best
tools and continuous training. We have created shareable
design resources, refined our job loop, pivoted to training
online, and have more fully leveraged capabilities and
manpower between our operating centers. Our growth
driven service expenditures continue unabated as we
continually invest in technology, recruitment, and training
to bring our customers an overall experience our com-
petitors fail to match.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 9
Comfort Systems USA focuses company-wide on safety leading indicators, and not just OSHA compliance. We believe safety has less to do with rulebooks and more to do with what is in the minds of our workers and the hearts of our management.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 10
Comfort Systems USA focuses company-wide on safety leading indicators, and not just OSHA compliance. We believe safety has less to do with rulebooks and more to do with what is in the minds of our workers and the hearts of our management.
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 11
After making these considerable investments to
improve our existing business and workforce,
we seek to team up with well-established new
companies. These new partners bring us
valuable assembled workforces, reputations,
customers, and forward-thinking capabilities,
including our unmatched capability to design
and build complex and expansive modular
solutions. In turn, we further invest to improve
and grow their people and their businesses.
Finally, because we generally flow more
cash than we can prudently deploy in growth
and investment, we also regularly return a
portion of our growing capital to our
shareholders. In 2020, we continued our
longstanding practice of annually increasing our
dividend, and just as we have done each year
since 2007, we also continued our practice of
prudently and predictably dedicating a modest
portion of our excess cash flow to retiring
outstanding shares.
Despite the continued headwinds from the
global pandemic, we believe that 2021 will be
another year of strong profits and cash flow for
us. We remain committed to unwavering
investment in our people, and we believe that
our essential businesses will continue to
position us for ongoing value growth.
We stand today in awe and admiration of the men and
women who serve our customers and each other every
day. Because of them, we are more convinced than ever
that the best is yet to come. Thank you for your investment
and belief in us. We will continue working to make
Comfort Systems USA better and better.
Respectfully,
BRIAN E. LANE
President and
Chief Executive Officer
WILLIAM GEORGE
Executive Vice President
and Chief Financial Officer
TRENT M. MCKENNA
Chief Operating Officer
and Senior Vice President
COMFORT SYSTEMS USA • 2020 A N NUA L REPORT • 12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
☐
For the transition period from to
Commission file number: 1 - 13011
Comfort Systems USA, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
76 - 0526487
(I.R.S. Employer
Identification No.)
675 Bering Drive
Suite 400
Houston, Texas 77057
(713) 830 - 9600
(Address and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Trading Symbol(s)
FIX
Name of Each Exchange on which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well - known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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 (§ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). Yes ☐ No
The aggregate market value of the voting stock held by non - affiliates of the registrant at June 30, 2020 was approximately $1.45 billion,
based on the $40.75 last sale price of the registrant’s common stock on the New York Stock Exchange on June 30, 2020.
As of February 19, 2021, 36,185,179 shares of the registrant’s common stock were outstanding (excluding treasury shares of 4,938,186).
The information required by Part III (other than the required information regarding executive officers) is incorporated by reference from
the registrant’s definitive proxy statement, which will be filed with the Commission not later than 120 days following December 31, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2.
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . 84
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . 85
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Part IV
1
FORWARD - LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10 - K may constitute forward - looking
statements within the meaning of applicable securities laws and regulations. The words “believe,” “expect,”
“anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to
identify forward - looking statements, which are generally not historic in nature. These forward - looking statements are
based on the current expectations and beliefs of Comfort Systems USA, Inc. and its subsidiaries (collectively, the
“Company”) concerning future developments and their effect on the Company. While the Company’s management
believes that these forward - looking statements are reasonable as and when made, there can be no assurance that future
developments affecting the Company will be those that it anticipates. All comments concerning the Company’s
expectations for future revenue and operating results are based on the Company’s forecasts for its existing operations
and do not include the potential impact of any future acquisitions. The Company’s forward - looking statements involve
significant risks and uncertainties (some of which are beyond the Company’s control) and assumptions that could cause
actual future results to differ materially from the Company’s historical experience and its present expectations or
projections. Known material factors that could cause the Company’s actual results to differ from those in the
forward - looking statements are those described in Part I, “Item 1A. Risk Factors.”
Readers are cautioned not to place undue reliance on forward - looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly update or revise any forward - looking statements after the
date they are made, whether as a result of new information, future events, or otherwise.
2
PART I
The terms “Comfort Systems,” “we,” “us,” or “the Company” refer to Comfort Systems USA, Inc. or Comfort
Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.
ITEM 1. Business
Comfort Systems USA, Inc., a Delaware corporation, was established in 1997. We provide mechanical and
electrical contracting services. Our mechanical segment principally includes heating, ventilation and air conditioning
(“HVAC”), plumbing, piping and controls, as well as off - site construction, monitoring and fire protection. Our electrical
segment includes installation and servicing of electrical systems. We build, install, maintain, repair and replace
mechanical, electrical and plumbing (“MEP”) systems throughout our 37 operating units with 139 locations in 114 cities
throughout the United States.
We operate primarily in the commercial, industrial and institutional MEP markets and perform most of our
services in industrial, healthcare, education, office, technology, retail and government facilities. Substantially all of our
consolidated 2020 revenue was derived from commercial, industrial and institutional customers and multi - family
residential projects. Approximately 46.7% of our revenue was attributable to installation services in newly constructed
facilities and 53.3% was attributable to renovation, expansion, maintenance, repair and replacement services in existing
buildings. Our consolidated 2020 revenue was derived from the following service industries:
Service Activity
Mechanical Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electrical Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of
Revenue
84.5 %
15.5 %
100.0 %
Industry Overview
We believe that commercial, industrial, and institutional mechanical and electrical contracting generate annual
revenue in the United States of approximately $200 billion. Mechanical and electrical systems are necessary to virtually
all commercial, industrial and institutional buildings. Because most buildings are sealed, HVAC systems provide the
primary method of circulating fresh air in such buildings. Replacing an aging building’s existing systems with modern,
energy - efficient systems significantly reduces a building’s energy consumption, carbon footprint, and operating costs
while improving air quality and overall system effectiveness. Older commercial, industrial and institutional facilities
frequently have poor air quality and provide less comfortable environments, and older HVAC systems result in
significantly higher energy consumption than do modern systems. As electrical systems age they require service and
replacement, and changing building configurations and technological power load requirements lead to the need to
reconfigure and improve electrical systems in buildings on a regular basis.
Many factors affect mechanical and electrical services industry growth, including but not limited to,
(i) population growth, which increases the need for commercial, industrial and institutional space, (ii) an aging installed
base of buildings and equipment, (iii) increasing sophistication, complexity and efficiency of mechanical and electrical
systems, and (iv) growing emphasis on internal air quality, environmental sustainability and energy efficiency.
Our industry can be broadly divided into two categories:
•
•
construction of and installation in new buildings, which provided approximately 46.7% of our revenue in
2020, and
renovation, expansion, maintenance, repair and replacement in existing buildings, which provided the
remaining 53.3% of our 2020 revenue.
Construction, Installation, Expansion and Renovation Services— Construction, installation, expansion and
renovation services consist of “design and build” and “plan and spec” projects. In “design and build” projects, the
commercial MEP company is responsible for designing, engineering and installing a cost - effective, energy - efficient
system customized to the specific needs of the building owner. Costs and other project terms are normally negotiated
3
between the building owner or its representative and the contracting company. Companies that specialize in “design and
build” projects use a consultative approach with customers and tend to develop long - term relationships with building
owners and developers, general contractors, architects, consulting engineers and property managers. “Plan and spec”
installation refers to projects in which a third - party architect or consulting engineer designs the MEP systems and the
installation project is “put out for bid.” We believe that “plan and spec” projects usually take longer to complete and
frequently results in less efficient outcomes than “design and build” projects because the system design and installation
process are not integrated, thus resulting in more frequent adjustments to project specifications, work requirements and
schedules. Our investments in design and building information modeling enable us to collaborate with our customers to
achieve reliable and energy efficient construction outcomes and to eliminate unnecessary waste.
Maintenance, Repair and Replacement Services—These services include maintaining, repairing, replacing,
reconfiguring and monitoring previously installed systems and building automation controls. The growth and aging of
the installed base of MEP and related systems, changing requirements due to increasing technology deployment, and the
demand for more efficient systems and more capable building automation controls have fueled growth in these services.
The increasing complexity of these systems leads many commercial, industrial and institutional building owners and
property managers to outsource maintenance and repair, often through service agreements with service providers.
State - of - the - art control and monitoring systems feature electronic sensors and microprocessors that are crucial to energy
efficient operations. These systems require specialized training to install, maintain and repair. We believe that the work
that we perform to optimize and upgrade systems and to enable wise controls helps Comfort Systems USA to optimize
energy use and fundamentally reduce our nation’s carbon footprint.
Strategy
We focus on strengthening core operating competencies, leading in sustainability, efficiency and technological
improvement, and on increasing profit margins. The key objectives of our strategy are to improve profitability and
generate growth in our operations, to enable sustainable and efficient building environments, to improve the productivity
of our workforce, and to acquire complementary businesses. In order to accomplish our objectives, we are currently
focused on the following elements:
Achieve Excellence in Core Competencies—We have identified seven core competencies that we believe are
critical to attracting and retaining customers, increasing operating income and cash flow and maximizing the
productivity of our increasingly valuable skilled labor force. The seven core competencies are: (i) safety, (ii) customer
service, (iii) design and build expertise, (iv) effective pre-construction processes, (v) job and cost tracking, (vi)
leadership in energy efficient and sustainable design, and (vii) best-in-class servicing of existing building systems.
Achieve Operating Efficiencies—We think we can achieve operating efficiencies and cost savings through
purchasing economies, adopting operational “best practices,” and focusing on job management to deliver services in a
cost - effective and efficient manner. We are continually improving the “job loop” at our locations—qualifying,
estimating, pricing and executing projects effectively and efficiently. We also use our combined spend to gain
purchasing advantages on products and services such as MEP components, raw materials, services, vehicles, bonding,
insurance and employee benefits.
Attract, Retain and Invest in our Employees—We seek to attract and retain quality employees by providing
them an enhanced career path that offers a stable income, attractive benefits packages and excellent advancement
opportunities. We continually invest in training, including programs for project managers, field superintendents, service
managers, service technicians, sales managers, estimators, and leadership and development of key managers and leaders.
We believe that skilled labor forces in the building and services trades have become increasingly scarce and valuable,
and we are increasing our national and local focus on growing and improving our skilled labor force, including through
recruitment, development and skills training for our hourly workers.
Focus on Industrial, Commercial and Institutional Markets—We focus on the industrial, commercial and
institutional building markets, including construction, maintenance, repair and replacement services. We believe that
these complex markets are attractive because of their growth opportunities, large and diverse customer base, attractive
margins and potential for long - term relationships with building owners.
Leverage Resources and Capabilities—We believe significant operating efficiencies can be achieved by
leveraging resources among our operating locations. We have shifted certain fabrication activities to centralized
4
locations in order to increase asset utilization. We opportunistically allocate our engineering, field and supervisory labor
from one operation to another to use our employee base more fully, meet our customers’ needs and share expertise. Our
ability to share resources frequently allows us to pursue work that would otherwise not be available to us and allows us
to provide a more diversified and steady deployment of our labor. We believe we have realized scale benefits from
coordinated purchasing, technical innovation, insurance, benefits, bonding and financing activities across our operations.
Maintain a Diverse Customer, Geographic and Project Base—We have a distribution of revenue across
end - use sectors that we believe reduces our exposure to negative developments in any given sector. We also have
significant geographical diversification across all regions of the United States, again reducing our exposure to negative
developments in any given region. Our distribution of revenue in 2020 by end - use sector was as follows:
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail, Restaurants and Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-Family and Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38.9 %
17.1 %
11.2 %
13.0 %
5.7 %
8.4 %
3.0 %
2.7 %
100.0 %
Approximately 87.0% of our revenue is earned on a project basis for installation of systems in newly
constructed or existing facilities. As of December 31, 2020, we had 5,687 projects in process with an aggregate contract
value of approximately $5.0 billion. Our average project takes six to nine months to complete, with an average contract
price of approximately $871,000. This average project size, when taken together with the approximately 13.0% of our
revenue derived from maintenance and service, provides us with a broad base of work in the construction services sector.
A stratification of projects in progress as of December 31, 2020, by contract price, is as follows:
Aggregate
Contract
No. of Price Value
Contract Price of Project
(millions)
Projects
644.0
Under $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,905 $
1,283.4
$1 million - $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
692.3
$5 million - $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
684.9
$10 million - $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,648.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,687 $ 4,952.9
575
94
56
57
Develop and Adopt Leading Technologies—We are improving productivity by increasing use of innovative
techniques in prefabrication, project design and planning, as well as in coordination and production methods. We have
invested in the refinement and adoption of prefabrication practices. We work to identify, develop and implement new
materials, products and methods that can achieve greater productivity and more efficient and sustainable outcomes.
Above all, we have concluded that as technology develops in our industry the fundamental prerequisite for leadership in
adopting such opportunities is the quality, accuracy and buildability of our designs. Accordingly, we have invested in the
experts, training, and internal and external knowledge transfer to ensure that we are properly scaling, achieving true
buildability and fundamentally and continuously improving our design capabilities to meet our customers’ evolving
requirements. Our goal is to use our scale and strategic investments to maintain a leading position in design and
modeling excellence, and we believe that will enable us to optimize productivity and quality today, and especially will
position us to wisely capitalize from ongoing or future technological developments.
Excel at Modular and Off-Site Construction—We believe that modular and off-site construction – the ability to
build superior quality plants and systems away from the construction site – will become increasingly important in
complex construction projects. Accordingly, through our acquisitions, we have invested in that capability, and after
acquisition we have further invested in improving and growing that service offering. This has led to meaningful growth
in our ability to provide this expertise. Through recent and ongoing development and acquisitions, we plan to continue
to improve on our unmatched capability in mechanical off-site or modular construction. With our recent acquisition of
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Starr Electric Company, Incorporated in North Carolina and TAS Energy Inc. in Texas, we significantly improved our
off-site construction capabilities and offerings and will continue to invest in the improvement of these offerings.
Although complex modular construction is a small percentage of our current revenue, we believe that it is ripe for
investment and growth and that it helps us to sell work and improve outcomes across our businesses.
Service Growth Initiative—Over the last several years we have made substantial investments to expand our
service and maintenance revenue by increasing the value we can offer to service and maintenance customers. We are
actively concentrating managerial and sales resources on training and hiring experienced employees to sell and
profitably perform service work. In many locations we have added or upgraded our capability, and we believe our
investments and efforts have provided customer value and stimulated growth in all aspects of our businesses.
Seek Growth through Acquisitions—We believe that we can further increase our cash flow and operating
income by continuing to opportunistically enter new markets or service lines through acquisition. We have dedicated a
significant portion of our cash flow on an ongoing basis to seeking opportunities to acquire businesses that have strong
assembled workforces, excellent historical safety performance, leading design and energy efficiency capabilities,
attractive market positions, a record of consistent positive cash flow, and desirable market locations.
Operations and Services Provided
We provide a wide range of construction, renovation, expansion, maintenance, repair and replacement services
for MEP and related systems in commercial, industrial and institutional properties. Our local management teams
maintain responsibility for day - to - day operating decisions. Local management is augmented by regional leadership that
focuses on core business competencies, regional financial performance, cooperation and coordination between locations,
implementing best practices and corporate initiatives. In addition to senior management, local personnel generally
include design engineers, energy efficiency and sustainability experts, sales personnel, customer service personnel,
installation and service technicians, sheet metal and prefabrication technicians, estimators and administrative personnel.
We have centralized certain administrative functions such as insurance, employee benefits, training, safety programs,
marketing and cash management to enable our local operating management to focus on pursuing new business
opportunities and improving operating efficiencies.
Construction and Installation Services for New Buildings—Our installation business related to newly
constructed facilities, which comprised approximately 46.7% of our consolidated 2020 revenue, involves the design,
engineering, integration, installation and start - up of MEP and related systems. We provide “design and build” and “plan
and spec” installation services for office buildings, retail centers, manufacturing plants, healthcare, education and
government facilities and other commercial, industrial and institutional facilities. In a “design and build” installation, we
work with the customer to determine the needed capacity and to optimize energy efficiency of the MEP systems that best
suit the proposed facility. The final design, terms, price and timing of the project are then negotiated with the customer
or its representatives, after which any necessary modifications are made to the system plan. In “plan and spec”
installation, we participate in a bid process to provide labor, equipment, materials and installation based on the end
user’s plans and engineering specifications.
Once an agreement has been reached, we order the necessary materials and equipment for delivery to meet the
project schedule. In many instances we fabricate ductwork, conduit and piping and assemble certain components for the
system based on the mechanical drawing specifications. Finally, we install the systems at the project site, working
closely with the owner or general contractor. Our average project takes six to nine months to complete, with an average
contract price of approximately $871,000. We also perform larger project work, with 782 contracts in progress at
December 31, 2020 with contract prices in excess of $1 million. Our largest project in progress at December 31, 2020
had a contract price of $78.3 million. Project contracts typically provide for periodic billings to the customer as we meet
progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a small
portion of progress billings or contract price to be withheld by the customer until after we have completed the work.
Amounts withheld under this practice are known as retention or retainage.
Renovation, Expansion, Maintenance, Monitoring, Repair and Replacement Services for Existing Buildings—
Our renovation, expansion, maintenance, monitoring, repair and replacement services in existing buildings comprised
approximately 53.3% of our consolidated 2020 revenue. Maintenance and repair services are provided either in response
to service calls or under a service agreement. Service calls are coordinated by customer service representatives or
dispatchers that use computer and communication technology to process orders, arrange service calls, dispatch
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technicians and communicate with and invoice customers. Service technicians work from service vehicles equipped with
commonly used parts, supplies and tools to complete a variety of jobs. Optimal maintenance is crucial to energy efficient
operations. Commercial, industrial and institutional service agreements usually have terms of one or more years, with
automatic annual renewals, and frequently include thirty- to sixty - day cancellation notice periods. We also provide
remote monitoring of power usage, temperature, pressure, humidity and air flow for MEP and other building systems.
Sources of Supply
The raw materials and components we use include MEP system components, ductwork, pipe, conduit, wire,
electrical fixtures, steel, sheet metal and copper tubing and piping. These raw materials and components are generally
available from a variety of domestic or foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand, may extend to one month or more. We
estimate that direct purchase of commodities and finished products comprises between 25% and 30% of our average
project cost. We have procedures to reduce commodity cost exposure such as purchasing commodities early for
particular projects, as well as selectively using time or market-based escalation and escape provisions in bids and
contracts.
Chillers for large applications typically have the longest delivery time and frequently have lead times of up to
six months. The major components of commercial MEP systems are compressors and chillers that are manufactured
primarily by Carrier, Lennox, Daikin, Trane and York. The major suppliers of building automation control systems are
Automated Logic, Cisco, Delta, Distech Controls, Honeywell, Johnson Controls, Rockwell Automation, Schneider
Electric, Siemens, Trane and York. We do not have any significant contracts guaranteeing us a supply of raw materials
or components.
Cyclicality and Seasonality
The construction industry is subject to business cycle fluctuation. As a result, our volume of business,
particularly in new construction projects and renovation, may be adversely affected by declines in new installation and
replacement projects in various geographic regions of the United States during periods of economic weakness.
The mechanical and electrical contracting industries are also subject to seasonal variations. The demand for new
installation and replacement is generally lower during the winter months (the first quarter of the year) due to reduced
construction activity during inclement weather and less use of air conditioning during the colder months. Demand for
our services is generally higher in the second and third calendar quarters due to increased construction activity and
increased use of air conditioning during the warmer months. Accordingly, we expect our revenue and operating results
generally will be lower in the first calendar quarter.
Sales and Marketing
We have a diverse customer base, with our top customer representing 5% of consolidated 2020 revenue, and
our largest customer often changes from year to year. Management and a dedicated sales force are responsible for
developing and maintaining successful long - term relationships with key customers. Customers generally include
building owners and developers and property managers, as well as general contractors, architects and consulting
engineers. We intend to continue our emphasis on developing and maintaining long - term relationships with our
customers by providing superior, high - quality service in a professional manner. We believe we can continue to leverage
the diverse technical and marketing strengths at individual locations to expand the services offered in other local
markets. With respect to multi - location service opportunities, we maintain a national sales force in our national accounts
group.
Human Capital Resources
Employees—As of December 31, 2020, we had approximately 11,100 employees as compared to approximately
12,000 employees as of December 31, 2019. We have collective bargaining agreements covering less than ten
employees. We have not experienced and do not expect any significant strikes or work stoppages and believe our
relations with employees covered by collective bargaining agreements are good.
Culture and Core Values—Our values define, inform, and guide the way we operate on a daily basis, both
within our Company and in the communities where we do business. Our core values are: be safe; be honest; be
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respectful; be innovative; and be collaborative. These values set the foundation for our Code of Conduct, which applies
to all employees, officers, and directors of the Comfort Systems USA family of companies. The Code of Conduct is
regularly reinforced to the Company’s employees and management through periodic ethics, equal opportunity
employment, and anti-corruption trainings. In addition, certain business partners, such as consultants, agents, suppliers,
contractors, and other third parties, serve as an extension of the Company. They are expected to follow the spirit of our
Code of Conduct, all applicable laws, and any applicable contractual provisions when working on our behalf.
We believe that the way we conduct business is just as important as the business we do. Operating with
integrity helps us deliver on the promises we have made to each other, our customers, and the communities where we
live and work. It is also the basis for ensuring continued growth and success. Everyone at our Company shares a
responsibility for doing business ethically and in a sustainable manner, preserving our good name. We ensure that this
responsibility applies at every level in our organization, and everyone from corporate officers, to members of our Board
of Directors, to our field personnel is responsible for overseeing these efforts.
Recruiting and Training—Our continued success depends, in part, on our ability to continue to attract, retain
and motivate qualified engineers, service technicians, field supervisors and project managers. We believe our success in
retaining qualified employees will be based on the quality of our recruiting, training, compensation, employee benefits
programs and opportunities for advancement. We provide numerous training programs for management, sales and
leadership, as well as on - the - job training, technical training, apprenticeship programs, attractive benefit packages and
career advancement opportunities within our Company.
Safety—We have established comprehensive safety programs throughout our operations to ensure that all
employees comply with safety standards we have established and that are established under federal, state and local laws
and regulations. Safety leadership establishes safety programs and benchmarking to improve safety across the Company.
Additionally, our employment screening process seeks to determine that prospective employees have requisite skills,
sufficient background references and acceptable driving records, if applicable. Our rate of incidents recordable under the
standards of the Occupational Safety and Health Administration (“OSHA”) per one hundred employees per year, also
known as the OSHA recordable rate, was 1.36 during 2020. This level was 20% better than the most recently published
OSHA rate for our industry.
Diversity and Inclusion—We are an equal opportunity employer, and we welcome and celebrate our teams’
differences, experiences, and beliefs. We expect all employees to be treated with dignity and respect in an environment
free from discrimination and harassment regardless of race, color, religion, sex, sexual orientation, gender identity or
expression, national origin, age, disability, veteran status, genetic information or any other protected class. We know that
diversity is truly a competitive advantage that helps drive growth and innovation, and we have increasingly focused on
diversity and inclusion programs within our Company. Diversity and inclusion is among our leadership team’s top
priorities, with clearly outlined near-term actions to accelerate progress in outreach, representation, development and
advancement of underrepresented groups within our Company. Our Board of Directors and Board committees provide
oversight on certain human capital matters, including our diversity and inclusion strategy.
Insurance and Litigation
The primary insured risks in our operations are bodily injury, property damage and workers’ compensation
injuries. We retain the risk for workers’ compensation, employer’s liability, auto liability, general liability and employee
group health claims resulting from uninsured deductibles per-incident or occurrence. Because we have very large per
incident deductibles, the vast majority of our claims are paid by us, so as a practical matter we self - insure the great
majority of these risks. Losses up to such per - incident deductible amounts are estimated and accrued based upon known
facts, historical trends and industry averages using the assistance of an actuary to project the extent of these obligations.
We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various
insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals
for probable losses and related legal fees associated with certain litigation in our consolidated financial statements.
While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability
arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash
flows or financial condition, after giving effect to provisions already recorded.
We typically warrant labor for the first year after installation on new MEP systems that we build and install,
and we pass through to the customer manufacturers’ warranties on equipment. We generally warrant labor for thirty days
after servicing existing MEP systems. We do not expect warranty claims to have a material adverse effect on our
financial position or results of operations.
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Competition
The mechanical and electrical contracting industries are highly competitive and consist of thousands of local
and regional companies. We believe that purchasing decisions in the commercial, industrial and institutional markets are
based on (i) competitive price, (ii) relationships, (iii) quality, timeliness and reliability, (iv) tenure, financial strength and
access to bonding, (v) range of capabilities, and (vi) scale of operation. To improve our competitive position, we focus
on both the consultative “design and build” installation market and the maintenance, repair and replacement market in
order to develop and strengthen customer relationships. In addition, we believe our ability to provide multi - location
coverage and a broad range of services gives us a strategic advantage over smaller competitors who may have more
limited resources and capabilities.
We believe that we are larger than most of our competitors, which are generally small, owner - operated
companies in a specific area. However, there are divisions of larger contracting companies, utilities and MEP equipment
manufacturers that provide MEP services in some of the same service lines and geographic areas we serve. Some of
these competitors and potential competitors have greater financial resources than we do to finance development
opportunities and support their operations. We believe our smaller competitors generally compete with us based on price
and their long - term relationships with local customers. Our larger competitors compete with us on those factors but may
also provide attractive financing and comprehensive service and product packages.
Vehicles
We operate a fleet of various owned or leased service trucks, vans and support vehicles. We believe these
vehicles generally are well maintained and sufficient for our current operations.
Governmental Regulation and Environmental Matters
Our operations are subject to various federal, state and local laws and regulations, including: (i) licensing
requirements applicable to engineering, construction and service technicians, (ii) building and MEP codes and zoning
ordinances, (iii) regulations relating to consumer protection, including those governing residential service agreements,
(iv) special bidding and procurement requirements on government projects, (v) wage and hour regulations, and
(vi) regulations relating to worker safety and protection of the environment. For example, our operations are subject to
the requirements of OSHA and comparable state laws directed towards protection of employees. We believe we have all
required licenses to conduct our operations and are in substantial compliance with applicable regulatory requirements. If
we fail to comply with applicable regulations, we could be subject to substantial fines or revocation of our operating
licenses.
Many state and local regulations governing the MEP services trades require individuals to hold permits and
licenses. In some cases, a required permit or license held by a single individual may be sufficient to authorize specified
activities for all of our service technicians who work in the state or county that issued the permit or license. We seek to
ensure that, where possible, we have two employees who hold any such permits or licenses that may be material to our
operations in a particular geographic region.
Our operations are subject to the federal Clean Air Act, as amended, which governs air emissions and imposes
specific requirements on the use and handling of ozone - depleting refrigerants generally classified as chlorofluorocarbons
(“CFCs”) or hydrochlorofluorocarbons (“HCFCs”). Clean Air Act regulations promulgated by the United States
Environmental Protection Agency (“USEPA”) require the certification of service technicians involved in the service or
repair of equipment containing these refrigerants and also regulate the containment and recycling of these refrigerants.
These requirements have increased our training expenses and expenditures for containment and recycling equipment.
The Clean Air Act is intended ultimately to eliminate the use of ozone - depleting substances such as CFCs and HCFCs in
the United States and to require alternative refrigerants to be used in replacement HVAC systems. Some replacement
refrigerants, already in use, and classified as hydrofluorocarbons (“HFCs”) are not ozone - depleting substances. HFCs
are considered by USEPA to have high global warming potential. USEPA may at some point require the phase - out of
HFCs and expand existing technician certification requirements to cover the handling of HFCs. We do not believe the
existing regulations governing technician certification requirements for the handling of ozone - depleting substances or
possible future regulations applicable to HFCs will materially affect our business on the whole because, although they
require us to incur modest ongoing training costs, our competitors also incur such costs, and such regulations may
encourage or require our customers to update their MEP systems.
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Additional Information
Our Internet address is www.comfortsystemsusa.com. We make available free of charge on or through our
website our annual report on Form 10 - K, quarterly reports on Form 10 - Q, current reports on Form 8 - K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the
“SEC”). These materials are also available at www.sec.gov. Our website also includes our code of ethics, titled the “Code
of Conduct,” together with other governance materials including our corporate governance standards and our Board
committee charters for the audit committee, the compensation committee, and the governance and nominating
committee; the executive committee, formed in 2019, operates under written grants of authority that may be amended
from time to time by the Board. Printed versions of our code of ethics and our corporate governance standards may be
obtained upon written request to our Corporate Compliance Officer at our headquarters address.
The content of our websites is not incorporated by reference into this annual report on Form 10-K or in any
other report or document we file with the SEC, and any references to our websites are intended to be inactive textual
references only.
ITEM 1A. Risk Factors
Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and
uncertainties described below. The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties not known to us or which we have not determined to be material may also
impair our business operations. You should carefully consider the risks described below, together with all other
information included in this report, including information contained in the “Business,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative
Disclosures about Market Risk” sections. Our business, financial condition, results of operations or cash flows
could be adversely affected by the occurrence of any of these events, which could cause actual results to differ
materially from expected and historical results, and the trading price of our common stock could decline.
Risks Related to Our Business
Economic downturns in the markets in which we operate may materially and adversely affect our business because
our business is dependent on levels of construction activity.
The demand for our services is dependent upon the existence of construction projects and service requirements
within the markets in which we operate. Any period of economic recession, including the ongoing recession caused by
the Coronavirus Disease 2019 (“COVID-19”) pandemic, affecting a market or industry in which we transact business is
likely to adversely impact our business. Many of the projects we work on have long lifecycles from conception to
completion, and the bulk of our performance generally occurs late in a construction project’s lifecycle. We experience
the results of economic trends well after an economic cycle begins, and therefore have generally continued to experience
the results of an economic recession well after conditions in the general economy have improved.
The industries and markets in which we operate have always been and will continue to be vulnerable to
macroeconomic downturns because they are cyclical in nature. When there is a reduction in demand, it often leads to
greater price competition as well as decreased revenue and profit. The lasting effects of a recession can also increase
economic instability with our vendors, subcontractors, developers, and general contractors, which can increase our
liability exposure and result in us not being paid in full or at all on some projects, thus decreasing our revenue and profit.
Further, to the extent some of our vendors, subcontractors, developers, or general contractors seek bankruptcy
protection, such bankruptcy will likely force us to incur additional costs in attorneys’ fees, as well as other professional
consultants, and will result in decreased revenue and profit. Additionally, because 5.7% of our revenue for the year
ended December 31, 2020 was attributable to projects in the government sector, a reduction in federal, state, or local
government spending in our industries and markets could result in decreased revenue and profit for us.
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Because we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some
cases, losses under these contracts if costs increase above our estimates.
Our contract prices are established largely based on estimates and assumptions of our projected costs, including
assumptions about: future economic conditions; prices, including commodity prices; availability of labor, including the
costs of providing labor, equipment, and materials; and other factors outside our control. If our estimates or assumptions
prove to be inaccurate, circumstances change in a way that renders our assumptions and estimates inaccurate or we fail
to successfully execute the work, cost overruns may occur, and we could experience reduced profits or a loss for affected
projects. For instance, unanticipated technical problems may arise, we could have difficulty obtaining permits or
approvals, local laws, labor costs or labor conditions could change, bad weather could delay construction, raw materials
prices could increase, our suppliers or subcontractors may fail to perform as expected or site conditions may be different
than we expected. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices.
Additionally, in certain circumstances, we guarantee project completion or the achievement of certain acceptance and
performance testing levels by a scheduled date. Failure to meet schedule or performance requirements typically results in
additional costs to us, and in some cases, we may also create liability for consequential and liquidated damages.
Performance problems for existing and future projects could cause our actual results of operations to differ materially
from those we anticipate and could damage our reputation within our industry and our customer base.
Our backlog is subject to unexpected adjustments and cancellations, which means that amounts included in our
backlog may not result in actual revenue or translate into profits.
Backlog reflects revenue still to be recognized under contracted or committed installation and replacement
project work. Our backlog as of December 31, 2020 was $1.51 billion. The predictive value of backlog information is
limited to indications of general revenue direction over the near term, and we cannot guarantee that the revenue
projected from our backlog will be realized or, if realized, will be profitable. Projects may remain in our backlog for an
extended period of time, or project cancellations or scope adjustments may occur with respect to contracts reflected in
our backlog. Such changes may adversely affect the revenues and profit we ultimately realize on these projects.
The effects of the COVID-19 pandemic and related economic repercussions have materially affected how we and our
customers, vendors, subcontractors, developers, and general contractors are operating our businesses, and the
duration and extent to which this will negatively impact our future results of operations and overall financial
performance remains uncertain.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and
global supply chains, and created significant volatility and disruption of financial markets. We have experienced some
resulting disruptions to our business operations, and we expect the COVID-19 pandemic could have a material adverse
impact on our business and financial performance. The extent of the impact of the COVID-19 pandemic on our business
and financial performance, including our ability to execute our near-term and long-term business strategies and
initiatives in the expected time frame, will depend on future developments, including the duration and severity of the
pandemic, the resulting governmental and other measures implemented to address the pandemic and the development
and availability of effective treatments and vaccines, which are uncertain and cannot be predicted at this time.
We have been negatively impacted by the COVID-19 pandemic as a result of the shelter-in-place restrictions
and work disruptions in some of our service areas creating disruptions to portions of our operations, particularly in major
metropolitan markets that have been meaningfully impacted by the pandemic. We have also experienced permitting and
regulatory delays attributable to the COVID-19 pandemic. In addition to these current dynamics, the COVID-19
pandemic may create or exacerbate risks related to our operations and regulatory and compliance matters, including as a
result of:
•
•
•
evolving governmental guidance or requirements, including travel and movement restrictions, that continue
to impact our ability to perform services or complete projects in accordance with required delivery
schedules, which could result in additional costs or penalties (e.g., liquidated damages);
additional delays with respect to permitting and regulatory matters;
additional project deferrals, delays, and cancellations and changes in customer spending patterns and
strategic plans as a result of, among other things, lack of available financing for our customers’ businesses
or termination of, or force majeure events arising under, existing customer agreements;
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•
•
•
•
•
•
•
•
governmental guidance or requirements, including work-from-home policies, or potential illness that
negatively impact the availability or productivity of our key personnel or a significant number of
employees or cause other disruptions to our business, corporate governance or financial reporting
processes;
increased payment risk associated with customers experiencing financial difficulties (including bankruptcy)
and an increase in disputes with customers relating to billing and payment under contracts and change
orders;
potential liabilities and reputational harm related to occupational health and safety matters associated with
COVID-19;
our inability to execute our business strategy, including with respect to certain capital investments such as
acquisitions, investments and service offering expansions;
limitations on the ability of our suppliers, vendors and subcontractors to perform;
asset impairment charges related to property and equipment, goodwill, other intangible assets, other long-
lived assets and investments;
additional costs associated with restructuring, severance and related matters, potential mandated increases
in pay for critical infrastructure workers or other increased employment-related costs (e.g., workers’
compensation insurance claims); and
an increase in cyber-attacks and attempted intrusions into our information technology systems as a result
of, among other things, increased reliance on such systems.
As a result of these factors, the extent of the impact of the COVID-19 pandemic on our business is highly
uncertain. At this point, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, or its
ultimate impact on our business, financial condition, results of operations or cash flows.
Intense competition in our industry could reduce our market share and our profit.
The markets we serve are highly fragmented and competitive. Our industry is characterized by many small
companies whose activities are geographically concentrated. We compete on the basis of our technical expertise and
experience, financial and operational resources, nationwide presence, industry reputation and dependability. While we
believe our customers consider a number of these factors in awarding available contracts, a large portion of our work is
awarded through a bid process. Consequently, price is often the principal factor in determining which contractor is
selected, especially on smaller, less complex projects. Smaller competitors are sometimes able to win bids for these
projects based on price alone due to their lower cost and financial return requirements. We expect competition to
continue in our industry, presenting us with significant challenges in our ability to maintain strong growth rates and
acceptable profit margins. We also expect increased competition from in - house service providers, because some of our
customers have employees who perform service work similar to the services we provide. Vertical consolidation could
also contribute to competition in our industry. If we are unable to meet these competitive challenges, we will lose market
share to our competitors and experience an overall reduction in our profits. In addition, our profitability would be
impaired if we have to reduce our prices to remain competitive.
Our recent and future acquisitions may not be successful.
We expect to continue pursuing selective acquisitions of businesses. We cannot guarantee that we will be able
to identify acquisitions or that we will be able to consummate transactions on terms and conditions acceptable to us, or
that acquired businesses will be profitable. Acquisitions may expose us to additional business risks different than those
we have traditionally experienced. We also may encounter difficulties integrating acquired businesses and successfully
managing the growth we expect to experience from these acquisitions.
We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. Future
acquisitions could dilute earnings or disrupt the payment of a stockholder dividend. To the extent we make acquisitions,
a number of risks will result, including:
•
•
the assumption of material liabilities (including for environmental - related costs);
failure of due diligence to uncover situations that could result in legal exposure or to quantify the true
liability exposure from known risks;
12
•
•
•
the diversion of management’s attention from the management of daily operations to the integration of
operations;
difficulties in the assimilation and retention of employees, in the assimilation of different cultures and
practices, in the assimilation of broad and geographically dispersed personnel and operations, and the
retention of employees generally;
the risk of additional financial and accounting challenges and complexities in areas such as tax planning,
treasury management, financial reporting and internal controls; and
• we may not be able to realize the cost savings or other financial benefits we anticipated prior to the
acquisition.
The failure to successfully integrate acquisitions could have an adverse effect on our business, financial
condition and results of operations.
Third parties contribute significantly to our completion of many projects.
We hire third - party subcontractors to perform work and depend on third - party suppliers to provide equipment
and materials necessary to complete our projects. If we are unable to retain qualified subcontractors or suppliers, or if
our subcontractors or suppliers do not perform as anticipated for any reason, our execution, reputation and profitability
could be harmed.
Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets.
We carry a significant amount of goodwill and identifiable intangible assets on our consolidated Balance
Sheets. Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess
goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. We
have determined in the past and may again determine in the future that a significant impairment has occurred in the value
of our unamortized intangible assets or fixed assets, which could require us to write off a portion of our assets and could
adversely affect our financial condition or our reported results of operations.
Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously
recorded revenue or profits.
A material portion of our revenue is recognized using the percentage-of-completion method of accounting,
which results in our recognizing contract revenue and earnings ratably over the contract term in the proportion that our
actual costs bear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on
estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability
on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of
change orders to the original contract, collection disputes with the customer on amounts invoiced or claims against the
customer for increased costs incurred by us due to customer - induced delays and other factors. Contract losses are
recognized in the fiscal period when the loss is determined. Contract profit estimates are also adjusted in the fiscal period
in which it is determined that an adjustment is required. As a result of the requirements of the percentage - of - completion
method of accounting, the possibility exists, for example, that we could have estimated and reported a profit on a
contract over several periods and later determined, usually near contract completion, that all or a portion of such
previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement
will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits
from other contracts that would have otherwise been reported in such period or even resulting in a loss being reported for
such period. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards
completion on our long - term contracts. However, given the uncertainties associated with these types of contracts, it is
possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of
previously recorded revenue and profits.
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A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial
and surety markets may adversely affect our bonding capacity and availability.
In the past we have expanded, and it is possible we will continue to expand, the number and percentage of total
contract dollars that require an underlying bond. Historically surety market conditions have experienced times of
difficulty as a result of significant losses incurred by many surety companies and the results of macroeconomic trends
outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety
terms have become more expensive and more restrictive. As such, we cannot guarantee our ability to maintain a
sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or
successfully contract with some customers. Additionally, even if we continue to be able to access bonding capacity to
sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity
we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to
new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety
providers. If our surety companies were to limit or eliminate our access to bonds, our alternatives would include seeking
bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting
other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these
alternatives in a timely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or
reduction in the availability of bonding capacity, it is likely we would be unable to compete for or work on certain
projects.
If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures.
Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments
from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer
payments may require us to make a working capital investment. If a customer defaults in making their payments on a
project to which we have devoted resources, it could have a material negative effect on our financial condition and
results of operations.
Our business may be affected by the work environment.
We may need to perform our work under a variety of conditions, including but not limited to, difficult terrain,
difficult site conditions and busy urban centers where delivery of materials and availability of labor may be impacted,
clean-room environments where strict procedures must be followed and sites that may have been exposed to harsh and
hazardous conditions and outbreaks of infectious disease, such as the ongoing COVID-19 pandemic. If we are unable to
manage the conditions required for certain of our jobs, including the availability of sufficient labor, adherence to
environmental, health and safety or other standards, and adequately addressing harsh or hazardous conditions, our
business and financial condition could be adversely affected.
We are susceptible to adverse weather conditions, which may harm our business and financial results.
Our business can be highly cyclical and subject to seasonal and other variations that can result in significant
differences in operating results from quarter to quarter. Moreover, our business may be adversely affected by severe
weather in areas where we have significant operations. Repercussions of severe weather conditions may include:
•
•
•
•
curtailment of services;
suspension of operations;
inability to meet performance schedules in accordance with contracts and potential liability for liquidated
damages;
injuries or fatalities;
• weather-related damage to our facilities;
•
disruption of information systems;
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•
•
inability to receive machinery, equipment and materials at jobsites; and
loss of productivity.
Future climate change could adversely affect us.
Climate change may create physical and financial risk to our business. Physical risks from climate change
could, among other things, include an increase in extreme weather events (such as floods or hurricanes), rising sea levels
and limitations on water availability and quality. Such extreme weather conditions may limit the availability of
resources, increasing the costs of our projects, or may cause projects to be delayed or cancelled.
Legislation, nationwide protocols, regulation or other restrictions related to climate change could negatively
impact our operations or our customers’ operations. Such legislation or restrictions could increase the costs of projects
for our customers or, in some cases, prevent a project from going forward, which could in turn have an adverse effect on
our financial condition and results of operations.
Continuing worldwide political and economic uncertainties may adversely affect our revenue and profitability.
The last several years have been periodically marked by political and economic concerns, including the ongoing
COVID-19 pandemic, decreased consumer confidence, the lingering effects of international conflicts, tariffs, energy
costs and inflation. This instability can make it extremely difficult for our customers, our vendors and us to accurately
forecast and plan future business activities, and could cause constrained spending on our services, delays and a
lengthening of our business development efforts, the demand for more favorable pricing or other terms, and/or difficulty
in collection of our accounts receivable. Our government clients may face budget deficits that prohibit them from
funding proposed and existing projects. Further, ongoing economic instability in the global markets, including from the
ongoing COVID-19 pandemic, could limit our ability to access the capital markets at a time when we would like, or
need, to raise capital, which could have an impact on our ability to react to changing business conditions or new
opportunities. If economic conditions remain uncertain or weaken, or government spending is reduced, our revenue and
profitability could be adversely affected.
Risks Related to Our Operations
If we are unable to attract and retain qualified managers and employees, we will be unable to operate efficiently,
which could reduce our profitability.
Our business is labor intensive, and many of our operations experience a high rate of employee turnover. At
times of low unemployment rates in the United States, it is typically more difficult for us to find qualified personnel at
low cost in some geographic areas where we operate. Additionally, our business is managed by a small number of key
executive and operational officers. We may be unable to hire and retain the sufficient skilled labor force necessary to
operate efficiently and to support our growth strategy. Our labor expenses may increase as a result of a shortage in the
supply of skilled personnel. Labor shortages, increased labor costs or the loss of key personnel could reduce our
profitability and negatively impact our business. Further, our relationships with some customers could suffer if we are
unable to retain the employees with whom those customers primarily work and have established relationships.
Future growth could also impose significant additional responsibilities on members of our senior management,
including the need to recruit and integrate new senior level managers and executives. To the extent that we are unable to
manage our growth effectively, or are unable to attract and retain additional qualified management, we may not be able
to expand our operations or successfully execute our business plan.
We are a decentralized company and place significant decision making powers with our subsidiaries’ management,
which presents certain risks.
We believe that our practice of placing significant decision making powers with local management is important
to our successful growth and allows us to be responsive to opportunities and to our customers’ needs. However, this
practice presents certain risks, including the risk that we may be slower or less effective in our attempts to identify or
react to problems affecting an important business than we would under a more centralized structure or that we would be
slower to identify a misalignment between a subsidiary’s and the Company’s overall business strategy. Further, if a
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subsidiary location fails to follow the Company’s compliance policies, we could be made party to a contract,
arrangement or situation that requires the assumption of large liabilities or has less advantageous terms than is typically
found in the market.
Information technology system failures, network disruptions or cybersecurity breaches could adversely affect our
business.
We use and rely significantly on sophisticated information technology systems, networks, and infrastructure in
conducting our day to day operations, providing services to certain customers and protecting sensitive Company
information. In addition, we also rely on third-party software and information technology for certain of our critical
accounting, project management and financial information systems. We also collect and retain information about our
customers, stockholders, vendors and employees, with the expectation by such third parties being that we will adequately
protect such information.
Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt our
operations by causing transaction errors, processing inefficiencies, the loss of customers, other business disruptions or
the loss of employee or other third-party personal information. We have in the past experienced system interruptions and
delays and expect that such interruptions and delays may occur in the future, given the increasing diversity and
sophistication of cybersecurity threats. In addition, our systems, networks and infrastructure could be damaged or
interrupted by natural disasters, power loss, telecommunications failures, intentional or inadvertent user misuse or error,
failures of information technology solutions, computer viruses, malicious code, ransomware attacks and acts of
terrorism. We may also be subject to physical or electronic security breaches, including breaches by computer hackers or
cyber-terrorists or unauthorized access to or disclosure of our or our customers’ data. These events could impact our
customers, employees and reputation and lead to financial losses from remediation actions, loss of business or access to
our business data, potential liability or an increase in expenses, all of which may have a material adverse effect on our
business. Similar risks could affect our customers and vendors, indirectly affecting us.
While we have security, internal control and technology measures in place to protect our systems and networks,
these measures could fail as a result of a cyber-attack, other third-party action, employee error, malfeasance or other
security failure. In the ordinary course of business, we have been targeted by malicious cyber-attacks. In April 2019, for
example, our information technology infrastructure was impacted by a ransomware attack virus, which caused a
substantial majority of our operating locations to experience loss of access to certain data and outages affecting systems
including accounting, payroll, billing, job report and management and other software environments. These disruptions
created challenges in key back office functions that required workarounds and alternative procedures. Because the
techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified
until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. As a result, we may be required to expend significant resources to protect against the threat of
system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these
events could damage our reputation and, while the April 2019 incident did not have such effects, have a material adverse
effect on our business, results of operations, financial condition and cash flows.
In addition, current and future laws and regulations governing data privacy and the unauthorized disclosure of
confidential information may pose complex compliance challenges and result in additional costs. A failure to comply
with such laws and regulations could result in penalties or fines, legal liabilities or reputational harm. The continuing and
evolving threat of cyber-attacks has also resulted in increased regulatory focus on risk management and prevention. New
cyber-related regulations or other requirements could require significant additional resources and cause us to incur
significant costs, which could have an adverse effect on our results of operations and cash flows.
We regularly evaluate the need to upgrade or replace our systems and network infrastructure to protect our
information technology environment, to stay current on vendor supported products and to improve the efficiency and
scope of our systems and information technology capabilities. The implementation of new systems and information
technology could adversely impact our operations by requiring substantial capital expenditures, diverting management’s
attention, or causing delays or difficulties in transitioning to new systems. In addition, our systems implementations may
not result in productivity improvements at the levels anticipated. Systems implementation disruption and any other
information technology disruption, if not anticipated and appropriately mitigated, could have an adverse effect on our
business.
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Our insurance policies against many potential liabilities require high deductibles, and our risk management policies
and procedures may leave us exposed to unidentified or unanticipated risks. Additionally, difficulties in the insurance
markets may adversely affect our ability to obtain necessary insurance.
We insure various general liability, workers’ compensation, property and auto risks as well as other risks
through a variety of direct insurance policies and a captive insurance company that are reinsured for risks above certain
deductibles and retentions. All of our insurance policies and programs are subject to high deductibles and retentions; as
such, we are, in effect, self - insured for substantially all of our typical claims. We hire an actuary to determine any
liabilities for unpaid claims and associated expenses for the three major lines of coverage (workers’ compensation,
general liability and auto liability). The determination of these claims and expenses and the appropriateness of the
estimated liability are reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate
due to the many relevant factors, the effects of which are often unknown, including the severity of an injury, the
determination of our liability in proportion to other parties, the number of incidents that have occurred but are not
reported and the effectiveness of our safety program. Our accruals are based on known facts, historical trends (both
internal trends and industry averages) and our reasonable estimate of our future expenses. We believe our accruals are
adequate. However, our risk management strategies and techniques may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. If any of the variety of instruments, processes or
strategies we use to manage our exposure to various types of risk are not effective, we may incur losses that are not
covered by our insurance policies or that exceed our accruals or coverage limits.
Additionally, we typically are contractually required to provide proof of insurance for projects on which we
work. Historically, insurance market conditions become more difficult for insurance consumers during periods when
insurance companies suffer significant investment losses as well as casualty losses. Consequently, it is possible that
insurance markets will become more expensive and restrictive. Also, our prior casualty loss history might adversely
affect our ability to procure insurance within commercially reasonable ranges. As such, we may not be able to maintain
commercially reasonable levels of insurance coverage in the future, which could preclude our ability to work on many
projects and increase our overall risk exposure. Our insurance providers are under no commitment to renew our existing
insurance policies in the future; therefore, our ability to obtain necessary levels or kinds of insurance coverage is subject
to market forces outside our control. If we were unable to obtain necessary levels of insurance, it is likely we would be
unable to compete for or work on most projects.
Failure to remain in compliance with covenants under our credit agreement, service our indebtedness, or fund our
other liquidity needs could adversely impact our business.
Our credit agreement and related restrictive and financial covenants are more fully described in Note 9 of
“Notes to the Consolidated Financial Statements.” Our failure to comply with any of these covenants under the credit
agreement, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under
the credit agreement. Default under our credit agreement could result in (1) us no longer being entitled to borrow under
the agreement; (2) termination of the agreement; (3) acceleration of the maturity of outstanding indebtedness under the
agreement; and/or (4) foreclosure on any collateral securing the obligations under the agreement. If we are unable to
service our debt obligations or fund our other liquidity needs, we could be forced to curtail our operations, reorganize
our capital structure (including through bankruptcy proceedings) or liquidate some or all of our assets in a manner that
could cause holders of our securities to experience a partial or total loss of their investment in us. In addition, in
July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling
banks to submit rates for calculation of LIBOR after 2021. At this time, it is not clear that LIBOR will cease to exist, and
if so, what alternative benchmark rate will replace LIBOR, though it is likely that the lenders under our credit agreement
would select as an alternative benchmark rate the forward-looking term rate based on the secured overnight financing
rate published by the Federal Reserve Bank of New York. Under the Eurodollar Rate Loan Option under the Facility
(defined below), the interest rate is determined based on the one- to six-month Eurodollar Rate, which rate corresponds
very closely to rates described in various general business media sources as LIBOR. Any new benchmark rate will likely
not exactly replicate LIBOR, which could impact the determination of interest rates under the Eurodollar Rate Loan
Option.
Our inability to properly utilize our workforce could have a negative impact on our profitability.
The extent to which we utilize our workforce affects our profitability. Underutilizing our workforce could result
in lower gross margins and, consequently, a decrease in short - term profitability. On the other hand, overutilization of our
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workforce could negatively impact safety, employee satisfaction and project execution, leading to a potential decline in
future project awards. The utilization of our workforce is impacted by numerous factors, including:
•
•
•
our estimate of headcount requirements and our ability to manage attrition;
efficiency in scheduling projects and our ability to minimize downtime between project assignments; and
productivity.
If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either
strained or over - burdensome, and we may be unable to increase revenue growth.
The growth that we have experienced in the past, and that we may experience in the future, may provide
challenges to our organization, requiring us to expand our personnel and our operations. Future growth may strain our
infrastructure, operations and other managerial and operating resources. We have also experienced in the past severe
constriction in the markets in which we operate and, as a result, in our operating requirements. Failing to maintain the
appropriate cost structure during a particular economic cycle may result in our incurring costs that affect our
profitability. If our business resources become strained or over - burdensome, our earnings may be adversely affected, and
we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our
labor, managerial or other resources, which could also adversely affect our earnings and our ability to increase revenue
growth.
Increases and uncertainty in our health insurance costs could adversely impact our results of operations and cash
flows.
The costs of employee health insurance have been increasing in recent years due to rising health care costs,
legislative changes, and general economic conditions. Additionally, we may incur additional costs as a result of the
Patient Protection and Affordable Care Act (the “Affordable Care Act”) that was signed into law in March 2010. Future
legislation could also have an impact on our business. The status of the Affordable Care Act, any amendment, repeal or
replacement thereof, is currently uncertain. For example, in December 2019, the United States Court of Appeals for the
Fifth Circuit struck down a central provision of the Affordable Care Act, ruling that the requirement that people have
health insurance was unconstitutional, sending the case back to a federal district judge in Texas to determine which of
the law’s many parts could survive without the mandate. On March 2, 2020, the United States Supreme Court granted
certiorari to review this case, which is expected to be decided by mid-2021. Because of the continued uncertainty about
the implementation of the Affordable Care Act, including the potential for further legal challenges or repeal of that
legislation, it is unclear what the impact of the Affordable Care Act, its amendment thereof, or its potential repeal or
replacement will have on our financial position or results of operations.
Regulatory and Legal Risks
Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and
weaken our financial condition.
We are likely to continue to be named as a defendant in legal proceedings claiming damages from us in
connection with the operation of our business. These actions and proceedings may involve claims for, among other
things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract
or property damage. In addition, we may be subject to class action lawsuits involving allegations of violations of the Fair
Labor Standards Act and state wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of any such actions or proceedings. We also are, and are likely to continue to be, from time
to time a plaintiff in legal proceedings against customers, in which we seek to recover payment of contractual amounts
we are owed as well as claims for increased costs we incur. When appropriate, we establish provisions against possible
exposures, and we adjust these provisions from time to time according to ongoing exposure. If our assumptions and
estimates related to these exposures prove to be inadequate or inaccurate, we could experience a reduction in our
profitability and liquidity and a weakening of our financial condition. In addition, claims, lawsuits and proceedings may
harm our reputation or divert management resources away from operating our business.
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We typically warrant the services we provide, guaranteeing the work performed against defects in workmanship
and the material we supply. Historically, warranty claims have not been material as our customers evaluate much of the
work we perform for defects shortly after work is completed. However, if warranty claims occur, we could be required
to repair or replace warrantied items at our cost. In addition, our customers may elect to repair or replace the warrantied
item by using the services of another provider and require us to pay for the cost of the repair or replacement. Costs
incurred as a result of warranty claims could adversely affect our operating results and financial condition.
Misconduct by our employees, subcontractors or partners or our overall failure to comply with laws or regulations
could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us
to criminal and civil enforcement actions.
Misconduct, fraud, non - compliance with applicable laws and regulations, or other improper activities by one or
more of our employees, directors, executive officers, subcontractors or partners could have a significant negative impact
on our business and reputation. Examples of such misconduct include employee or subcontractor theft, personal
misconduct and failure to comply with safety standards, including regulatory, company or site-specific COVID-19 safety
protocols, laws and regulations, customer requirements, environmental laws and any other applicable laws or
regulations. While we take precautions to prevent and detect these activities, such precautions may not be effective and
are subject to inherent limitations, including human error and fraud. Our failure to comply with applicable laws or
regulations or acts of misconduct could subject us to fines and penalties, harm our reputation, lead to loss of the services
of employees or members of management, damage our relationships with customers, reduce our revenue and profits and
subject us to criminal and civil enforcement actions.
We have subsidiary operations through the United States and are exposed to multiple state and local regulations, as
well as federal laws and requirements applicable to government contractors. Changes in law, regulations or
requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our
costs and have other negative impacts on our business.
Our 139 locations are located in 27 states, which exposes us to a variety of different state and local laws and
regulations, particularly those pertaining to contractor licensing requirements. These laws and regulations govern many
aspects of our business, and there are often different standards and requirements in different locations. In addition, our
subsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory and
contractual requirements. Changes in any of these laws, or any of our subsidiaries’ material failure to comply with them,
can adversely impact our operations by, among other things, increasing costs, distracting management’s time and
attention from other items, and harming our reputation.
As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts
with government entities are subject to audit. Violations of the applicable rules and regulations could result in a
subsidiary being barred from future government contracts.
Government contractors must comply with many regulations and other requirements that relate to the award,
administration and performance of government contracts. A violation of these laws and regulations could result in
imposition of fines and penalties, the termination of a government contract or debarment from bidding on government
contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact other
locations’ ability to bid on and perform government contracts. Additionally, because of our decentralized nature, we face
risks in maintaining compliance with all local, state and federal government contracting requirements. Because 5.7% of
our revenue for the year ended December 31, 2020 was attributable to projects in the government sector, prohibitions
against bidding on future government contracts could have an adverse effect on our financial condition and results of
operations.
Past and future environmental, safety and health regulations could impose significant additional costs on us that
could reduce our profits.
HVAC systems are subject to various environmental statutes and regulations, including the Clean Air Act and
those regulating the production, servicing and disposal of certain ozone - depleting refrigerants used in HVAC systems.
There can be no assurance that the regulatory environment in which we operate will not change significantly in the
future. Various local, state and federal laws and regulations impose licensing standards on technicians who install and
service HVAC systems. Additional laws, regulations and standards apply to contractors who perform work that is being
funded by public money, particularly federal public funding. Our failure to comply with these laws and regulations could
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subject us to substantial fines, the loss of our licenses or potentially debarment from future publicly funded work. It is
impossible to predict the full nature and effect of judicial, legislative or regulatory developments relating to health and
safety regulations and environmental protection regulations applicable to our operations. Additionally, industries in
which our customers or potential customers operate may be affected by new or changing environmental, safety, health or
other regulatory requirements, leading to decreased demand for our services and potentially impacting our business,
financial condition, results of operations, cash flows and ability to grow.
Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher
operating costs, negatively impact employee morale and result in higher employee turnover.
Our projects are conducted at a variety of sites including construction sites and industrial facilities. Each
location is subject to numerous safety risks, including electrocutions, fires, explosions, mechanical failures,
weather - related incidents, transportation accidents, damage to equipment and, with respect to indoor sites, an increased
risk of COVID-19 outbreaks. These hazards can cause personal injury and loss of life, severe damage to or destruction of
property and equipment and other consequential damages and could lead to suspension of operations, large damage
claims and, in extreme cases, criminal liability. While we have taken what we believe are appropriate precautions to
minimize safety risks, we have experienced serious accidents, including fatalities, in the past and may experience
additional accidents in the future. Serious accidents may subject us to penalties, civil litigation or criminal prosecution.
Claims for damages to property or persons, including claims for bodily injury or loss of life, could result in significant
costs and liabilities, which could adversely affect our financial condition and results of operations. Poor safety
performance could also jeopardize our relationships with our customers, negatively impact employee morale and harm
our reputation.
Changes in United States trade policy, including the imposition of tariffs and the resulting consequences, may have a
material adverse impact on our business and results of operations.
As a result of policy changes or shifting proposals by the U.S. government, there may be greater restrictions and
economic disincentives on international trade. For example, the U.S. government has pursued a new approach to trade
policy, including renegotiating or terminating certain existing bilateral or multi-lateral trade agreements. It has also
imposed tariffs on certain foreign goods and has raised the possibility of imposing significant, additional tariff increases
or expanding the tariffs to capture other types of goods. These tariffs and other changes in U.S. trade policy have in the
past and could continue to trigger retaliatory actions by affected countries, and certain foreign governments have
instituted or are considering imposing retaliatory measures on certain U.S. goods. We, our suppliers and our customers
import certain raw materials, components and other products from foreign suppliers. As such, the adoption and
expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade
agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our
suppliers, and the United States economy, which in turn could have an adverse effect on our business, financial condition
and results of operations.
Tax matters, including changes in corporate tax laws and disagreements with taxing authorities, could impact our
results of operations and financial condition.
We conduct business across the United States and file income taxes in various tax jurisdictions. Our effective
tax rates could be affected by many factors, some of which are outside of our control, including changes in tax laws and
regulations in the various tax jurisdictions in which we file income taxes. For instance, the Tax Cuts and Jobs Act was
enacted into law in December 2017. While certain portions of the Tax Cuts and Jobs Act seem to have had a positive
impact on the Company’s results of operations, the overall impact of the Tax Cuts and Jobs Act is uncertain and our
business and financial condition could be adversely affected. Furthermore, to the extent that certain of our customers are
negatively affected by the Tax Cuts and Jobs Act and/or any uncertainty around its implementation or enforcement, they
may reduce spending and defer, delay or cancel projects or contracts. Reduced government revenue resulting from
changes to tax law may also lead to reduced government spending, which may negatively impact our government
contracting business. It is also unknown if and to what extent various states will conform to the changes enacted by the
Tax Cuts and Jobs Act.
Issues relating to tax audits or examinations and any related interest or penalties and uncertainty in obtaining
deductions or credits claimed in various jurisdictions could also impact our effective tax rates. Our results of operations
are reported based on our determination of the amount of taxes we owe in various tax jurisdictions. Significant judgment
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is required in determining our provision for income taxes and our determination of tax liability is always subject to
review or examination by tax authorities in applicable tax jurisdictions. An adverse outcome of such a review of
examination could adversely affect our operating results and financial condition. Further, the results of tax examinations
and audits could have a negative impact on our financial results and cash flows where the results differ from the
liabilities recorded in our financial statements.
Risks Related to Our Common Stock
Our common stock, which is listed on the New York Stock Exchange, has from time to time experienced significant
price and volume fluctuations. These fluctuations are likely to continue in the future, and our stockholders may
suffer losses.
The market price of our common stock may change significantly in response to various factors and events
beyond our control. A variety of events may cause the market price of our common stock to fluctuate significantly,
including the following: (i) the risk factors described in this Annual Report on Form 10 - K; (ii) a shortfall in operating
revenue or net income from that expected by securities analysts and investors; (iii) quarterly fluctuations in our operating
results; (iv) changes in securities analysts’ estimates of our financial performance or that of our competitors or
companies in our industry generally; (v) general conditions in our customers’ industries, including as a result of the
ongoing COVID-19 pandemic; (vi) general conditions in the securities markets; (vii) our announcements of significant
contracts, milestones and acquisitions; (viii) our relationship with other companies; (ix) our investors’ view of the
sectors and markets in which we operate; and (x) additions or departures of key personnel. Some companies that have
volatile market prices for their securities have been subject to security class action suits filed against them. If a suit were
to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s
attention and resources. This could have a material adverse effect on our business, results of operations and financial
condition.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public market or otherwise, either by us, a
member of management or a major stockholder, or the perception that these sales could occur, could depress the market
price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
Our charter contains certain anti - takeover provisions that may inhibit or delay a change in control.
Our certificate of incorporation authorizes our Board of Directors to issue, without stockholder approval, one or
more series of preferred stock having such preferences, powers and relative, participating, optional and other rights
(including preferences over the common stock respecting dividends and distributions and voting rights) as the Board of
Directors may determine. The issuance of this “blank - check” preferred stock could render more difficult or discourage
an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Additionally, certain
provisions of the Delaware General Corporation Law or even certain provisions of our credit agreement may also
discourage takeover attempts that have not been approved by the Board of Directors.
General Risk Factors
Failure or circumvention of our disclosure controls and procedures or internal controls over financial reporting
could seriously harm our financial condition, results of operations, and our business.
We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of
our disclosure controls and internal controls over financial reporting. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the
objectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financial
reporting could harm our financial condition and results of operations.
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Force majeure events, including natural disasters, outbreaks of infectious disease, such as COVID-19, and terrorists’
actions, could negatively impact our business, which may affect our financial condition, results of operations or cash
flows.
Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and
man - made disasters, as well as outbreaks of infectious disease (e.g., COVID-19) and terrorist actions, could negatively
impact us. We typically negotiate contract language where we are granted certain relief from force majeure events in
private client contracts and review and attempt to mitigate force majeure events in both public and private client
contracts. We remain obligated to perform our services after most extraordinary events subject to relief that may be
available to us pursuant to a force majeure clause. If we are not able to react quickly to force majeure events, our
operations may be affected significantly, which would have a negative impact on our financial position, results of
operations, cash flows and liquidity and could also negatively affect our reputation in the marketplace.
Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or
injure employees, contractors, customers or the public and result in liability to us.
Intentional acts of destruction could damage or destroy our facilities, reducing our operational production
capacity and potentially requiring us to repair or replace our facilities at substantial cost. Additionally, employees,
contractors and the public could suffer substantial physical injury from acts of terrorism for which we could be liable.
Governmental authorities may also impose security or other requirements that could make our operations more difficult
or costly. The consequences of any such actions could adversely affect our financial condition and results of operations.
We are required to assess and report on our internal controls each year. Findings of inadequate internal controls
could reduce investor confidence in the reliability of our financial information.
As directed by the Sarbanes - Oxley Act, the SEC adopted rules generally requiring public companies, including
us, to include in their annual reports on Form 10 - K a report of management that contains an assessment by management
of the effectiveness of our internal control over financial reporting. In addition, the independent registered public
accounting firm auditing our financial statements must report on the effectiveness of our internal control over financial
reporting. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by
the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and records of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
We may discover in the future that we have deficiencies in the design and operation of our internal controls. If
any of the deficiencies in our internal control, either by itself or in combination with other deficiencies, becomes a
“material weakness”, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis, we may be unable to conclude that we have
effective internal control over financial reporting. In such event, investors could lose confidence in the reliability of our
financial statements, which may significantly harm our business and cause our stock price to decline. In addition, the
failure to maintain effective internal controls could also result in unauthorized transactions.
Rising inflation and/or interest rates could have an adverse effect on our business, financial condition and results of
operations.
Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on our
business. If our costs were to become subject to significant inflationary pressures or interest rate increases, we may not
be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our financial
position and results of operations.
22
Changes in accounting rules and regulations could adversely affect our financial results.
Accounting rules and regulations are subject to review and interpretation by the Financial Accounting
Standards Board (the “FASB”), the SEC and various other governing bodies. A change in U.S. GAAP could have a
significant effect on our reported financial results. Additionally, the adoption of new or revised accounting principles
could require that we make significant changes to our systems, processes and controls. We cannot predict the effect of
future changes to accounting principles, which could have a significant effect on our reported financial results and/or our
results of operations, cash flows and liquidity.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
As of December 31, 2020, we owned 16 properties. Other than these owned properties, we lease the real
property and buildings from which we operate. Our facilities are located in 27 states and consist of offices, shops and
fabrication, maintenance and warehouse facilities. Generally, leases range from three to ten years and are on terms we
believe to be commercially reasonable. A majority of these premises are leased from individuals or entities with whom
we have no other business relationship. In certain instances, these leases are with current or former employees. To the
extent we renew, enter into leases or otherwise change leases with current or former employees, we enter into such
agreements on terms that reflect a fair market valuation for the properties. Leased premises range in size from
approximately 1,000 square feet to 110,000 square feet. To maximize available capital, we generally intend to continue
to lease our properties, but may consider further purchases of property where we believe ownership would be more
economical. We believe that our facilities are sufficient for our current needs.
We lease our executive and administrative offices in Houston, Texas.
ITEM 3. Legal Proceedings
We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various
insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals
for probable losses and related legal fees associated with certain litigation in our Consolidated Financial Statements.
While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability
arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash
flows or financial condition, after giving effect to provisions already recorded.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 4A. Executive Officers of the Registrant
Executive officers are appointed by our Board of Directors and hold office until their successors are elected and
duly qualified. The following persons serve as executive officers of the Company.
Brian E. Lane, age 63, has served as our Chief Executive Officer and President since December 2011 and as a
director since November 2010. Mr. Lane served as our President and Chief Operating Officer from March 2010 until
December 2011. Mr. Lane joined the Company in October 2003 and served as Vice President and then Senior Vice
President for Region One of the Company until he was named Executive Vice President and Chief Operating Officer in
January 2009. Prior to joining the Company, Mr. Lane spent fifteen years at Halliburton, the global service and
equipment company devoted to energy, industrial, and government customers. During his tenure at Halliburton, he held
various positions in business development, strategy, and project initiatives. He departed as the Regional Director of
Europe and Africa. Mr. Lane’s additional experience includes serving as a Regional Director of Capstone Turbine
Corporation, a distributed power manufacturer. He also was a Vice President of Kvaerner, an international engineering
and construction company where he focused on the chemical industry. Mr. Lane holds a Bachelor of Science in
Chemistry from the University of Notre Dame and a Master of Business Administration from Boston College.
23
William George, age 56, has served as our Executive Vice President and Chief Financial Officer since
May 2005, was our Senior Vice President, General Counsel and Secretary from May 1998 to May 2005, and was our
Vice President, General Counsel and Secretary from March 1997 to April 1998. Since October 2011, Mr. George has
also served as Regional Vice President for Region 5. Mr. George was a member of our founding management team in
connection with our formation in 1997. From October 1995 to February 1997, Mr. George was Vice President and
General Counsel of American Medical Response, Inc., a publicly - traded healthcare transportation company. From
September 1992 to September 1995, Mr. George practiced corporate and antitrust law at Ropes & Gray, a Boston,
Massachusetts, law firm. Mr. George holds a Bachelor of Science in Economics from Brigham Young University and a
Juris Doctorate from Harvard Law School.
Julie S. Shaeff, age 55, has served as our Senior Vice President and Chief Accounting Officer since May 2005,
was our Vice President and Corporate Controller from March 2002 to May 2005, and was our Assistant Corporate
Controller from September 1999 to February 2002. From 1996 to August 1999, Ms. Shaeff was Financial Accounting
Manager—Corporate Controllers Group for Browning - Ferris Industries, Inc., a publicly - traded waste services company.
From 1987 to 1995, she held various positions with Arthur Andersen LLP. Ms. Shaeff is a Certified Public Accountant
and holds a Bachelor of Business Administration in Accounting from Texas A&M University.
Trent T. McKenna, age 48, has served as Chief Operating Officer and Senior Vice President since
January 2021. Mr. McKenna previously served as our Senior Vice President and Vice President – Region 4 from
January 2019 to December 2020; Senior Vice President, General Counsel and Secretary from August 2013 to
December 2018; Vice President, General Counsel and Secretary from May 2005 to August 2013; and Associate General
Counsel from August 2004 to May 2005. From February 1999 to August 2004, Mr. McKenna was a practicing attorney
in the area of complex commercial litigation in the Houston, Texas, office of Akin Gump Strauss Hauer & Feld LLP, an
international law firm. Mr. McKenna earned a Bachelor of Arts degree in English from Brigham Young University and
his Juris Doctorate from Duke University School of Law.
Laura F. Howell, age 33, has served as Vice President and General Counsel for the Company since
January 2019. Prior to her current position, Ms. Howell served as the Associate General Counsel from January 2018 to
December 2018 and as Senior Counsel, Corporate from November 2014 to December 2017. Prior to joining the
Company, she was an associate in the corporate department of the Houston office of Latham & Watkins, LLP from
November 2013 to October 2014. From September 2012 to October 2013, Ms. Howell was an associate in the corporate
department of the Silicon Valley office of Fenwick & West, LLP. Ms. Howell holds a Bachelor of Arts in Economics
from Wake Forest University and a Juris Doctorate from Stanford Law School.
Terry A. Young, age 58, has served as Senior Vice President of Service for the Company since January 2019.
Prior to his current position, Mr. Young served as a Regional Vice President of Service for the Company from June 2013
to December 2018 and as Director of Business Development from May 2011 to June 2013. Mr. Young joined the
Company after working in various Executive GM and VP positions in Asia Pacific and North American organizations,
including Triple M Mechanical, Daikin (formerly McQuay International) and the Trane Company. He has spent more
than 35 years in the commercial HVAC construction and services industry in various roles including technical,
engineering, business development, project and strategic activities. Mr. Young has 6Sigma & PMI certifications and is a
graduate of the TAFE College of New South Wales, Australia where he completed studies in F&M Engineering.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our Common Stock is traded under the symbol FIX on the New York Stock Exchange.
As of February 19, 2021, there were approximately 319 stockholders of record of our Common Stock, and the
last reported sale price on that date was $60.56 per share.
We expect to continue paying cash dividends quarterly, although there is no assurance as to future dividends
because they depend on future earnings, capital requirements, and financial condition. In addition, our credit agreement
may limit the amount of dividends we can pay at any time that our Total Leverage Ratio exceeds 2.00 to 1.00.
24
The following Corporate Performance Graph and related information shall not be deemed “soliciting material”
or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the
Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Comfort Systems USA, Inc., the S&P 500 Index
and the Russell 2000 Index
$250
$200
$150
$100
$50
$0
12/15
12/16
12/17
12/18
12/19
12/20
Comfort Systems USA, Inc.
S&P 500
Russell 2000
*$100 invested on 12/31/15 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2021 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2021 Russell Investment Group. All rights reserved.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to
1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the
number of shares that may be acquired under the program and approved extensions of the program. On December 8,
2020, the Board approved an extension to the program by increasing the shares authorized for repurchase by 0.7 million
shares. Since the inception of the repurchase program, the Board has approved 10.3 million shares to be repurchased. As
of December 31, 2020, we have repurchased a cumulative total of 9.3 million shares at an average price of $19.63 per
share under the repurchase program.
The share repurchases will be made from time to time at our discretion in the open market or privately
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve
months ended December 31, 2020, we repurchased 0.7 million shares for approximately $30.1 million at an average
price of $43.99 per share.
25
During the year ended December 31, 2020, we purchased our common shares in the following amounts at the
following average prices:
Total Number of Shares Maximum Number of
Period
January 1 - January 31 . . . . . . . . . . . .
February 1 - February 29 . . . . . . . . . .
March 1 - March 31 . . . . . . . . . . . . . . .
April 1 - April 30 . . . . . . . . . . . . . . . . .
May 1 - May 31 . . . . . . . . . . . . . . . . . .
June 1 - June 30 . . . . . . . . . . . . . . . . . .
July 1 - July 31 . . . . . . . . . . . . . . . . . .
August 1 - August 31 . . . . . . . . . . . . .
September 1 - September 30 . . . . . . . .
October 1 - October 31 . . . . . . . . . . . .
November 1 - November 30 . . . . . . . .
December 1 - December 31 . . . . . . . .
or Programs
or Programs (1)
Purchased as Part of
Shares that May Yet Be
Total Number of Average Price Publicly Announced Plans Purchased Under the Plans
Shares Purchased Paid Per Share
49.04
47.58
35.42
—
36.72
38.22
39.22
51.00
51.10
46.62
47.63
51.21
43.99
26,606 $
17,724 $
193,029 $
— $
3,000 $
49,991 $
24,455 $
23,966 $
109,387 $
37,442 $
166,325 $
32,709 $
684,634 $
8,653,973
8,671,697
8,864,726
8,864,726
8,867,726
8,917,717
8,942,172
8,966,138
9,075,525
9,112,967
9,279,292
9,312,001
9,312,001
894,196
876,472
683,443
683,443
680,443
630,452
605,997
582,031
472,644
435,202
268,877
981,750
981,750
(1) Purchased as part of a program announced on March 29, 2007 under which, since the inception of this program,
10.3 million shares have been approved for repurchase.
Under our 2012 Equity Incentive Plan and 2017 Omnibus Incentive Plan, employees may elect to have us
withhold common shares to satisfy statutory federal, state and local tax withholding obligations arising on the vesting of
restricted stock awards and exercise of options. When we withhold these shares, we are required to remit to the
appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of the common
shares by us on the date of withholding.
ITEM 6. Selected Financial Data
The following selected historical financial data has been derived from our audited financial statements and
should be read in conjunction with the historical Consolidated Financial Statements and related notes:
2020
Year Ended December 31,
2018
(in thousands, except per share amounts)
2019
2017
2016
STATEMENT OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 $ 2,615,277 $ 2,182,879 $ 1,787,922 $ 1,634,340
101,569
Operating income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 190,651 $
64,896
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,139 $
1.74
4.11 $
Basic income per share from continuing operations . . . . . $
1.72
4.09 $
Diluted income per share from continuing operations . . . . $
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.275
0.425 $
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118,948 $
142,642 $
Total assets (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,757,355 $ 1,505,012 $ 1,062,564 $
76,918 $
Total debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235,733 $
498,047 $
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $ 696,429 $
163,639 $
114,324 $
3.10 $
3.08 $
0.395 $
150,238 $
112,903 $
3.03 $
3.00 $
0.330 $
99,260 $
55,272 $
1.48 $
1.47 $
0.295 $
115,629 $
881,120 $
60,539 $
417,945 $
98,276
708,903
2,811
376,633
226,135 $
585,304 $
182,187 $
(1) Included in operating income is a goodwill impairment charge of $1.1 million for 2017. There were no goodwill
impairment charges for 2020, 2019, 2018 or 2016.
(2) The impact of adoption of the new lease accounting standard is reflected in total assets in 2019.
26
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and related notes included elsewhere in this annual report on Form 10 - K. Also see “Forward - Looking
Statements” discussion.
Introduction and Overview
We are a national provider of comprehensive mechanical and electrical installation, renovation, maintenance,
repair and replacement services within the mechanical and electrical services industries. We operate primarily in the
commercial, industrial and institutional markets and perform most of our work in industrial, healthcare, education,
office, technology, retail and government facilities. We operate our business in two business segments: mechanical and
electrical.
Nature and Economics of Our Business
In our mechanical business segment, customers hire us to ensure HVAC systems deliver specified or generally
expected heating, cooling, conditioning and circulation of air in a facility. This entails installing core system equipment
such as packaged heating and air conditioning units, or in the case of larger facilities, separate core components such as
chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elements such as
piping and ducting.
In our electrical business segment, our principal business activity is electrical construction and engineering in
the commercial and industrial field. We also perform electrical logistics services, electrical service work, and electrical
construction and engineering services.
In both our mechanical and electrical business segments, our responsibilities usually require conforming the
systems to pre - established engineering drawings and equipment and performance specifications, which we frequently
participate in establishing. Our project management responsibilities include staging equipment and materials to project
sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any
subcontractors we might use to deliver our portion of the work.
Approximately 87.0% of our revenue is earned on a project basis for installation services in newly constructed
facilities or for replacement of systems in existing facilities. When competing for project business, we usually estimate
the costs we will incur on a project, and then propose a bid to the customer that includes a contract price and other
performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and
provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project
costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we
might forego by committing capacity to this project, and other costs that we incur to support our operations but which
are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the
criteria on which customers select a provider vary widely and include factors such as quality, technical expertise,
on - time performance, post - project support and service, and company history and financial strength, we believe that price
for value is the most influential factor for most customers in choosing a mechanical or electrical installation and service
provider.
After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we
will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall
price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work
conditions that result in unexpected additional work are usually subject to additional payment from the customer via
what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as
we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a
small portion of progress billings or contract price to be withheld by the customer until after we have completed the
work. Amounts withheld under this practice are known as retention or retainage.
Labor, materials and overhead costs account for the majority of our cost of service. Labor management and
utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if
our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can
27
experience reduced profits or even significant losses on fixed price project work. We also perform some project work on
a cost - plus or a time and materials basis, under which we are paid our costs incurred plus an agreed - upon profit margin,
and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than
fixed - price contract margins because there is less risk of unrecoverable cost overruns in cost - plus or time and materials
work.
As of December 31, 2020, we had 5,687 projects in process. Our average project takes six to nine months to
complete, with an average contract price of approximately $871,000. Our projects generally require working capital
funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until
late in the job. Our average project duration together with typical retention terms as discussed above generally allow us
to complete the realization of revenue and earnings in cash within one year. We have what we consider to be a
well - diversified distribution of revenue across end - use sectors that we believe reduces our exposure to negative
developments in any given sector. Because of the integral nature of our services to most buildings, we have the legal
right in almost all cases to attach liens to buildings or related funding sources when we have not been fully paid for
installing systems, except with respect to some government buildings. The service work that we do, which is discussed
further below, usually does not give rise to lien rights.
We also perform larger projects. Taken together, projects with contract prices of $1 million or more totaled
$4.3 billion of aggregate contract value as of December 31, 2020, or approximately 85%, out of a total contract value for
all projects in progress of $5.0 billion. Generally, projects closer in size to $1 million will be completed in one year or
less. It is unusual for us to work on a project that exceeds two years in length.
A stratification of projects in progress as of December 31, 2020, by contract price, is as follows:
Contract Price of Project
Under $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1 million - $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5 million - $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10 million - $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate
Contract
Price Value
(millions)
No. of
Projects
4,905 $
575
94
56
57
5,687 $
644.0
1,283.4
692.3
684.9
1,648.3
4,952.9
In addition to project work, approximately 13.0% of our revenue represents maintenance and repair service on
already installed HVAC, electrical, and controls systems. This kind of work usually takes from a few hours to a few days
to perform. Prices to the customer are based on the equipment and materials used in the service as well as technician
labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to
thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid
regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements
typically are for one or more years and frequently contain thirty- to sixty - day cancellation notice periods.
A relatively small portion of our revenue comes from national and regional account customers. These
customers typically have multiple sites and contract with us to perform maintenance and repair service. These contracts
may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch
technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance
being subcontracted to third parties that meet our performance qualifications.
Profile and Management of Our Operations
We manage our 37 operating units based on a variety of factors. Financial measures we emphasize include
profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving
project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support
expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original
estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we
emphasize include project selection, estimating, pricing, management and execution practices, labor utilization, safety,
28
training, and the make - up of both existing backlog as well as new business being pursued, in terms of project size,
technical application, facility type, end - use customers and industries and location of the work.
Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit
managers is an important factor in our business, particularly in view of the relative uniqueness of each market and
operation, the importance of relationships with customers and other market participants, such as architects and
consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly,
we devote considerable attention to operating unit management quality, stability, and contingency planning, including
related considerations of compensation and non - competition protection where applicable.
Economic and Industry Factors
As a mechanical and electrical services provider, we operate in the broader nonresidential construction services
industry and are affected by trends in this sector. While we do not have operations in all major cities of the United
States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing of our
services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor the
views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including
trends in gross domestic product, interest rates, business investment, employment, demographics and the fiscal condition
of federal, state and local governments.
Spending decisions for building construction, renovation and system replacement are generally made on a
project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital,
time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly
concerns about economic and financial conditions and trends. We have experienced periods of time when economic
weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.
Operating Environment and Management Emphasis
Nonresidential building construction and renovation activity, as reported by the federal government, declined
steeply over the four-year period from 2009 to 2012, and 2013 and 2014 activity levels were relatively stable at the low
levels of the preceding years. During the five-year period from 2015 to 2019, there was an increase in overall activity
levels, and then in early 2020 the advent of a global pandemic led to some delays in service and construction, including
the potential for delayed project starts and air pockets as the year ended.
We have a credit facility in place, with terms we believe are favorable, that does not expire until January 2025.
As of December 31, 2020, we had $330.5 million of credit available to borrow under our credit facility. We have strong
surety relationships to support our bonding needs, and we believe our relationships with the surety markets are strong
and benefit from our operating history and financial position. We have generated positive free cash flow in each of the
last twenty-two calendar years and will continue our emphasis in this area. We believe that the relative size and strength
of our Balance Sheet and surety relationships as compared to most companies in our industry represent competitive
advantages for us.
As discussed at greater length in “Results of Operations” below, we expect price competition to continue as our
customers and local and regional industry participants compete for customers. We will continue to invest in our service
business, to pursue the more active sectors in our markets, and to emphasize our regional and national account business.
Critical Accounting Policies
Our critical accounting policies are based upon the significance of the accounting policy to our overall financial
statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective
assessments. Our most critical accounting policy is revenue recognition. We recognize revenue over time for all of our
services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we
have the right to bill the customer as costs are incurred. The customer typically controls the work in process as
evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a
reasonable profit to deliver products or services that do not have an alternative use to the Company.
For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the
performance obligation. The selection of the method to measure progress towards completion requires judgment and is
29
based on the nature of the products or services to be provided. We generally use the cost to cost measure of progress for
our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under
the cost to cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs
incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated
fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and
subcontractors’ costs, other direct costs and an allocation of indirect costs.
For a small portion of our business in which our services are delivered in the form of service maintenance
agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is
to maintain the customer’s mechanical system for a specific period of time. Similar to jobs, we recognize revenue over
time; however, for service maintenance agreements in which the full cost to provide services may not be known, we
generally use an input method to recognize revenue, which is based on the amount of time we have provided our services
out of the total time we have been contracted to perform those services.
As discussed elsewhere in this annual report on Form 10 - K, our business has two service functions:
(i) installation, which we account for under the percentage of completion method, and (ii) maintenance, repair and
replacement, which we account for as the services are performed, or in the case of replacement, under the percentage of
completion method. In addition, we identified other critical accounting policies related to our allowance for credit losses,
accounting for leases, the recording of our self - insurance liabilities, valuation of deferred tax assets, accounting for
acquisitions and the recoverability of goodwill and identifiable intangible assets. These accounting policies, as well as
others, are described in Note 2 to the Consolidated Financial Statements included elsewhere in this annual report on
Form 10 - K.
Percentage of Completion Method of Accounting
Approximately 87.0% of our revenue was earned on a project basis and recognized through the percentage of
completion method of accounting during 2020. Under this method, contract revenue recognizable at any time during the
life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs
incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process to
obtain installation contracts, we estimate our contract costs, which include all direct materials, labor and subcontract
costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. These contract costs are included in our results of operations under the caption “Cost of Services.” Then, as we
perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract
and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is
performed. Subcontractor labor is recognized as the work is performed. Non - labor project costs consist of purchased
equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to
job specifications and is a value-added element to our work. The costs are considered to be incurred when title is
transferred to us, which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and piping,
are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of
the job. Other materials costs are generally recorded when delivered to the work site. This measurement and comparison
process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective
assessments and judgments.
We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the
start of a project. On rare occasions, when significant pre - contract costs are incurred, they are capitalized and amortized
on a percentage of completion basis over the life of the contract. We do not currently have any capitalized obtainment or
fulfillment costs on our Balance Sheet and did not incur any impairment loss on such costs in the current year.
Project contracts typically provide for a schedule of billings or invoices to the customer based on our job-to-
date percentage of completion of specific tasks inherent in the fulfillment of our performance obligation(s). The
schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract
revenue recognized in our Statement of Operations can and usually does differ from amounts that can be billed or
invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on
a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are
reflected as a current asset in our Balance Sheet under the caption “Costs and estimated earnings in excess of billings.”
Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract
revenue recognized on the contract are reflected as a current liability in our Balance Sheet under the caption “Billings in
excess of costs and estimated earnings.”
30
The percentage of completion method of accounting is also affected by changes in job performance, job
conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore,
revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these
revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a
loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such
conclusion is reached, regardless of the percentage of completion of the contract.
Revisions to project costs and conditions can give rise to change orders under which there is an agreement
between the customer and us that the customer pays an additional or reduced contract price. Revisions can also result in
claims we might make against the customer to recover project variances that have not been satisfactorily addressed
through change orders with the customer. Except in certain circumstances, we do not recognize revenue or margin based
on change orders or claims until they have been agreed upon with the customer. The amount of revenue associated with
unapproved change orders and claims was immaterial for the year ended December 31, 2020.
Variations from estimated project costs could have a significant impact on our operating results, depending on
project size, and the recoverability of the variation via additional customer payments.
Accounting for Allowance for Credit Losses
Effective January 1, 2020, we adopted the requirements of Accounting Standards Update (ASU) No. 2016-13,
“Financial Instruments – Credit Losses (Topic 326).” For additional information on the new standard and the impact on
our results of operations, refer to our Summary of Significant Accounting Policies in Note 2 to the Consolidated
Financial Statements.
We are required to estimate and record the expected credit losses over the contractual life of our financial assets
measured at amortized cost, including billed and unbilled accounts receivable, other receivables and costs and estimated
earnings in excess of billings. Accounts receivable include amounts from work completed in which we have billed or
have an unconditional right to bill our customers. Our trade receivables are contractually due in less than a year.
We estimate our credit losses using a loss-rate method for each of our identified portfolio segments. Our
portfolio segments are construction, service and other. While our construction and service financial assets are often with
the same subset of customers and industries, our construction financial assets will generally have a lower loss-rate than
service financial assets due to lien rights, which we are more likely to have on construction jobs. These lien rights result
in lower credit loss expenses on average compared to receivables that do not have lien rights. Financial assets classified
as Other include receivables that are not related to our core revenue producing activities, such as receivables related to
our acquisition activity from former owners, our vendor rebate program or receivables for estimated losses in excess of
our insurance deductible, which are accrued with a corresponding accrued insurance liability.
Loss rates for our portfolios are based on numerous factors, including our history of credit loss expense by
portfolio, the financial strength of our customers and counterparties in each portfolio, the aging of our receivables, our
expectation of likelihood of payment, macroeconomic trends in the U.S. and the current and forecasted non-residential
construction market trends in the U.S.
In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific
receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as
concerns about a specific customer going bankrupt and no longer being able to pay the receivables due to us. These
estimates are evaluated and adjusted as needed when additional information is received.
Accounting for Leases
We lease certain facilities, vehicles and equipment under noncancelable operating leases. The most significant
portion of these noncancelable operating leases are for the facilities occupied by our corporate office and our operating
locations. Leases with an initial term of 12 months or less are not recorded on the Balance Sheet. We account for lease
components separately from the non-lease components. We have certain leases with variable payments based on an
index as well as some short-term leases on equipment and facilities. Lease right-of-use assets and liabilities are
recognized at commencement date based on the present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments.
31
The lease terms generally range from three to ten years. Some leases include one or more options to renew,
which may be exercised to extend the lease term. We include the exercise of lease renewal options in the lease term
when it is reasonably certain that we will exercise the option and such exercise is at our sole discretion. A majority of the
Company’s real property leases are with individuals or entities with whom we have no other business relationship.
However, in certain instances the Company enters into real property leases with current or former employees.
If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the
remaining lease payments under the term of the lease. Our lease agreements do not contain any material residual value
guarantees or material restrictive covenants. On rare occasions, we rent or sublease certain real estate assets that we no
longer use to third parties.
Accounting for Self - Insurance Liabilities
We are substantially self - insured for workers’ compensation, employer’s liability, auto liability, general
liability and employee group health claims in view of the relatively high per - incident deductibles we absorb under our
insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and
industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our
accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and
longer - developing risks—workers’ compensation, auto liability and general liability—are reviewed by a third-party
actuary quarterly.
We believe these accruals are adequate. However, insurance liabilities are difficult to estimate due to unknown
factors, including the severity of an injury, the determination of our liability in proportion to other parties, timely
reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the
effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and
estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such
experience becomes known.
Accounting for Deferred Tax Assets
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is
uncertain. In assessing the realizability of deferred tax assets, we must consider whether it is more-likely-than-not some
portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and
negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of
deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning
strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive
evidence.
Acquisitions
We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and
liabilities, based on fair value estimates as of the date of acquisition.
Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent
upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized
liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any
differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in
income from operations.
Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their
acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies
cannot be determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be
reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information
regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.
Recoverability of Goodwill and Identifiable Intangible Assets
Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess
goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.
32
When the carrying value of a given reporting unit exceeds its fair value, a goodwill impairment loss is recorded
for this difference, not to exceed the carrying amount of goodwill. The requirements for assessing whether goodwill has
been impaired involve market - based information. This information, and its use in assessing goodwill, entails some
degree of subjective assessment.
We perform our annual impairment testing as of October 1, and any impairment charges resulting from this
process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of
operating and financial independence of each unit and our related management of them. We perform our annual
goodwill impairment testing at the reporting unit level. We perform a goodwill impairment review for each of our
operating units, as we have determined that each of our operating units are reporting units.
In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine
whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value
of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is
more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to
perform any further testing. If we conclude otherwise, or if we elect to perform a quantitative assessment, then we
calculate the fair value of the reporting unit and compare the fair value with the carrying value of the reporting unit.
We estimate the fair value of the reporting unit based on a market approach and an income approach, which
utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow
model include discount rates, cash flow projections, projected long - term growth rates and the determination of terminal
values. The market approach utilizes market multiples of invested capital from comparable publicly traded companies
(“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and
earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).
There are significant inherent uncertainties and management judgment involved in estimating the fair value of
each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of
our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current
estimates and assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in
future periods.
We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or
market condition may result in adjustments to recorded intangible asset balances or their useful lives.
Results of Operations (in thousands):
2020
Year Ended December 31,
2019
2018
Revenue . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 100.0 % $ 2,615,277 100.0 % $ 2,182,879 100.0 %
79.6 %
Cost of services . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . .
20.4 %
Selling, general and administrative
80.9 % 2,113,334
501,943
19.1 %
80.8 % 1,736,600
446,279
19.2 %
2,309,676
546,983
expenses . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Changes in the fair value of
357,777
(1,445)
190,651
103
(8,385)
12.5 %
(0.1)%
6.7 %
—
(0.3)%
340,005
(1,701)
163,639
224
(9,317)
13.0 %
(0.1)%
6.3 %
—
(0.4)%
296,986
(945)
150,238
73
(3,710)
contingent earn-out obligations . . . .
9,119
52
Other income (expense) . . . . . . . . . . .
191,540
Income before income taxes . . . . . . . .
Provision for income taxes . . . . . . . . .
41,401
Net income . . . . . . . . . . . . . . . . . . . . . . $ 150,139
0.3 %
—
6.7 %
$
(2,991)
187
151,742
37,418
114,324
(0.1)%
—
5.8 %
$
(2,066)
4,141
148,676
35,773
112,903
13.6 %
—
6.9 %
—
(0.2)%
(0.1)%
0.2 %
6.8 %
2020 Compared to 2019
We had 35 operating locations as of December 31, 2019. In the second quarter of 2020, we completed the
acquisition of TAS Energy Inc. (“TAS”), which reports as a separate operating location. In the fourth quarter of 2020,
33
we completed the acquisition of TEC Industrial Construction and Maintenance (“T E C”), which reports as a separate
operating location. As of December 31, 2020, we had 37 operating locations. Acquisitions are included in our results of
operations from the respective acquisition date. The same - store comparison from 2020 to 2019, as described below,
excludes T E C, which was acquired December 31, 2020, eleven months of results for our electrical contractor in North
Carolina, which was acquired February 1, 2020 and reports together with our existing North Carolina operation, nine
months of results for TAS, which was acquired April 1, 2020 and three months of results for Walker, which was
acquired April 1, 2019. An operating location is included in the same - store comparison on the first day it has comparable
prior year operating data, except for immaterial acquisitions that were absorbed and integrated, or “tucked-in,” with
existing operations.
Revenue—Revenue increased $241.4 million, or 9.2%, to $2.86 billion in 2020 compared to 2019. The increase
included an 11.6% increase related to the TAS, North Carolina electrical contractor and Walker acquisitions and a 2.4%
decrease in revenue related to same - store activity.
The following table presents our operating segment revenue (in thousands, except percentages):
Year Ended December 31,
2020
2019
Revenue:
Mechanical Services . . . . . . . . . . . $ 2,413,016
Electrical Services . . . . . . . . . . . .
443,643
Total . . . . . . . . . . . . . . . . . . . . . $ 2,856,659
84.5 % $ 2,251,560
363,717
15.5 %
100.0 % $ 2,615,277
86.1 %
13.9 %
100.0 %
Revenue for our mechanical services segment increased $161.5 million, or 7.2%, to $2.41 billion in 2020
compared to 2019. Of this increase, $106.4 million was attributable to the TAS acquisition. The same-store revenue
increase included an increase in the education sector at one of our Virginia operations ($22.1 million), in the office
building and healthcare sectors at one of our Tennessee operations ($19.2 million) and in the education sector at our
Wisconsin operation ($14.8 million). This increase was offset by the sale of the majority of the assets and ongoing
business of our California operation in the third quarter of 2019 ($14.1 million).
Revenue for our electrical services segment increased $79.9 million to $443.6 million in 2020 compared to
2019. The increase related to the acquisition of Walker in April 2019 as well as the acquisition of the electrical
contractor in North Carolina in February 2020. These increases were partially offset by a $118.0 million decrease in
same-store revenue, primarily resulting from expected decreases driven by a higher volume of large jobs in the prior
period at our Walker operation and the impact of Coronavirus Disease 2019 (“COVID-19”).
Backlog reflects revenue still to be recognized under contracted or committed installation and replacement
project work. Project work generally lasts less than one year. Service agreement revenue, service work and short
duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents
only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our
operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information
is limited to indications of general revenue direction over the near term and should not be interpreted as indicative of
ongoing revenue performance over several quarters.
December 31,
2020
December 31,
2019
Backlog:
Mechanical Services . . . . . . . . . . . $ 1,253,762
Electrical Services . . . . . . . . . . . .
257,652
Total . . . . . . . . . . . . . . . . . . . . . $ 1,511,414
83.0 % $ 1,348,651
253,135
17.0 %
100.0 % $ 1,601,786
84.2 %
15.8 %
100.0 %
Backlog as of December 31, 2020 was $1.51 billion, a 5.8% increase from September 30, 2020 backlog of
$1.43 billion and a 5.6% decrease from December 31, 2019 backlog of $1.60 billion. The sequential backlog increase
included the T E C acquisition ($72.8 million or 5.1%). Same-store backlog increased 0.7%, primarily due to increased
project bookings at TAS ($124.3 million), offset by completion of project work at our Colorado operation ($23.9
million), one of our Indiana operations ($19.4 million) and our Walker operation ($13.5 million). The year-over-year
34
backlog decrease included a same-store backlog decrease of 23.4%, which was broad-based and was primarily as a result
of completion of project work at our Walker operation ($116.3 million), our Colorado operation ($33.7 million) and one
of our Florida operations ($29.7 million). This decrease was partially offset by the acquisition of the North Carolina
electrical contractor ($47.4 million), the TAS acquisition ($164.3 million) and the T E C acquisition ($72.8 million).
Gross Profit—Gross profit increased $45.0 million, or 9.0%, to $547.0 million in 2020 as compared to 2019.
The increase included a $20.7 million, or 4.1%, increase related to the Walker, TAS and North Carolina electrical
contractor acquisitions and a $24.4 million, or 4.9%, increase on a same - store basis. The same - store increase in gross
profit was primarily due to improvement in project execution at our North Carolina operation ($14.8 million), one of our
Indiana operations ($11.0 million) and one of our Tennessee operations ($6.7 million), offset by a decrease at one of our
Florida operations ($8.2 million). As a percentage of revenue, gross profit decreased slightly from 19.2% in 2019 to
19.1% in 2020. Improvements in project execution discussed above were offset by lower margins on the Walker
acquisition, which was acquired in April 2019, and by preventative and protective actions taken on projects, such as
social distancing and other procedure adjustments caused by COVID-19, which negatively impacted margins starting in
March 2020.
Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $17.8 million, or 5.2%, to
$357.8 million for 2020 as compared to 2019. On a same - store basis, excluding amortization expense, SG&A decreased
$6.2 million, or 1.9%. This decrease is primarily due to the sale of the majority of the assets and ongoing business of our
California operation in the third quarter of 2019 ($5.7 million) as well as due to a reduction in travel-related expenses as
a result of COVID-19 ($4.2 million). These decreases were partially offset by an increase in bad debt expense of $1.3
million, mainly driven by concerns about collectability of certain receivables due to the business interruptions caused by
COVID-19, specifically with respect to receivables with retail, restaurants and entertainment companies. Additionally,
tax consulting fees increased from $1.3 million in 2019 to $2.8 million in 2020. Amortization expense increased $3.8
million during the period primarily as a result of the TAS and North Carolina electrical contractor acquisitions. As a
percentage of revenue, SG&A decreased from 13.0% in 2019 to 12.5% in 2020 due to the factors discussed above and
due to the acquisition of Walker, which has lower SG&A as a percentage of revenue.
We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of
comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under
generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should
not be considered an alternative to SG&A as shown in our consolidated statements of operations.
Year Ended
December 31,
2020
2019
(in thousands)
SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 357,777 $ 340,005
Less: SG&A from companies acquired . . . . . . . . . . . . . . . . . . . . . . .
—
Less: Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,654)
Same-store SG&A, excluding amortization expense . . . . . . . . . . . . $ 311,166 $ 317,351
(20,125)
(26,486)
Interest Expense—Interest expense decreased $0.9 million, or 10.0%, in 2020. A reduction in our average
interest rate on outstanding borrowings in 2020 as compared to 2019 caused the decrease in interest expense.
Changes in the Fair Value of Contingent Earn - out Obligations—The contingent earn - out obligations are
measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. Income
from changes in the fair value of contingent earn - out obligations increased $12.1 million in 2020 compared to 2019. The
increases were caused by higher expenses in the prior year as a result of increasing our obligation for the BCH
acquisition as earnings exceeded forecast in the prior year as well as a reduction in our obligation for Walker in the
current year caused by project delays, the impact of COVID-19 and lower than forecasted earnings in the fourth quarter
of 2020.
Provision for Income Taxes—We conduct business throughout the United States in virtually all fifty states. Our
effective tax rate changes based upon our relative profitability, or lack thereof, in states with varying tax rates and rules.
In addition, discrete items, such as tax law changes, judgments and legal structures can impact our effective tax rate.
These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair
35
value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions, accounting for losses associated
with underperforming operations and noncontrolling interests.
Our provision for income taxes for 2020 was $41.4 million with an effective tax rate of 21.6%, as compared to
a provision for income taxes of $37.4 million with an effective tax rate of 24.7% for 2019. The effective rate for 2020
was higher than the 21% federal statutory rate primarily due to net state income taxes (4.4%) and nondeductible
expenses, including nondeductible expenses related to TAS (1.3%), partially offset by reductions in unrecognized tax
benefits plus interest as a result of settlement with the Internal Revenue Service (the “IRS”) upon completion of its
examination of our amended federal returns for 2014 and 2015 (4.7%). The effective rate for 2019 was higher than the
21% federal statutory rate primarily due to net state income taxes (4.4%) and nondeductible expenses (1.4%), partially
offset by benefits from the filing, and expected filing, of amended returns to claim the energy efficient commercial
buildings deduction (the “179D deduction”) allocated to us (1.5%) and deductions for stock-based compensation (0.5%).
Refer to Note 11 in the Consolidated Financial Statements for a reconciliation of the federal statutory rates to the
effective tax rates reflected in our financial statements.
The decrease in our effective tax rate from 2019 to 2020 was primarily due to reductions in unrecognized tax
benefits as a result of settlement with the IRS upon completion of its examination of our amended federal returns for
2014 and 2015 partially offset by nondeductible expenses related to TAS and smaller benefits from the filing of
amended returns to claim the 179D deduction allocated to us.
We currently estimate our future effective tax rates will be between 25% and 30%. However, our effective tax
rates could be on the low end of this range, or lower, as we continue to pursue claims for the credit for increasing
research activities (the “R&D tax credit”) and the 179D deduction allocated to us. The 179D deduction was made
permanent by the Consolidated Appropriations Act, 2021.
2019 Compared to 2018
For a discussion of the period-to-period comparison of 2019 to 2018, please refer to “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—2019 Compared to
2018” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Outlook
Industry conditions improved during the four-year period from 2016 to 2019, and at the beginning of 2020 we
expected this strong activity to continue during 2020. However, starting at the end of the first quarter of 2020, we
experienced negative impacts to our business due to the business disruption caused by COVID-19. In March 2020, the
World Health Organization categorized COVID-19 as a pandemic, and the United States declared the COVID-19
outbreak a national emergency.
Our service business experienced the first and most pronounced negative impacts, largely because of building
closures or decisions by customers to limit building access. As of the end of the third quarter, the majority of our service
operations had returned to levels that are at or near normal functioning. Our construction activities have generally been
classified as essential services in the substantial majority of our markets, although we have had certain jobs temporarily
or partially close due to government action, decisions by owners, or upon positive tests for COVID-19 of workers at
various sites. We have also experienced delays in the award of new construction work in certain instances, and we have
also faced limited instances of delayed starts. At the outset of the pandemic, we had some delays or cancellations of
work in less than 5% of our backlog. Across our operations, we have implemented safety precautions and other
COVID- 19 related guidelines that have added cost or inefficiency as we work to create a safe environment for our team
members and our communities. The Company considered the ongoing impact of COVID-19 on the assumptions and
estimates used to determine our results and asset valuations as of December 31, 2020 and determined that there were no
material or systematic adverse impacts on the Company except for diminished revenue, operational inefficiency, and
adjustments in bad debt expense due to the potential for nonpayment by customers in industries more directly impacted
by COVID-19.
Although conditions are stabilizing, COVID-19 continues to affect our business outlook, and we expect that in
some markets we will experience additional delays in the award or commencement of a portion of our projects that is
likely to impact activity levels in the coming quarters, and particularly during the first half of 2021. Despite these
36
factors, we currently anticipate our full-year 2021 results are likely to be similar to, but somewhat lower than, the record
results that we achieved in 2020, and we continue to prepare for a wide range of economic circumstances.
Liquidity and Capital Resources
Cash provided by (used in):
2020
Year Ended December 31,
2019
(in thousands)
2018
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,510 $ 142,028 $ 147,190
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(95,710)
(224,450)
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
87,590
(42,402)
Net increase (decrease) in cash and cash equivalents . . $
5,168 $ 9,078
Free cash flow:
(207,802)
(74,600)
4,108 $
Cash provided by operating activities . . . . . . . . . . . . $ 286,510 $ 142,028 $ 147,190
Purchases of property and equipment . . . . . . . . . . . .
(27,268)
Proceeds from sales of property and equipment . . . .
1,698
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 264,649 $ 112,437 $ 121,620
(24,131)
2,270
(31,750)
2,159
Cash Flow
Our business does not require significant amounts of investment in long - term fixed assets. The substantial
majority of the capital used in our business is working capital that funds our costs of labor and installed equipment
deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a
small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld
under this practice are known as retention or retainage. Our average project duration, together with typical retention
terms, generally allow us to complete the realization of revenue and earnings in cash within one year.
2020 Compared to 2019
Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for our
services and operating margins but can also be influenced by working capital needs associated with the various types of
services that we provide. In particular, working capital needs may increase when we commence large volumes of work
under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to
be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are
generally higher during the late winter and spring months as we prepare and plan for the increased project demand when
favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically
converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are
sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays or
accelerations and other economic factors that may affect customer spending.
We generated $286.5 million of cash flow from operating activities during 2020 compared with $142.0 million
during 2019. The $144.5 million increase was primarily driven by an $88.0 million change in receivables, net
attributable to strong collections in the current year, a $15.6 million change in other long-term liabilities, a $15.1 million
change in billings in excess of costs, which was driven by timing of payments and project billings, and a $10.7 million
change in prepaid expenses and other current assets. Operating cash flows in the current year benefited by approximately
$32.0 million from the deferral of payroll taxes allowed by the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”) that normally would have been paid by December 31, 2020.
Cash Used in Investing Activities—Cash used in investing activities was $207.8 million for 2020 compared to
$224.5 million during 2019. The $16.6 million decrease in cash used primarily relates to less cash paid (net of cash
acquired) for acquisitions and capital expenditures in 2020 compared to the same period in 2019.
Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $74.6 million for 2020
compared to cash provided by financing activities of $87.6 million during 2019. The $162.2 million increase in cash
37
used in financing activities is primarily due to a decrease in net proceeds from the debt compared to the prior year, which
was driven by stronger operating cash flows in the current year that allowed us to pay down more debt.
2019 Compared to 2018
For a discussion of the period-to-period comparison of 2019 to 2018, please refer to “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—2019
Compared to 2018” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Free Cash Flow
We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the
proceeds from asset sales. We believe free cash flow, by encompassing both profit margins and the use of working
capital over our approximately one year working capital cycle, is an effective measure of operating effectiveness and
efficiency. We have included free cash flow information here for this reason, and because we are often asked about it by
third parties evaluating us. However, free cash flow is not considered under generally accepted accounting principles to
be a primary measure of an entity’s financial results, and accordingly free cash flow should not be considered an
alternative to operating income, net income, or amounts shown in our consolidated statements of cash flows as
determined under generally accepted accounting principles. Free cash flow may be defined differently by other
companies.
Share Repurchase Program
On March 29, 2007, our Board of Directors approved a stock repurchase program to acquire up to 1.0 million
shares of our outstanding common stock. Subsequently, the Board has from time to time increased the number of shares
that may be acquired under the program and approved extensions of the program. On December 8, 2020, the Board
approved an extension to the program by increasing the shares authorized for repurchase by 0.7 million shares. Since the
inception of the repurchase program, the Board has approved 10.3 million shares to be repurchased. As of December 31,
2020, we have repurchased a cumulative total of 9.3 million shares at an average price of $19.63 per share under the
repurchase program.
The share repurchases will be made from time to time at our discretion in the open market or privately
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the year ended
December 31, 2020, we repurchased 0.7 million shares for approximately $30.1 million at an average price of $43.99 per
share.
Debt
Revolving Credit Facility and Term Loan
We have a $600.0 million senior credit facility (the “Facility”) provided by a syndicate of banks. The Facility is
composed of a revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility also
provides for a $150.0 million accordion or increase option for the revolving portion of the Facility. As of December 31,
2020, the Facility capacity was $585.0 million as the term loan was paid down by $15.0 million since the inception of
the Facility. The Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The
Facility expires in January 2025 and is secured by a first lien on substantially all of our personal property except for
assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and our wholly
owned captive insurance company and a second lien on our assets related to projects subject to surety bonds. In 2019, we
incurred approximately $1.4 million in financing and professional costs in connection with an amendment to the Facility,
which are being amortized over the remaining term of the Facility. Of this amount, $0.4 million is attributable to the
term loan and is being amortized using the effective interest method. The remaining $1.0 million is attributable to the
revolving credit line, which combined with the previous unamortized costs of $1.3 million, is being amortized over the
remaining term of the Facility on a straight-line basis as a non-cash charge to interest expense. For the term loan, we are
required to make quarterly payments increasing over time from 1.25% to 3.75% of the original aggregate principal
amount of the term loan, with the balance due in January 2025. As of December 31, 2020, we had $135.0 million
38
principal outstanding on the term loan, $70.0 million of outstanding borrowings, $49.5 million in letters of credit
outstanding and $330.5 million of credit available.
There are two interest rate options for borrowings under the Facility, the Base Rate Loan option and the
Eurodollar Rate Loan option. These rates are floating rates determined by the broad financial markets, meaning they can
and do move up and down from time to time. Additional margins are then added to these two rates. The weighted
average interest rate applicable to the borrowings under the revolving credit facility was approximately 1.4% as of
December 31, 2020. The weighted average interest rate applicable to the term loan was approximately 1.4% as of
December 31, 2020.
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self - funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. Our lenders issue such letters of credit through the Facility for a fee. We have never had a claim made
against a letter of credit that resulted in payments by a lender or by us and believe such claims are unlikely in the
foreseeable future. The letter of credit fees range from 1.25% to 2.00% per annum, based on the ratio of Consolidated
Total Indebtedness to “Credit Facility Adjusted EBITDA,” which shall mean Consolidated EBITDA as such term is
defined in the credit agreement.
Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters
of credit at any given time. These fees range from 0.20% to 0.35% per annum, based on the ratio of Consolidated Total
Indebtedness to Credit Facility Adjusted EBITDA.
Interest expense included the following primary elements (in thousands):
Year Ended December 31,
2018
2019
2020
Interest expense on notes to former owners . . . . . . . . . . . . . . . . . $ 1,354 $ 1,531 $ 642
2,211
Interest expense on borrowings and unused commitment fees . .
Interest expense on interest rate swaps . . . . . . . . . . . . . . . . . . . . .
—
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
474
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . .
383
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,385 $ 9,317 $ 3,710
5,319
338
830
544
6,887
—
512
387
The Facility contains financial covenants defining various financial measures and the levels of these measures
with which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA
is defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given
quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision
for income taxes; (c) depreciation and amortization; (d) stock compensation; (e) other non - cash charges; and
(f) pre - acquisition results of acquired companies. The following is a reconciliation of Credit Facility Adjusted EBITDA
to net income for 2020 (in thousands):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,139
41,401
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,282
60,629
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,934
Pre-acquisition results of acquired companies, as defined under the Facility . . . . .
18,511
Credit Facility Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,896
The Facility’s principal financial covenants include:
Total Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to
our Credit Facility Adjusted EBITDA not exceed 3.00 to 1.00 as of the end of each fiscal quarter. The total
leverage ratio as of December 31, 2020 was 0.8.
39
Fixed Charge Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted
EBITDA, less non-financed capital expenditures, provision for income taxes, dividends and amounts used to
repurchase stock when the Company’s Total Leverage Ratio exceeds 2.00 to 1.00 to (b) the sum of interest
expense and scheduled principal payments of indebtedness be at least 1.50 to 1.00. Credit Facility Adjusted
EBITDA, capital expenditures, provision for income taxes, dividends, stock repurchase payments, interest
expense, and scheduled principal payments are defined under the Facility, for purposes of this covenant, to be
amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The
fixed charge coverage ratio as of December 31, 2020 was 7.2.
Other Restrictions—The Facility permits acquisitions of up to $5.0 million per transaction, provided
that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not
exceed $10.0 million. However, these limitations only apply when the Company’s Total Leverage Ratio is
greater than 2.50 to 1.00.
While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our
debt level under the Facility at a quarter - end covenant compliance measurement date were to cause us to violate
the Facility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we
currently have could be negatively impacted by the lenders.
We were in compliance with all of our financial covenants as of December 31, 2020.
Notes to Former Owners
As part of the consideration used to acquire four companies, we have outstanding notes to the former owners.
Together, these notes had an outstanding balance of $31.0 million as of December 31, 2020. In conjunction with the
acquisition of T E C in the fourth quarter of 2020, we issued a promissory note to former owners with an outstanding
balance of $7.0 million as of December 31, 2020 that bears interest, payable quarterly, at a stated interest rate of 2.5%.
The principal is due in December 2023. In conjunction with the acquisition of TAS in the second quarter of 2020, we
issued a promissory note to former owners with an outstanding balance of $8.0 million as of December 31, 2020 that
bears interest, payable quarterly, at a stated interest rate of 3.5%. The principal is due in April 2022. In conjunction with
the acquisition of the electrical contractor in North Carolina in the first quarter of 2020, we issued a promissory note to
former owners with an outstanding balance of $6.0 million as of December 31, 2020 that bears interest, payable
quarterly, at a stated interest rate of 3.0%. The principal is due in installments in February 2023 and February 2024. In
conjunction with the Walker acquisition in the second quarter of 2019, we issued a promissory note to former owners
with an outstanding balance of $10.0 million as of December 31, 2020 that bears interest, payable quarterly, at a stated
interest rate of 4.0%. The remaining principal is due in April 2023.
Outlook
We have generated positive net free cash flow for the last twenty-two calendar years, much of which occurred
during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our
credit facility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with
sufficient liquidity to fund our operations for the foreseeable future.
Off - Balance Sheet Arrangements and Other Commitments
As is common in our industry, we have entered into certain off - balance sheet arrangements in the ordinary
course of business that result in risks not directly reflected in our Balance Sheets, such as obligations involving letters of
credit and surety guarantees.
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self - funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. The letters of credit we provide are actually issued by our lenders through the Facility as described
above. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder
demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse
the lenders. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings
for the reimbursement. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of
credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders,
letters of credit are treated as a use of the Facility’s capacity just the same as actual borrowings. Claims against letters of
40
credit are rare in our industry. To date, we have not had a claim made against a letter of credit that resulted in payments
by a lender or by us. We believe that it is unlikely that we will have to fund claims under a letter of credit in the
foreseeable future.
Many customers, particularly in connection with new construction, require us to post performance and payment
bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety
make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they
incur. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our
behalf, and we do not expect such losses to be incurred in the foreseeable future.
Under standard terms in the surety market, sureties issue bonds on a project - by - project basis, and can decline to
issue bonds at any time. Historically, approximately 15% to 25% of our business has required bonds. While we currently
have strong surety relationships to support our bonding needs, future market conditions or changes in our sureties’
assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that
were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral
for project performance, such as letters of credit or cash, and seeking bonding capacity from other sureties. We would
likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While
we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an
interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to
decline in the near term.
Contractual Obligations
2021
Twelve Months Ended December 31,
2023
2022
2024
2025
Thereafter
Total
Revolving credit facility . . . . . . $
Term loan . . . . . . . . . . . . . . . . . .
Notes to former owners . . . . . . .
Interest payable . . . . . . . . . . . . .
Operating lease obligations . . . .
— $ 70,000
135,000
—
31,000
—
12,905
—
113,959
36,645
Total . . . . . . . . . . . . . . . . . . . $ 24,159 $ 43,620 $ 51,733 $ 42,063 $ 164,644 $ 36,645 $ 362,864
— $
—
—
3,905
20,254
22,500
4,000
2,342
13,221
15,000
19,000
3,006
14,727
15,000
8,000
3,616
17,004
82,500
—
36
12,108
— $ 70,000 $
— $
— $
As of December 31, 2020, we have $49.5 million in letter of credit commitments, of which $16.8 million will
expire in 2021, $16.7 million will expire in 2022 and $16.0 million will expire in 2025. The substantial majority of these
letters of credit are posted with insurers who disburse funds on our behalf in connection with our workers’
compensation, auto liability and general liability insurance program. These letters of credit provide additional security to
the insurers that sufficient financial resources will be available to fund claims on our behalf, many of which develop
over long periods of time, should we ever encounter financial duress. Posting of letters of credit for this purpose is a
common practice for entities that manage their self - insurance programs through third - party insurers as we do. While
some of these letter of credit commitments expire in 2021, we expect nearly all of them, particularly those supporting
our insurance programs, will be renewed annually.
As discussed in Note 11 “Income Taxes,” included in our Consolidated Balance Sheet at December 31, 2020 is
$28.8 million of unrecognized tax benefits. We believe it is reasonably possible that a reduction of up to $28.8 million in
unrecognized tax benefits could occur within the next twelve months. However, due to the uncertain and complex
application of tax regulations, combined with the difficulty in predicting when tax audits may be concluded, we
generally cannot make reliable estimates of the timing of cash outflows relating to these liabilities.
Other than the operating lease obligations discussed in Note 10 “Leases,” we have no significant purchase or
operating commitments outside of commitments to deliver equipment and provide labor in the ordinary course of
performing project work.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed
below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate
41
risk management techniques. We are not exposed to any other significant financial market risks, including commodity
price risk or foreign currency exchange risk, from the use of derivative financial instruments. At times, we use derivative
financial instruments to manage our interest rate risk.
We have exposure to changes in interest rates under our revolving credit facility and term loan. Our debt with
fixed interest rates consists of notes to former owners of acquired companies.
The following table presents principal amounts (stated in thousands) and related average interest rates by year
of maturity for our debt obligations and their indicated fair market value at December 31, 2020:
Twelve Months Ended December 31,
2021
2022
2023
2024
2025
Thereafter
Total
Fixed Rate Debt . . . . . . . . . . . . . . . . . $
Average Interest Rate . . . . . . . . . . . .
Variable Rate Debt . . . . . . . . . . . . . . $
— $ 8,000 $ 19,000 $ 4,000 $
3.3%
3.3%
3.0%
3.0%
— $
—
— $ 15,000 $ 15,000 $ 22,500 $ 152,500 $
— $ 31,000
3.1%
—
— $ 205,000
The weighted average interest rate applicable to the borrowings under the revolving credit facility was
approximately 1.4% as of December 31, 2020. The weighted average interest rate applicable to the term loan was
approximately 1.4% as of December 31, 2020.
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when
they are deemed to be other - than - temporarily impaired. We did not recognize any impairments, in the current year, on
those assets required to be measured at fair value on a nonrecurring basis.
The valuation of the Company’s contingent earn - out payments is determined using a probability weighted
discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum
and maximum payment, length of earn - out periods, manner of calculating any amounts due, etc.) and utilizes
assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.
42
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Comfort Systems USA, Inc.
Management’s Report on Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
45
47
48
49
50
51
52
Page
43
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the
framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO 2013 framework). Based on that evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is
included elsewhere herein, has issued an attestation report auditing the effectiveness of our internal control over financial
reporting as of December 31, 2020.
44
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Comfort Systems USA, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. (the Company) as of
December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated February 25, 2021 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below was a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way
our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it
relates.
Revenue recognition using percentage of completion method
Description of
the Matter
As disclosed in Note 3 to the consolidated financial statements, for fixed price agreements, the
Company uses the percentage of completion (POC) method of accounting under which contract
revenue recognizable at any time during the life of a contract is determined by multiplying expected
total contract revenue by the percentage of contract costs incurred at any time to total estimated
contract costs. Estimating contract costs is subjective and certain projects require considerable
judgment and could be impacted by changes in labor and materials/equipment.
45
Auditing management’s estimates of total contract costs for certain longer-duration projects was
challenging due to significant judgments made by management with respect to labor and
materials/equipment costs as future results may vary significantly from past estimates due to changes
in facts and circumstances as the project progresses to completion.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls
over the contract estimated cost at completion process. For example, we tested controls over
management’s review of cost estimates for significant inputs such as labor and materials/equipment
costs.
To evaluate the Company’s contract cost estimates, our audit procedures included selecting a sample
of contracts and, among others procedures, reviewing the contracts and any associated amendments,
conducting interviews with and reviewing questionnaires completed by project personnel, assessing
blended labor rates used in the estimate to complete the project against blended labor rates actually
incurred to date, agreeing estimated labor and materials/equipment costs to supporting documentation,
and performing lookback analyses comparing gross margin over the life of the project to assess
management’s ability to estimate.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 25, 2021
46
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Comfort Systems USA, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Comfort Systems USA, Inc.’s internal control over financial reporting as of December 31, 2020, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Comfort Systems USA, Inc. (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes and our report dated February 25, 2021 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
February 25, 2021
47
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31,
2020
2019
CURRENT ASSETS:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Billed accounts receivable, less allowance for credit losses of $9,087 and $6,907,
54,896 $
50,788
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
619,544
619,037
Unbilled accounts receivable, less allowance for credit losses of $784 and $0,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables, less allowance for credit losses of $759 and $0, respectively . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings, less allowance for credit losses of
45,596
44,212
13,472
15,510
55,542
37,632
10,053
14,396
$79 and $0, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LEASE RIGHT-OF-USE ASSET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IDENTIFIABLE INTANGIBLE ASSETS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER NONCURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,736
790,184
109,796
84,073
332,447
159,974
21,923
6,615
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,757,355 $ 1,505,012
18,622
811,852
117,206
94,727
464,392
231,807
29,401
7,970
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued self-insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LEASE LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204,145
121,864
226,237
49,166
91,492
692,904
235,733
80,576
1,339
50,374
1,060,926
— $
20,817
196,195
102,891
166,918
39,546
81,630
607,997
205,318
72,697
1,425
32,271
919,708
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365
shares issued, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
411
Treasury stock, at cost, 4,935,186 and 4,465,448 shares, respectively . . . . . . . . . . . . . .
(103,960)
320,168
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
368,685
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585,304
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,757,355 $ 1,505,012
411
(129,243)
322,451
502,810
696,429
The accompanying notes are an integral part of these consolidated financial statements.
48
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
2020
Year Ended December 31,
2019
2018
REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 $ 2,615,277 $ 2,182,879
1,736,600
COST OF SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
446,279
296,986
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . .
(945)
GAIN ON SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,238
2,309,676
546,983
357,777
(1,445)
190,651
2,113,334
501,943
340,005
(1,701)
163,639
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in the fair value of contingent earn-out obligations . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
103
(8,385)
9,119
52
889
191,540
41,401
150,139 $
224
(9,317)
(2,991)
187
(11,897)
151,742
37,418
114,324 $
73
(3,710)
(2,066)
4,141
(1,562)
148,676
35,773
112,903
INCOME PER SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4.11 $
4.09 $
3.10 $
3.08 $
3.03
3.00
SHARES USED IN COMPUTING INCOME PER SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
36,542
36,738
36,854
37,131
0.425 $
0.395 $
37,202
37,592
0.330
The accompanying notes are an integral part of these consolidated financial statements.
49
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands, Except Share Amounts)
Common Stock
Shares
Treasury Stock
Additional
Paid-In Retained Stockholders’
Total
Amount Shares
Amount Capital Earnings Equity
BALANCE AT DECEMBER 31, 2017 . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised . . .
Issuance of restricted stock &
performance stock . . . . . . . . . . . . . . . . .
Shares received in lieu of tax withholding
payment on vested restricted stock . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2018 . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised . . .
Issuance of restricted stock &
performance stock . . . . . . . . . . . . . . . . .
Shares received in lieu of tax withholding
payment on vested restricted stock . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2019 . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative-effect adjustment (1) . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised . . .
Issuance of restricted stock &
performance stock . . . . . . . . . . . . . . . . .
Shares received in lieu of tax withholding
payment on vested restricted stock . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2020 . . . . . . .
41,123,365 $
—
—
—
—
—
—
—
41,123,365 $
—
—
—
—
—
—
—
41,123,365 $
—
—
—
—
—
—
—
—
41,123,365 $
411
—
(3,936,291) $ (63,519) $ 312,784 $ 168,269 $
—
—
—
112,903
417,945
112,903
—
206,875
3,618
(513)
—
129,569
2,227
(4)
—
—
—
—
—
—
411
—
(36,967)
—
—
(592,839)
(1,540)
—
—
(28,533)
—
4,212
—
—
—
—
(12,268)
—
(4,229,653) $ (87,747) $ 316,479 $ 268,904 $
—
—
—
114,324
—
114,125
2,532
(182)
—
107,606
2,303
(297)
—
—
—
—
—
—
411
—
—
(28,586)
—
—
(428,940)
(1,498)
—
—
(19,550)
—
4,168
—
—
—
—
(14,543)
—
(4,465,448) $ (103,960) $ 320,168 $ 368,685 $
—
—
—
—
—
—
150,139
(515)
—
113,731
2,811
(667)
—
128,889
3,102
(1,247)
—
—
—
—
—
—
411
(27,724)
—
—
(684,634)
(1,076)
—
—
(30,120)
—
4,197
—
—
—
—
(15,499)
—
(4,935,186) $ (129,243) $ 322,451 $ 502,810 $
3,105
2,223
(1,540)
4,212
(12,268)
(28,533)
498,047
114,324
2,350
2,006
(1,498)
4,168
(14,543)
(19,550)
585,304
150,139
(515)
2,144
1,855
(1,076)
4,197
(15,499)
(30,120)
696,429
(1) Represents the adjustment to Retained Earnings as a result of adopting Accounting Standards Update (ASU)
No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” on January 1, 2020. See Note 2 for more
information.
The accompanying notes are an integral part of these consolidated financial statements.
50
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2019
2018
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,139 $ 114,324 $ 112,903
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in the fair value of contingent earn-out obligations . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of acquisitions and
32,698
27,931
16,692
5,253
(7,953)
544
(1,445)
(9,119)
6,934
27,082
24,490
16,887
2,978
(4,251)
387
(1,701)
2,991
5,878
20,089
22,600
—
3,562
4,456
383
(945)
2,066
7,161
divestitures—
(Increase) decrease in—
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings and unbilled accounts
38,486
(1,457)
(4,855)
(49,508)
2,366
(15,519)
(68,621)
(1,538)
519
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,706
(1,373)
(4,312)
(735)
(14,444)
(114)
Increase (decrease) in—
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,087
19,434
808
286,510
31,046
4,376
(14,751)
142,028
47,871
16,786
(5,544)
147,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24,131)
2,270
—
(185,941)
(207,802)
(31,750)
2,159
1,611
(196,470)
(224,450)
(27,268)
1,698
—
(70,140)
(95,710)
CASH FLOWS FROM FINANCING ACTIVITIES:
124,000
Proceeds from revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(119,000)
Payments on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Payments on term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,127)
(844)
Debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,268)
Payments of dividends to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,533)
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,540)
Shares received in lieu of tax withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,105
Proceeds from exercise of options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(750)
Deferred acquisition payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,445)
Payments for contingent consideration arrangements . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . .
(42,402)
9,078
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . .
36,542
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,896 $ 50,788 $ 45,620
268,000
(226,000)
(15,000)
(46,534)
—
(15,499)
(30,120)
(1,076)
2,144
(650)
(9,865)
(74,600)
4,108
50,788
356,000
(228,000)
—
(3,784)
(1,405)
(14,543)
(19,550)
(1,498)
2,350
(637)
(1,343)
87,590
5,168
45,620
The accompanying notes are an integral part of these consolidated financial statements.
51
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
1. Business and Organization
Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical
contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing,
electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We install, maintain,
repair and replace products and systems throughout the United States. Approximately 46.7% of our consolidated 2020
revenue is attributable to installation of systems in newly constructed facilities, with the remaining 53.3% attributable to
maintenance, repair and replacement services. The terms “Comfort Systems,” “we,” “us,” or the “Company,” refer to
Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the
context.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America. The accompanying consolidated financial statements include our accounts and those of our
subsidiaries in which we have a controlling interest. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods may have been reclassified to conform to the current period presentation.
The effects of the reclassifications were not material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the
use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue
and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates.
The most significant estimates used in our financial statements affect revenue and cost recognition for construction
contracts, self - insurance accruals, deferred tax assets, fair value accounting for acquisitions and the quantification of fair
value for reporting units in connection with our goodwill impairment testing.
Cash Flow Information
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Cash paid (in thousands) for:
Year Ended December 31,
2018
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,684 $ 8,817 $
3,743
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,286 $ 45,288 $ 33,401
2020
2019
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The
standard requires companies to consider historical experiences, current market conditions and reasonable and
supportable forecasts in the measurement of expected credit losses. The standard requires us to accrue higher credit
losses on financial assets compared to the legacy guidance on various items, such as contract assets and current
receivables. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within
those years. We adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” on January 1, 2020,
52
and the impact was not material to our overall financial statements. The adoption of ASU No. 2016-13 resulted in an
increase in Allowance for Credit Losses of $0.7 million, an increase to Deferred Tax Assets of $0.2 million and an
impact of $0.5 million to Retained Earnings.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removes certain
disclosure requirements including the valuation processes for Level 3 fair value measurements, the policy for timing of
transfers between levels and the amount of and reasons for transfers between Level 1 and Level 2 of the fair value
hierarchy. The standard requires certain additional disclosures for public entities, including disclosure of the changes in
unrealized gains and losses included in Other Comprehensive Income for Level 3 fair value measurements and the range
and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU
No. 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years.
Certain amendments, including the amendment on changes in unrealized gains and losses and the range and weighted
average of significant unobservable inputs, should be applied prospectively while other amendments should be applied
retrospectively to all periods presented upon their effective date. We have modified our fair value disclosures to conform
with the requirements of ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes
to the Disclosure Requirements for Fair Value Measurement,” which we adopted on January 1, 2020.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by eliminating certain
exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for
calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and
clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU No. 2019-12 is effective
for fiscal years beginning after December 15, 2020 and interim periods within that year. Early adoption is permitted. We
do not expect our adoption of this standard on January 1, 2021 to have a material impact on our consolidated financial
statements.
Revenue Recognition
We recognize revenue over time for all of our services as we perform them because (i) control continuously
transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The
customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to
payment for work performed to date plus a reasonable profit to deliver products or services that do not have an
alternative use to the Company.
For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the
performance obligation. The selection of the method to measure progress towards completion requires judgment and is
based on the nature of the products or services to be provided. We generally use the cost to cost measure of progress for
our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under
the cost to cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs
incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated
fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and
subcontractors’ costs, other direct costs and an allocation of indirect costs.
For a small portion of our business in which our services are delivered in the form of service maintenance
agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is
to maintain the customer’s mechanical system for a specific period of time. Similar to jobs, we recognize revenue over
time; however, for service maintenance agreements in which the full cost to provide services may not be known, we
generally use an input method to recognize revenue, which is based on the amount of time we have provided our services
out of the total time we have been contracted to perform those services. Our revenue recognition policy is further
discussed in Note 3 “Revenue from Contracts with Customers.”
Accounts Receivable and Allowance for Credit Losses
We are required to estimate and record the expected credit losses over the contractual life of our financial assets
measured at amortized cost, including billed and unbilled accounts receivable, other receivables and costs and estimated
53
earnings in excess of billings. Accounts receivable include amounts from work completed in which we have billed or
have an unconditional right to bill our customers. Our trade receivables are contractually due in less than a year.
We estimate our credit losses using a loss-rate method for each of our identified portfolio segments. Our
portfolio segments are construction, service and other. While our construction and service financial assets are often with
the same subset of customers and industries, our construction financial assets will generally have a lower loss-rate than
service financial assets due to lien rights, which we are more likely to have on construction jobs. These lien rights result
in lower credit loss expenses on average compared to receivables that do not have lien rights. Financial assets classified
as “other” include receivables that are not related to our core revenue producing activities, such as receivables related to
our acquisition activity from former owners, our vendor rebate program or receivables for estimated losses in excess of
our insurance deductible, which are accrued with a corresponding accrued insurance liability.
Loss rates for our portfolios are based on numerous factors, including our history of credit loss expense by
portfolio, the financial strength of our customers and counterparties in each portfolio, the aging of our receivables, our
expectation of likelihood of payment, macroeconomic trends in the U.S. and the current and forecasted non-residential
construction market trends in the U.S.
In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific
receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as
concerns about a specific customer going bankrupt and no longer being able to pay the receivables due to us.
Starting in March 2020, we experienced negative impacts to our business due to the disruption caused by
Coronavirus Disease 2019 (“COVID-19”). In March 2020, the World Health Organization categorized COVID-19 as a
pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Company
considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset
valuations as of December 31, 2020.
During the year ended December 31, 2020, we increased our loss rates and increased our specific reserves
primarily due to the economic disruption caused by COVID-19, which is reflected in our bad debt expense in the current
year. This increase was primarily, but not exclusively, due to concern over collectability of receivables from customers
more directly impacted by COVID-19.
Activity in our allowance for credit losses consisted of the following (in thousands):
Year Ended December 31,
2020
Service
Construction Other
Total
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,192 $
Impact of new accounting standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions for uncollectible receivables written off, net of recoveries .
Credit allowance of acquired companies on the acquisition date . . . . . .
Reclass to other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,637 $
310
2,566
(1,431)
—
—
3,400
331
2,697
(735)
335
—
6,028
$
$
315
54
(10)
—
—
(315)
44
$ 6,907
695
5,253
(2,166)
335
(315)
$ 10,709
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bad debt expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions for uncollectible receivables written off, net of recoveries . . . . . . . . . . . . . . . . . . . . .
Credit allowance of acquired companies on the acquisition date . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,898
2,978
(3,924)
1,955
6,907
Year Ended December 31,
2019
54
Inventories
Inventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business
and are stated at the lower of cost or net realizable value using the average-cost method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using the straight - line method over the
estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the
expected life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in “Gain on sale of
assets” in the Statement of Operations.
Recoverability of Goodwill and Identifiable Intangible Assets
Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess
goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.
When the carrying value of a given reporting unit exceeds its fair value, a goodwill impairment loss is recorded
for this difference, not to exceed the carrying amount of goodwill. The requirements for assessing whether goodwill has
been impaired involve market - based information. This information, and its use in assessing goodwill, entails some
degree of subjective assessment.
We perform our annual impairment testing as of October 1, and any impairment charges resulting from this
process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of
operating and financial independence of each unit and our related management of them. We perform our annual
goodwill impairment testing at the reporting unit level. We perform a goodwill impairment review for each of our
operating units, as we have determined that each of our operating units are reporting units.
In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine
whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value
of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is
more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to
perform any further testing. If we conclude otherwise, or if we elect to perform a quantitative assessment, then we
calculate the fair value of the reporting unit and compare the fair value with the carrying value of the reporting unit.
We estimate the fair value of the reporting unit based on a market approach and an income approach, which
utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow
model include discount rates, cash flow projections, projected long - term growth rates and the determination of terminal
values. The market approach utilizes market multiples of invested capital from comparable publicly traded companies
(“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and
earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).
We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or
market condition may result in adjustments to recorded intangible asset balances or their useful lives.
Long - Lived Assets
Long - lived assets are comprised principally of goodwill, identifiable intangible assets, property and equipment,
and deferred tax assets. We periodically evaluate whether events and circumstances have occurred that indicate that the
remaining balances of these assets may not be recoverable. We use estimates of future income from operations and cash
flows, as well as other economic and business factors, to assess the recoverability of these assets.
55
Acquisitions
We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and
liabilities, based on fair value estimates as of the date of acquisition.
Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent
upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized
liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any
differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in
income from operations.
Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their
acquisition date fair value when their respective fair values are determinable. Acquisition date fair value estimates are
revised as necessary if, and when, additional information regarding these contingencies becomes available to further
define and quantify assets acquired and liabilities assumed.
Self - Insurance Liabilities
We are substantially self - insured for workers’ compensation, employer’s liability, auto liability, general
liability and employee group health claims, in view of the relatively high per - incident deductibles we absorb under our
insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and
industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our
accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and
longer - developing risks—workers’ compensation, auto liability and general liability—are reviewed by a third - party
actuary quarterly. Our self - insurance arrangements are further discussed in Note 13 “Commitments and Contingencies.”
Warranty Costs
We typically warrant labor for the first year after installation on new MEP systems that we build and install,
and we pass through to the customer manufacturers’ warranties on equipment. We generally warrant labor for thirty days
after servicing existing MEP systems. A reserve for warranty costs is estimated and recorded based upon the historical
level of warranty claims and management’s estimate of future costs.
Income Taxes
We conduct business throughout the United States in virtually all fifty states. Our effective tax rate changes
based upon our relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items
such as tax law changes, judgments and legal structures can impact our effective tax rate. These items can also include
the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related
assets and liabilities, tax reserves for uncertain tax positions and accounting for losses associated with underperforming
operations.
Income taxes are provided for under the liability method, which takes into account differences between
financial statement treatment and tax treatment of certain transactions. Deferred taxes are based on the difference
between the financial reporting and tax basis of assets and liabilities. The deferred tax provision represents the change
during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and
dispositions. Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if,
based on available evidence, it is more-likely-than-not some portion or all of the deferred tax assets will not be realized.
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is
uncertain. In assessing the realizability of deferred tax assets, we must consider whether it is more-likely-than-not some
portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and
negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of
deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning
strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive
evidence.
56
Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We
establish reserves when, despite our belief that our tax return positions are supportable, we believe that certain positions
may be disallowed. When facts and circumstances change, we adjust these reserves through our provision for income
taxes.
To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax,
such amounts have been accrued and are classified as a component in provision for income taxes in our Consolidated
Statements of Operations.
Concentrations of Credit Risk
We provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables
from a variety of customers including general contractors, property owners and developers, and commercial and
industrial companies. We are subject to potential credit risk related to changes in business and economic factors
throughout the United States within the nonresidential construction industry. However, we are entitled to payment for
work performed and have certain lien rights related to that work. Further, we believe that our contract acceptance, billing
and collection policies are adequate to manage potential credit risk. We regularly review our accounts receivable and
estimate an allowance for uncollectible amounts. We have a diverse customer base, with our top customer representing
5% of consolidated 2020 revenue.
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts
payable, interest rate swaps, life insurance policies, notes to former owners, a revolving credit facility and a term loan.
We believe that the carrying values of these instruments on the accompanying Balance Sheets approximate their fair
values.
Insurance Recovery
We recorded a $4.8 million gain in the fourth quarter of 2019 due to insurance proceeds we received in the
fourth quarter related to the ransomware incident that occurred in April 2019. Approximately $1.6 million of the gain
was recorded as a reduction in SG&A, and the remainder was recorded as a reduction in Cost of Services
expense. These proceeds related to recoverable costs that were primarily incurred prior to the fourth quarter in 2019. We
do not expect any additional insurance proceeds or other recoveries related to the ransomware incident.
3. Revenue from Contracts with Customers
Revenue is recognized when control of the promised goods or services is transferred to our customers in an
amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Sales-
based taxes are excluded from revenue.
We provide mechanical and electrical contracting services. Our mechanical segment principally includes
HVAC, plumbing, piping and controls, as well as off - site construction, monitoring and fire protection. Our electrical
segment includes installation and servicing of electrical systems. We install, maintain, repair and replace products and
systems throughout the United States. All of our revenue is recognized over time as we deliver goods and services to our
customers. Revenue can be earned based on an agreed upon fixed price or based on actual costs incurred marked up at
an agreed upon percentage.
For fixed price agreements, we use the percentage of completion method of accounting under which contract
revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract
revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as
part of the negotiation and bidding process to obtain installation contracts, we estimate our contract costs, which include
all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the
caption “Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total
estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are
considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed.
57
Non - labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased
equipment on our projects is substantially produced to job specifications and is a value-added element to our work. The
costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the work site.
Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract
costs when fabricated for the unique specifications of the job. Other materials costs are generally recorded when
delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to
complete the contract, and these updates may include subjective assessments and judgments.
We account for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the
parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability
of consideration is probable. We consider the start of a project to be when the above criteria have been met and we either
have written authorization from the customer to proceed or an executed contract.
Selling, marketing and estimation costs incurred in relation to selling contracts are expensed as incurred. On
rare occasions, we may incur significant expenses related to selling a contract that we only incurred because we sold that
contract. If this occurs, we capitalize that cost and amortize it on a percentage of completion basis over the life of the
contract. We do not currently have any capitalized selling, marketing, or estimation costs on our Balance Sheet and did
not incur any impairment loss in the current year.
We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the
start of a project. On rare occasions, when significant pre - contract costs are incurred, they are capitalized and amortized
on a percentage of completion basis over the life of the contract. We do not currently have any capitalized obtainment or
fulfillment costs on our Balance Sheet and did not incur any impairment loss on such costs in the current year.
Project contracts typically provide for a schedule of billings or invoices to the customer based on our job-to-
date percentage of completion of specific tasks inherent in the fulfillment of our performance obligation(s). The
schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract
revenue recognized in our Statement of Operations can and usually does differ from amounts that can be billed or
invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on
a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are
reflected as a current asset in our Balance Sheet under the caption “Costs and estimated earnings in excess of billings.”
Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract
revenue recognized on the contract are reflected as a current liability in our Balance Sheet under the caption “Billings in
excess of costs and estimated earnings.”
Contracts in progress are as follows (in thousands):
December 31,
2020
2019
Costs incurred on contracts in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,103,580 $ 2,518,581
Estimated earnings, net of losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
405,891
(3,033,112)
Less—Billings to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(55,542)
Less—Unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Less—Unbilled accounts receivable credit allowance . . . . . . . . . . . . . . . . . . . . . . . . . . .
(164,182)
548,435
(3,813,171)
(45,596)
(784)
(207,536) $
$
Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Plus—Costs and estimated earnings in excess of billings credit allowance . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
18,622 $
79
(226,237)
(207,536) $
2,736
—
(166,918)
(164,182)
Accounts receivable include amounts billed to customers under retention or retainage provisions in construction
contracts. Such provisions are standard in our industry and usually allow for a small portion of progress billings or the
contract price to be withheld by the customer until after we have completed work on the project, typically for a period of
six months. Based on our experience with similar contracts in recent years, the majority of our billings for such retention
balances at each Balance Sheet date are finalized and collected within the subsequent year. Retention balances at
58
December 31, 2020 and 2019 were $124.1 million and $111.7 million, respectively, and are included in accounts
receivable.
Accounts payable at December 31, 2020 and 2019 included $22.2 million and $15.8 million of retainage under
terms of contracts with subcontractors, respectively. The majority of the retention balances at each Balance Sheet date
are finalized and paid within the subsequent year.
The percentage of completion method of accounting is also affected by changes in job performance, job
conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore,
revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these
revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a
loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such
conclusion is reached, regardless of the percentage of completion of the contract.
Revisions to project costs and conditions can give rise to change orders under which there is an agreement
between the customer and us that the customer pays an additional or reduced contract price. Revisions can also result in
claims we might make against the customer to recover project variances that have not been satisfactorily addressed
through change orders with the customer. Except in certain circumstances, we do not recognize revenue or margin based
on change orders or claims until they have been agreed upon with the customer. The amount of revenue associated with
unapproved change orders and claims was immaterial for the year ended December 31, 2020.
Variations from estimated project costs could have a significant impact on our operating results, depending on
project size, and the recoverability of the variation via additional customer payments.
We typically invoice our customers with payment terms of net due in 30 days. It is common in the construction
industry for a contract to specify more lenient payment terms allowing the customer 45 to 60 days to make their
payment. It is also common for the contract in the construction industry to specify that a general contractor is not
required to submit payments to a subcontractor until it has received those funds from the owner or funding source. In
most instances, we receive payment of our invoices between 30 to 90 days of the date of the invoice.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as,
the performance obligation is satisfied.
To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts
should be combined and accounted for as one performance obligation and whether the combined or single contract
should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the
decision to combine a group of contracts or separate the combined or single contract into multiple performance
obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the
customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a
single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract
is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or
services within a contract, in which case we separate the contract into more than one performance obligation. If a
contract is separated into more than one performance obligation, we allocate the total transaction price to each
performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or
services underlying each performance obligation. We infrequently sell standard products with observable standalone
sales. In such cases, the observable standalone sales are used to determine the standalone selling price. More frequently,
we sell a customized, customer-specific solution, and, in these cases, we typically use the expected cost plus a margin
approach to estimate the standalone selling price of each performance obligation.
We recognize revenue over time for all of our services as we perform them because (i) control continuously
transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The
customer typically controls the work in process, as evidenced either by contractual termination clauses or by our rights to
payment for work performed to date plus a reasonable profit to deliver products or services that do not have an
alternative use to the Company.
59
For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the
performance obligation. The selection of the method to measure progress towards completion requires judgment and is
based on the nature of the products or services to be provided. We generally use the cost to cost measure of progress for
our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under
the cost to cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs
incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated
fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and
subcontractors’ costs, other direct costs and an allocation of indirect costs.
In our mechanical segment, for a small portion of our business in which our services are delivered in the form
of service maintenance agreements for existing systems to be repaired and maintained, as opposed to constructed, our
performance obligation is to maintain the customer’s mechanical system for a specific period of time. Similar to jobs, we
recognize revenue over time; however, for service maintenance agreements in which the full cost to provide services
may not be known, we generally use an input method to recognize revenue, which is based on the amount of time we
have provided our services out of the total time we have been contracted to perform those services.
Due to the nature of the work required to be performed on many of our performance obligations, the estimation
of total revenue and cost at completion (the process described below in more detail) is complex, subject to many
variables and requires significant judgment. The consideration to which we are entitled on our long-term contracts may
include both fixed and variable amounts. Variable amounts can either increase or decrease the transaction price. A
common example of variable amounts that can either increase or decrease contract value are pending change orders that
represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but
the final adjustment to contract price is yet to be negotiated. Other examples of positive variable revenue include
amounts awarded upon achievement of certain performance metrics, program milestones or cost of completion date
targets and can be based upon customer discretion. Variable amounts can result in a deduction from contract revenue if
we fail to meet stated performance requirements, such as complying with the construction schedule.
Contracts are often modified to account for changes in contract specifications and requirements. We consider
contract modifications to exist when the modification either creates new or changes the existing enforceable rights and
obligations. Most of our contract modifications are for goods or services that are not distinct from the existing
performance obligation(s). The effect of a contract modification on the transaction price, and our measure of progress for
the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or
decrease) on a cumulative catchup basis.
We have a Company-wide policy requiring periodic review of the Estimate at Completion in which
management reviews the progress and execution of our performance obligations and estimated remaining obligations. As
part of this process, management reviews information including, but not limited to, any outstanding key contract matters,
progress towards completion and the related program schedule, identified risks and opportunities and the related changes
in estimates of revenue and costs. The risks and opportunities include management's judgment about the ability and cost
to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly developed
product versus a mature product) and other contract requirements. Management must make assumptions and estimates
regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials,
the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials
and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our
customer, and overhead cost rates, among other variables.
Based on this analysis, any adjustments to revenue, cost of services, and the related impact to operating income
are recognized as necessary in the quarter when they become known. These adjustments may result from positive
program performance if we determine we will be successful in mitigating risks surrounding the technical, schedule and
cost aspects of those performance obligations or realizing related opportunities and may result in an increase in operating
income during the performance of individual performance obligations. Likewise, if we determine we will not be
successful in mitigating these risks or realizing related opportunities, these adjustments may result in a decrease in
operating income. Changes in estimates of revenue, cost of services and the related impact to operating income are
recognized quarterly on a cumulative catchup basis, meaning we recognize in the current period the cumulative effect of
the changes on current and prior periods based on a performance obligation's percentage of completion. A significant
change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For
projects in which estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to
be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
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The Company typically does not incur any returns, refunds, or similar obligations after the completion of the
performance obligation since any deficiencies are corrected during the course of the work or are included as a
modification to revenue. The Company does offer an industry standard warranty on our work, which is most commonly
for a one-year period. The vendors providing the equipment and materials are responsible for any failures in their
product unless installed incorrectly. We include an estimated amount to cover estimated warranty expense in our Cost of
Services and record a liability on our Balance Sheet to cover our current estimated outstanding warranty obligations.
During the years ended December 31, 2020 and December 31, 2019, net revenue recognized from our
performance obligations satisfied in previous periods was not material.
Disaggregation of Revenue
Our consolidated 2020 revenue was derived from contracts to provide service activities in the mechanical and
electrical services segments we serve. Refer to Note 16 “Segment Information” for additional information on our
reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and service
provided, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are
affected by economic factors. See details in the following tables (dollars in thousands):
Revenue by Service Provided
2020
Mechanical Services . . . . . . . . . . . . . . . . . . . . . . . $ 2,413,016 84.5 % $ 2,251,560 86.1 % $ 2,176,223 99.7 %
0.3 %
363,717
Electrical Services . . . . . . . . . . . . . . . . . . . . . . . .
100.0 %
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 100.0 % $ 2,615,277
6,656
100.0 % $ 2,182,879
13.9 %
15.5 %
443,643
2018
Year Ended December 31,
2019
Year Ended December 31,
2019
Revenue by Type of Customer
2020
38.9 % $ 886,668
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,112,075
412,318
17.1 %
487,922
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
348,640
11.2 %
319,426
Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . .
358,155
13.0 %
371,105
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
162,507
5.7 %
163,717
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248,083
8.4 %
239,541
Retail, Restaurants and Entertainment . . . . . . . .
104,693
3.0 %
86,799
Multi-Family and Residential . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,213
2.7 %
76,074
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 100.0 % $ 2,615,277
2018
33.9 % $ 596,557
391,937
15.8 %
288,090
13.3 %
319,958
13.7 %
143,958
6.2 %
225,348
9.5 %
136,075
4.0 %
80,956
3.6 %
100.0 % $ 2,182,879
27.3 %
18.0 %
13.2 %
14.7 %
6.6 %
10.3 %
6.2 %
3.7 %
100.0 %
Year Ended December 31,
2019
Revenue by Activity Type
2020
46.7 % $ 1,201,122
New Construction . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,333,739
793,159
31.9 %
910,807
Existing Building Construction . . . . . . . . . . . . . .
231,228
8.4 %
241,402
Service Projects . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service Calls, Maintenance and Monitoring . . . .
389,768
13.0 %
370,711
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,856,659 100.0 % $ 2,615,277
2018
45.9 % $ 829,978
796,946
30.3 %
206,506
8.9 %
349,449
14.9 %
100.0 % $ 2,182,879
38.0 %
36.5 %
9.5 %
16.0 %
100.0 %
Contract Assets and Liabilities
Contract assets include unbilled amounts typically resulting from sales under long term contracts when the cost
to cost method of revenue recognition is used, revenue recognized exceeds the amount billed to the customer and right to
payment is conditional, subject to completing a milestone, such as a phase of the project. Contract assets are generally
classified as current.
Contract liabilities consist of advance payments and billings in excess of revenue recognized. Our contract
assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. We
classify advance payments and billings in excess of revenue recognized as current. It is very unusual for us to have
advanced payments with a term of greater than one year; therefore, our contract assets and liabilities are usually all
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current. If we have advanced payments with a term greater than one year, the noncurrent portion of advanced payments
would be included in other long-term liabilities in our consolidated Balance Sheets.
The following table presents the changes in contract assets and contract liabilities (in thousands):
Year Ended December 31,
2020
Year Ended December 31,
2019
Contract Contract
Liabilities
Balance at beginning of period . . . . . . . . . . . . . . $ 2,736 $ 166,918 $ 10,213 $ 130,986
31,556
Change due to acquisitions / disposals . . . . . . . .
Change related to credit allowance . . . . . . . . . . .
—
Other changes in the period . . . . . . . . . . . . . . . . .
4,376
Balance at end of period . . . . . . . . . . . . . . . . . . . $ 18,622 $ 226,237 $ 2,736 $ 166,918
Contract Contract
Assets
6,573
—
(14,050)
39,885
—
19,434
9,509
(79)
6,456
Liabilities Assets
During the years ended December 31, 2020 and 2019, we recognized revenue of $165.8 million and $126.7
million related to our contract liabilities at January 1, 2020 and January 1, 2019, respectively.
We did not have any impairment losses recognized on our receivables or contract assets in 2020 and 2019.
Remaining Performance Obligations
Remaining construction performance obligations represent the remaining transaction price of firm orders for
which work has not been performed and exclude unexercised contract options. As of December 31, 2020, the aggregate
amount of the transaction price allocated to remaining performance obligations was $1.51 billion. The Company expects
to recognize revenue on approximately 80-85% of the remaining performance obligations over the next 12 months, with
the remaining recognized thereafter. Our service maintenance agreements are generally one-year renewable agreements.
We have adopted the practical expedient that allows us to not include service maintenance contracts with a term of less
than one year; therefore, we do not report unfulfilled performance obligations for service maintenance agreements.
4. Fair Value Measurements
Interest Rate Risk Management and Derivative Instruments
In April 2020, we entered into interest rate swap agreements to reduce our exposure to variable interest rates on
our term loan and revolving credit facility. The notional amount covered by these interest rate swaps was $130.0 million
as of December 31, 2020 and decreases to $80.0 million by November 30, 2021 until the termination date of
September 30, 2022.
We use derivative instruments to manage exposure to market risk, including interest rate risk. All of our current
derivatives are designated and accounted for as economic hedges. Unsettled amounts under our economic hedges are
recorded on the Balance Sheet at fair value in “Other Receivables” or “Other Current Liabilities.” Gains and losses on
our interest rate swaps are recorded on the Income Statement in “Interest Expense.” For the year ended December 31,
2020, we recognized a net loss of $0.3 million related to our interest rate swaps. We currently do not have any
derivatives that are accounted for as hedges under ASC 815.
Fair Value Measurement
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
• Level 1—quoted prices in active markets for identical assets and liabilities;
• Level 2—observable market-based inputs or unobservable inputs that are corroborated by market data; and
• Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an
entity to develop its own assumptions.
62
The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair
value measurements fall, for assets and liabilities measured on a recurring basis as of December 31, 2020 and 2019 (in
thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,896 $
Life insurance—cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest rate swap liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1
Level 3
Level 2
Fair Value Measurements at December 31, 2020
Total
— $ 54,896
— $ 5,420
— $ 25,979 $ 25,979
42
42 $
— $
— $ 5,420 $
— $
— $
— $
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,788 $
Life insurance—cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1
Level 2
Fair Value Measurements at December 31, 2019
Total
— $ 50,788
— $ 3,905
— $ 28,497 $ 28,497
— $
— $ 3,905 $
— $
Level 3
Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well - known
institutions with original maturities of three months or less. The original cost of these assets approximates fair value due
to their short-term maturity. The Company’s outstanding term loan held by third-party financial institutions is carried at
cost, adjusted for debt issuance costs. The Company’s term loan is not publicly traded and the carrying amount
approximates fair value as the loan accrues interest at a variable rate. The carrying value of our borrowings associated
with the Revolving Credit Facility approximate its fair value due to the variable rate on such debt.
We have life insurance policies covering 86 employees with a combined face value of $61.7 million. The
policies are invested in several investment vehicles, and the fair value measurement of the cash surrender balance
associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with
investment performance. The cash surrender value of these policies was $5.4 million as of December 31, 2020 and
$3.9 million as of December 31, 2019. These assets are included in “Other Noncurrent Assets” in our consolidated
Balance Sheets.
We value contingent earn - out obligations using a probability weighted discounted cash flow method. This fair
value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement
within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum
and maximum payments, length of earn - out periods, manner of calculating any amounts due, etc.) and utilizes
assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The
contingent earn - out obligations are measured at fair value each reporting period and changes in estimates of fair value
are recognized in earnings. Significant unobservable inputs that could impact the fair value measurement include our
weighted average cost of capital and the forecasted level of operating income for each earn-out measurement. As of
December 31, 2020, cash flows were discounted using a weighted average cost of capital ranging from 9.5% - 17.0%.
The table below presents a reconciliation of the fair value of our contingent earn - out obligations that use
significant unobservable inputs (Level 3) (in thousands):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,497 $ 7,375
19,500
Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,369)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,991
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,979 $ 28,497
16,715
(10,114)
(9,119)
December 31,
2020
2019
The fair value for our interest rate swaps is based upon inputs corroborated by observable market data with
similar tenors, which are considered Level 2 inputs. The Company’s outstanding term loan held by third-party financial
institutions is carried at cost, adjusted for debt issuance costs. The Company’s term loan is not publicly traded and the
carrying amount approximates fair value as the loan accrues interest at a variable rate. The carrying value of our
borrowings associated with the revolving credit facility approximate its fair value due to the variable rate on such debt.
63
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when
they are deemed to be other-than-temporarily impaired. No goodwill or other intangible asset impairments were recorded
during the years ended December 31, 2020, 2019 and 2018. We did not recognize any other impairments on those assets
required to be measured at fair value on a nonrecurring basis. See Note 6 “Goodwill and Identifiable Intangible Assets,
Net” for further discussion.
5. Acquisitions
TAS Energy Inc. Acquisition
On April 1, 2020, we consummated a merger through which TAS Energy Inc. (“TAS”) became a wholly owned
subsidiary of the Company. TAS is headquartered in Houston, Texas, and is a leading engineering, design and
construction provider of modular construction systems serving the technology, power and industrial sectors. As a result
of the acquisition, TAS is a wholly owned subsidiary of the Company reported in our mechanical services segment.
Revenue attributable to TAS was $106.4 million for the nine months from the acquisition date.
The following summarizes the acquisition date fair value of consideration transferred and the acquisition date
fair value of the identifiable assets acquired and liabilities assumed, including an amount for goodwill (in thousands):
Consideration transferred:
Cash paid at closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,950
Working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,455
Notes issued to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,000
Estimated fair value of contingent earn-out payments . . . . . . . . . . . . . . . . . . . . . . . .
9,100
$ 169,505
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,460
18,702
Billed and unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,634
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,556
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,709
72,788
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,400
Lease right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,736
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,453)
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24,196)
(2,337)
Current lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,109)
Long-term lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,398)
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,987)
$ 169,505
The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary and, therefore,
subject to change pending the completion of the final valuation of intangible assets and accrued liabilities. Goodwill
represents the future economic benefits arising from other assets acquired that could not be individually identified and
separately recognized. The goodwill recognized as a result of the TAS acquisition is not deductible for tax purposes.
In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined
to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and
customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows
attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required
rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty
rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to
present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the
identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs.
The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates
64
ranging from 15% - 23.5%. Estimated years of projected earnings generally follow the range of estimated remaining
useful lives for each intangible asset class.
As a result of the TAS acquisition, we acquired $53.2 million of federal net operating loss (“NOL”)
carryforwards and $6.5 million of state NOL carryforwards. Our ability to utilize these NOL carryforwards to reduce
taxable income in future years is subject to significant limitations under Section 382 of the Internal Revenue Code (the
“Code”) due to the ownership change in TAS on April 1, 2020. While we expect to fully utilize the federal NOL
carryforwards before they begin to expire in 2031, a full valuation allowance was recorded against virtually all of the
state NOL carryforwards. We do not believe it is more-likely-than-not that TAS will have sufficient revenue-generating
operations in those states in the future.
The acquired intangible assets include the following (dollars in thousands):
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relief-from-royalty 25 years
Customer Relationships . . . . . . . . . . . . . . . . . . .
10 years
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess earnings
Valuation Method
Excess earnings
Estimated
Useful Life
1 year
$
Estimated
Fair Value
5,200
8,200
40,000
$ 53,400
The contingent earn-out obligation is associated with the achievement of specified earnings milestones over a
27-month period, and the range of estimated milestone payments is from $1 million to $8 million. We determined the
initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method, which represents a
Level 3 measurement. Cash flows were discounted using a 17.7% discount rate, which we believe is appropriate and
representative of a market participant assumption. Subsequent to the acquisition date, the contingent earn-out obligation
is re-measured at fair value each reporting period. Changes in the estimated fair value of the contingent payments
subsequent to the acquisition date are recognized immediately in earnings.
T E C Industrial Construction and Maintenance Acquisition
On December 31, 2020, we consummated an acquisition of all outstanding equity interests of Tennessee
Electric Company, Inc. dba TEC Industrial Maintenance and Construction (“T E C”). T E C is headquartered in
Kingsport, Tennessee, and provides multidisciplined construction and industrial services, including electrical,
mechanical and other plant services, primarily in Tennessee and surrounding states. As a result of the acquisition, T E C
is a wholly owned subsidiary of the Company reported in our electrical services segment. T E C did not contribute to our
revenue in 2020.
65
The following summarizes the acquisition date fair value of consideration transferred and the acquisition date
fair value of the identifiable assets acquired and liabilities assumed, including an amount for goodwill (in thousands):
Consideration transferred:
Cash paid at closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,000
Working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,006
Notes issued to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000
7,560
Estimated fair value of contingent earn-out payments . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,566
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Billed and unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
13,660
2,040
108
53
912
44,431
37,200
1,234
(4,123)
(2,838)
(175)
(1,881)
(1,059)
$ 89,566
The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary and, therefore,
subject to change pending the completion of the final valuation of identifiable assets acquired and liabilities assumed.
Goodwill represents the future economic benefits arising from other assets acquired that could not be individually
identified and separately recognized. All of the goodwill recognized as a result of the T E C acquisition is tax deductible.
In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined
to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and
customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows
attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required
rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty
rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to
present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the
identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs.
The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates
ranging from 14% - 15%. Estimated years of projected earnings generally follow the range of estimated remaining useful
lives for each intangible asset class.
The acquired intangible assets include the following (dollars in thousands):
Estimated Estimated
Useful Life Fair Value
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess earnings 2 years $ 7,200
5,800
Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relief-from-royalty 20 years
Customer Relationships . . . . . . . . . . . . . . . . . . . . . . Excess earnings 9 years
24,200
$ 37,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation
Method
66
The contingent earn-out obligation is associated with the achievement of specified earnings milestones over a
three year period, and the range of estimated milestone payments is from less than $1 million to $5 million. We
determined the initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method,
which represents a Level 3 measurement. Cash flows were discounted using a 12.9% discount rate, which we believe is
appropriate and representative of a market participant assumption. Subsequent to the acquisition date, the contingent
earn-out obligation is re-measured at fair value each reporting period. Changes in the estimated fair value of the
contingent payments subsequent to the acquisition date are recognized immediately in earnings.
Other Acquisitions
In addition to the TAS and T E C acquisitions, we completed the acquisition of an electrical contractor in North
Carolina in the first quarter of 2020 with a total purchase price of $41.6 million. This acquisition is reported in our
electrical services segment.
In the second quarter of 2019, we acquired all of the issued and outstanding stock of Walker TX Holding
Company, LLC and each of its wholly owned subsidiaries (collectively “Walker”) for $235.4 million of which $187.0
million was allocated to goodwill and identifiable intangible assets. The total purchase price included $178.0 million in
cash, $25.0 million in notes payable to former owners, a $20.5 million advance to former owners, a $19.5 million
contingent earn-out obligation and a $0.2 million tax equalization payment, offset by a $7.8 million working capital
adjustment. Walker is a full-service electrical contracting and network infrastructure engineering business serving
commercial and industrial clients with headquarters in Irving, Texas, and operations throughout the state of Texas. As a
result of the acquisition, Walker is a wholly owned subsidiary of the Company reported in our electrical services
segment. In addition to the Walker acquisition, we completed two additional acquisitions in 2019 which were
“tucked- in” with existing operations. The total purchase price for these additional acquisitions, including earn-outs, was
$2.6 million.
The results of operations of acquisitions are included in our consolidated financial statements from their
respective acquisition dates. Our consolidated Balance Sheet includes preliminary allocations of the purchase price to the
assets acquired and liabilities assumed for the applicable acquisitions pending the completion of the final valuation of
intangible assets and accrued liabilities. Excluding the Walker and TAS acquisitions, the acquisitions completed in 2020
and the prior year were not material, individually or in the aggregate. Additional contingent purchase price (“earn-out”)
has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs, when they are
not subject to the continued employment of the sellers, are estimated as of the purchase date and included as part of the
consideration paid for the acquisition. If we have an earn-out under which continued employment is a condition to
receipt of payment, then the earn-out is recorded as compensation expense over the period earned.
6. Goodwill and Identifiable Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisitions and purchase price adjustments (See Note 5) . . . . . . . . .
Impact of segment reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and purchase price adjustments (See Note 5) . . . . . . . . .
Balance at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
235,182 $
579
(1,101)
234,660
72,788
307,448 $
—
96,686
1,101
97,787
59,157
156,944
Mechanical Services Electrical Services
Segment
Segment
Total
$ 235,182
97,265
—
332,447
131,945
$ 464,392
The aggregate goodwill balance as of December 31, 2020 and 2019 includes $116.6 million of accumulated
impairment charges, all of which relate to the mechanical services segment.
67
We perform our annual impairment testing on October 1, or more frequently, if events and circumstances
indicate impairment may have occurred. As discussed in Note 2, “Summary of Significant Accounting Policies,” we
have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value
of the reporting unit is less than the carrying value.
During our annual impairment testing on October 1, 2019, we performed a quantitative assessment where the
fair value of each reporting unit was estimated using a discounted cash flow model combined with a market valuation
approach. We assigned a weighting of 50% to the discounted cash flow analysis and 50% to the public company
approach for the year ended December 31, 2019. Based on this assessment, we concluded that the fair value of each of
the reporting units was greater than its carrying value. The calculated fair values for the majority of the Company’s
reporting units that have goodwill were significantly in excess (all greater than 80%) of the respective reporting unit’s
carrying value, while two reporting units that were recently acquired had calculated fair values in excess of carrying
value of at least 27%.
During our annual impairment testing on October 1, 2020, we performed a qualitative assessment for all of our
reporting units except one, which considered various factors, including changes in the carrying value of the reporting
unit, forecasted operating results, long-term growth rates and discount rates. Additionally, we considered qualitative key
events and circumstances (i.e. macroeconomic environment, industry and market specific conditions, cost factors and
events specific to the reporting unit, etc.). Based on this assessment, we concluded that it was more likely than not that
the fair value of each of the reporting units was greater than its carrying value. Accordingly, no further testing was
required. For Walker, we performed a step 1 quantitative assessment and the calculated fair value exceeded the carrying
value by 24%. As a result of uncertainty caused by COVID-19 and Walker’s smaller excess of fair value percentage, this
reporting unit is more susceptible to impairment risk from additional adverse changes in its operating environment,
including micro- and macroeconomic environment conditions that could negatively impact them. Such adverse changes
could include worsening economic conditions in the locations or markets they primarily serve, whether due to
COVID- 19 or other events and conditions. As of December 31, 2020, Walker had a goodwill balance of $96.8 million.
There are significant inherent uncertainties and management judgment involved in estimating the fair value of
each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of
our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current
estimates and assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in
future periods.
Identifiable Intangible Assets, Net
Identifiable intangible assets consist of the following (dollars in thousands):
Customer Relationships
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade Names . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
Weighted-Average
Remaining Useful Lives Gross Book Accumulated Gross Book Accumulated
Value
Amortization
$ 255,692 $ (103,919) $ 183,061 $ (80,813)
(6,388)
(15,281)
$ 366,987 $ (135,180) $ 262,456 $ (102,482)
in Years
8.0
2.0
20.5
11.7
7,400
71,995
19,800
91,495
(12,600)
(18,661)
December 31, 2019
Amortization
Value
The amounts attributable to customer relationships and tradenames are amortized to “Selling, General and
Administrative Expenses” based upon the estimated consumption of their economic benefits, or a straight - line method
over periods from one to twenty-five years if the pattern of economic benefit cannot otherwise be reliably estimated. The
amounts attributable to backlog are being amortized to “Cost of Services” on a proportionate method over the remaining
backlog period. Amortization expense for the years ended December 31, 2020, 2019 and 2018 was $32.7 million,
$27.1 million and $20.1 million, respectively.
68
As of December 31, 2020, future amortization expense of identifiable intangible assets was as follows (in
thousands):
Year ended December 31—
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,344
27,412
23,514
22,164
19,977
106,396
231,807
7. Property and Equipment
Property and equipment consist of the following (dollars in thousands):
Estimated
Useful Lives
in Years
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
1 – 7
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . .
1 - 20
Computer and telephone equipment . . . . . . . . . . . . . . .
1 - 10
Buildings and leasehold improvements . . . . . . . . . . . . .
1 - 40
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 - 17
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . —
Less—Accumulated depreciation . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . .
December 31,
$
2020
7,167 $
2019
6,206
106,972
35,575
20,744
62,301
5,244
2,123
239,165
(129,369)
$ 117,206 $ 109,796
113,802
43,386
23,215
69,683
5,861
1,294
264,408
(147,202)
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $27.9 million, $24.5 million
and $22.6 million, respectively.
8. Detail of Other Current Liabilities
Other current liabilities consist of the following (in thousands):
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued job losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued sales and use tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities due to former owners . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2020
8,914 $
16,586
2,151
3,731
4,559
10,280
45,271
91,492 $
2019
7,452
14,016
2,226
2,938
5,506
11,219
38,273
81,630
69
9. Debt Obligations
Debt obligations consist of the following (in thousands):
December 31,
2019
28,000
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
150,000
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,483
Notes to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226,483
(348)
Less—unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . .
226,135
Total debt, net of unamortized debt issuance costs . . . . . . . . . . . .
Less—current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,817)
Total long-term portion of debt, net . . . . . . . . . . . . . . . . . . . . . . . . $ 235,733 $ 205,318
2020
70,000 $
135,000
31,000
236,000
(267)
235,733
—
At December 31, 2020, future principal payments of debt are as follows (in thousands):
Year ended December 31—
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
23,000
34,000
26,500
152,500
—
$ 236,000
Interest expense included the following primary elements (in thousands):
Year Ended December 31,
2018
2019
2020
Interest expense on notes to former owners . . . . . . . . . . . . . . . . . $ 1,354 $ 1,531 $ 642
2,211
Interest expense on borrowings and unused commitment fees . .
Interest expense on interest rate swaps . . . . . . . . . . . . . . . . . . . . .
—
474
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . .
383
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,385 $ 9,317 $ 3,710
6,887
—
512
387
5,319
338
830
544
Revolving Credit Facility and Term Loan
In December 2019, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks,
increasing our borrowing capacity from $400.0 million to $600.0 million. As amended, the Facility is composed of a
revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility also provides for a
$150.0 million accordion or increase option for the revolving portion of the Facility. As of December 31, 2020, the
Facility capacity was $585.0 million as the term loan was paid down by $15.0 million since the inception of the Facility.
The amended Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The
Facility expires in January 2025 and is secured by a first lien on substantially all of our personal property except for
assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and our wholly
owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. In 2019,
we incurred approximately $1.4 million in financing and professional costs in connection with an amendment to the
Facility which are being amortized over the remaining term of the Facility. Of this amount, $0.4 million is attributable to
the term loan and is being amortized using the effective interest method. The remaining $1.0 million is attributable to the
revolving credit line, which combined with the previous unamortized costs of $1.3 million, is being amortized over the
remaining term of the Facility on a straight-line basis as a non-cash charge to interest expense. For the term loan, we are
required to make quarterly payments increasing over time from 1.25% to 3.75% of the original aggregate principal
amount of the term loan, with the balance due in January 2025. As of December 31, 2020, we had $135.0 million
70
principal outstanding on the term loan, $70.0 million of outstanding borrowings on the revolving credit facility,
$49.5 million in letters of credit outstanding and $330.5 million of credit available.
Collateral
A common practice in our industry is the posting of payment and performance bonds with customers. These
bonds are offered by financial institutions known as sureties and provide assurance to the customer that in the event we
encounter significant financial or operational difficulties, the surety will arrange for the completion of our contractual
obligations and for the payment of our vendors on the projects subject to the bonds. In cooperation with our lenders, we
granted our sureties a first lien on assets such as receivables, costs and estimated earnings in excess of billings, and
equipment specifically identifiable to projects for which bonds are outstanding, as collateral for potential obligations
under bonds. As of December 31, 2020, the book value of these assets was approximately $167.8 million.
Covenants and Restrictions
The Facility contains financial covenants defining various financial measures and the levels of these measures
with which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA
is defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given
quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision
for income taxes; (c) depreciation and amortization; (d) stock compensation; (e) other non - cash charges; and
(f) pre - acquisition results of acquired companies. The following is a reconciliation of Credit Facility Adjusted EBITDA
to net income for 2020 (in thousands):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,139
41,401
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,282
60,629
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,934
Pre-acquisition results of acquired companies, as defined under the Facility . . . . .
18,511
Credit Facility Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,896
The Facility’s principal financial covenants include:
Total Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to
our Credit Facility Adjusted EBITDA not exceed 3.00 to 1.00 as of the end of each fiscal quarter. The leverage
ratio as of December 31, 2020 was 0.8.
Fixed Charge Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted
EBITDA, less non-financed capital expenditures, provision for income taxes, dividends and amounts used to
repurchase stock when the Company’s Total Leverage Ratio exceeds 2.00 to 1.00 to (b) the sum of interest
expense and scheduled principal payments of indebtedness be at least 1.50 to 1.00. Credit Facility Adjusted
EBITDA, capital expenditures, provision for income taxes, dividends, stock repurchase payments, interest
expense, and scheduled principal payments are defined under the Facility for purposes of this covenant, to be
amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The
fixed charge coverage ratio as of December 31, 2020 was 7.2.
Other Restrictions—The Facility permits acquisitions of up to $5.0 million per transaction, provided
that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not
exceed $10.0 million. However, these limitations only apply when the Company’s Total Leverage Ratio is
greater than 2.50 to 1.00.
While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our
debt level under the Facility at a quarter - end covenant compliance measurement date were to cause us to violate
71
the Facility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we
currently have could be negatively impacted by the lenders.
We were in compliance with all of our financial covenants as of December 31, 2020.
Interest Rates and Fees
There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the
Eurodollar Rate Loan Option. Additional margins are then added to these two rates. Under the Base Rate Loan Option,
the interest rate is determined based on the highest of the Federal Funds Rate plus 0.5%, the prime lending rate offered
by Wells Fargo Bank, N.A. or the one - month Eurodollar Rate plus 1.00%. Under the Eurodollar Rate Loan Option, the
interest rate is determined based on the one- to six - month Eurodollar Rate. The Eurodollar Rate corresponds very closely
to rates described in various general business media sources as the London Interbank Offered Rate or “LIBOR.”
Additional margins are then added to these rates. The additional margins are determined based on the ratio of our
Consolidated Total Indebtedness as of a given quarter end to our “Credit Facility Adjusted EBITDA,” which shall mean
Consolidated EBITDA as such term is defined in the credit agreement, for the twelve months ending as of that quarter
end.
The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they
can and do move up and down from time to time. For illustrative purposes, the following are the respective market rates
as of December 31, 2020 relating to interest options under the Facility:
Base Rate Loan Option:
Federal Funds Rate plus 0.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.59%
Wells Fargo Bank, N.A. Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25%
One-month LIBOR plus 1.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14%
Eurodollar Rate Loan Option:
One-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.14%
Six-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.26%
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self - funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay
specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified
actions. If this were to occur, we would be required to reimburse the lenders for amounts they fund to honor the letter of
credit holder’s claim. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of
credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders,
letters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim
made against a letter of credit that resulted in payments by a lender or by us and believe such claim is unlikely in the
foreseeable future.
Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters
of credit at any given time. Letter of credit fees and commitment fees are based on the ratio of Consolidated Total
Indebtedness to Credit Facility Adjusted EBITDA.
Consolidated Total Indebtedness to
Credit Facility Adjusted EBITDA
Less than 1.00 1.00 to 1.75 1.75 to 2.50 2.50 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurodollar Rate Loan Option . . . . . . . . . . . . . . . . . . . . . . .
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitment fees on any portion of the Revolving Loan
capacity not in use for borrowings or letters of credit at
any given time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.25 %
1.25 %
1.25 %
0.50 %
1.50 %
1.50 %
0.75 %
1.75 %
1.75 %
1.00 %
2.00 %
2.00 %
0.20 %
0.25 %
0.30 %
0.35 %
72
The weighted average interest rate applicable to the borrowings under the revolving credit facility was
approximately 1.4% as of December 31, 2020. The weighted average interest rate applicable to the term loan was
approximately 1.4% as of December 31, 2020.
Notes to Former Owners
As part of the consideration used to acquire four companies, we have outstanding notes to the former owners.
Together, these notes had an outstanding balance of $31.0 million as of December 31, 2020. In conjunction with the
acquisition of T E C in the fourth quarter of 2020, we issued a promissory note to former owners with an outstanding
balance of $7.0 million as of December 31, 2020 that bears interest, payable quarterly, at a stated interest rate of 2.5%.
The principal is due in December 2023. In conjunction with the acquisition of TAS in the second quarter of 2020, we
issued a promissory note to former owners with an outstanding balance of $8.0 million as of December 31, 2020 that
bears interest, payable quarterly, at a stated interest rate of 3.5%. The principal is due in April 2022. In conjunction with
the acquisition of the electrical contractor in North Carolina in the first quarter of 2020, we issued a promissory note to
former owners with an outstanding balance of $6.0 million as of December 31, 2020 that bears interest, payable
quarterly, at a stated interest rate of 3.0%. The principal is due in installments in February 2023 and February 2024. In
conjunction with the Walker acquisition in the second quarter of 2019, we issued a promissory note to former owners
with an outstanding balance of $10.0 million as of December 31, 2020 that bears interest, payable quarterly, at a stated
interest rate of 4.0%. The remaining principal is due in April 2023.
10. Leases
We lease certain facilities, vehicles and equipment under noncancelable operating leases. The most significant
portion of these noncancelable operating leases are for the facilities occupied by our corporate office and our operating
locations. Leases with an initial term of 12 months or less are not recorded on the Balance Sheet. We account for lease
components separately from the non-lease components. We have certain leases with variable payments based on an
index as well as some short-term leases on equipment and facilities. Variable lease expense and short-term lease expense
were not material to our financial statements and aggregated to $7.7 million in 2020 and $8.4 million in 2019. Lease
right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments
over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments. The
weighted average discount rate as of December 31, 2020 and 2019 was 4.2% and 3.9%, respectively. We recognize lease
expense, including escalating lease payments and lease incentives, on a straight-line basis over the lease term. Lease
expense for the years ended December 31, 2020, 2019 and 2018 was $28.2 million, $24.8 million and $23.4 million,
respectively.
The lease terms generally range from three to ten years. Some leases include one or more options to renew,
which may be exercised to extend the lease term. We include the exercise of lease renewal options in the lease term
when it is reasonably certain that we will exercise the option and such exercise is at our sole discretion. The weighted
average remaining lease term was 7.5 years at December 31, 2020 and 8.1 years at December 31, 2019.
A majority of the Company’s real property leases are with individuals or entities with whom we have no other
business relationship. However, in certain instances the Company enters into real property leases with current or former
employees. Rent paid to related parties for the years ended December 31, 2020, 2019 and 2018 was approximately $4.2
million, $3.7 million and $4.8 million, respectively.
If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the
remaining lease payments under the term of the lease. Our lease agreements do not contain any material residual value
guarantees or material restrictive covenants. On rare occasions, we rent or sublease certain real estate assets that we no
longer use to third parties.
73
The following table summarizes the lease assets and liabilities included in the consolidated Balance Sheet as
follows (in thousands):
Lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Lease liabilities:
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2020 December 31, 2019
84,073
94,727
$
16,586
80,576
97,162
$
$
14,016
72,697
86,713
The maturities of lease liabilities as of December 31, 2020 are as follows (in thousands):
Year ending December 31—
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,254
17,004
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,727
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,221
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,108
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,645
Total Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113,959
Less—Present Value Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,797)
Present Value of Lease Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,162
Supplemental information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities . . . . . . . $
Lease right-of-use assets obtained in exchange for lease liabilities . . . . . . . . . . . $
20,443 $
27,346 $
16,895
26,811
Year Ended December 31,
2019
2020
11. Income Taxes
Provision for Income Taxes
Our provision for income taxes relating to continuing operations consists of the following (in thousands):
Current tax provision—
2020
December 31,
2019
2018
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,556 $ 33,281 $ 22,728
State and Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,589
Total current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,317
8,388
41,669
12,798
49,354
Deferred tax provision (benefit)—
4,347
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109
State and Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,456
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,401 $ 37,418 $ 35,773
(3,750)
(501)
(4,251)
(5,483)
(2,470)
(7,953)
74
The provision for income taxes for the years ended December 31, 2020, 2019 and 2018 resulted in effective tax
rates on continuing operations of 21.6%, 24.7% and 24.1%, respectively. The reasons for the differences between these
effective tax rates and the federal statutory rates are as follows (in thousands):
2020
December 31,
2019
2018
Federal statutory rate of— . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes at the federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,223
Increases (decreases) resulting from—
21 %
21 %
21 %
$ 31,866
$ 31,222
Net state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R&D tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179D deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,406
(254)
18,557
2,470
(26,133)
(1,062)
—
(426)
(380)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,401
6,644
(279)
7,338
2,180
(4,569)
(5,126)
—
(714)
78
$ 37,418
7,470
(2,852)
(15)
1,926
(2,726)
—
2,225
(1,293)
(184)
$ 35,773
Our provision for income taxes was reduced by $2.8 million in the first quarter of 2018 due to a reduction in
unrecognized tax benefits from the filing of a federal income tax automatic accounting method change application.
In the third quarter of 2019, we filed an amended federal return for 2015 to claim the credit for increasing
research activities (the “R&D tax credit”) and recorded a $4.6 million tax benefit that was fully offset by an addition to
unrecognized tax benefits. We previously filed an amended federal return for 2014 to claim the R&D tax credit during
2018 and recorded a $2.7 million tax benefit that was also fully offset by an addition to unrecognized tax benefits. These
$7.3 million of tax benefits were fully offset by additions to unrecognized tax benefits due to the uncertainty of the
outcome from examinations opened by the Internal Revenue Service (the “IRS”). As a result, the R&D tax credit
claimed had no impact on our effective tax rates.
During 2018, we dissolved our Puerto Rican subsidiary and thus wrote-off the remaining $2.2 million of net
operating loss (“NOL”) carryforwards and related valuation allowance. The dissolution of our Puerto Rican subsidiary
did not have an impact on our 2018 effective tax rate.
For the year ended December 31, 2019, our provision for income taxes was reduced by $2.2 million due to
benefits from the filing, and expected filing, of amended returns to claim the energy efficient commercial buildings
deduction (the “179D deduction”) allocated to us.
During the third quarter of 2020, the IRS completed its examination of our amended federal returns for 2014
and 2015 and issued a Revenue Agent Report (“RAR”) allowing the $8.9 million of refund claims in full. Subsequently,
the Joint Committee on Taxation (the “JCT”) reviewed and approved the refund claims. As a result, our provision for
income taxes was reduced by $8.3 million due to a reduction in unrecognized tax benefits of which $1.0 million related
to the 179D deduction.
In early October 2020, we filed amended federal returns for 2016, 2017 and 2018 to claim the R&D tax credit
and 179D deduction and recorded tax benefits of $6.1 million, $8.5 million and $11.9 million, respectively. The $26.5
million of tax benefits have been offset by additions to unrecognized tax benefits of $26.4 million due to the uncertainty
of the outcome of future IRS examinations. The R&D tax credit and 179D deduction for 2016, 2017 and 2018, therefore,
had no material impact on our effective tax rate for the year ended December 31, 2020. At this time, we cannot
reasonably estimate the R&D tax credit for years after 2018 or 179D deduction for years after 2017.
75
Deferred Tax Assets (Liabilities)
Significant components of the deferred tax assets and deferred tax liabilities as reflected on the balance sheets
are as follows (in thousands):
Year Ended
December 31,
2020
2019
Deferred tax assets—
Accounts receivable and allowance for credit losses . . . . . . . . . . . $
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,186 $
2,791
39,761
22,768
12,127
—
627
80,260
(514)
79,746
1,660
2,561
25,569
20,873
2,750
7,988
525
61,926
(369)
61,557
Deferred tax liabilities—
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(13,877)
(22,715)
(609)
(242)
(11,615)
(2,626)
(51,684)
28,062 $
(11,286)
(20,873)
(876)
—
(6,020)
(2,004)
(41,059)
20,498
The deferred tax assets and liabilities reflected above are included in the consolidated balance sheets as follows
(in thousands):
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
29,401 $
1,339 $
2019
21,923
1,425
As of December 31, 2020, we had $9.4 million of deferred tax assets related to $44.9 million of federal NOL
carryforwards as a result of the TAS acquisition. If not used, such carryforwards will begin to expire in 2031. We also
had $2.7 million of deferred tax assets related to $46.2 million of state NOL carryforwards, including carryforwards
acquired from TAS. The state NOL carryforwards will expire in varying amounts between the years 2021 and 2040.
Valuation allowances of $0.5 million have been recorded against certain of the state NOL carryforwards. The $2.2
million of deferred tax assets for state NOL carryforwards, net of valuation allowances, reflects our conclusion that it is
more-likely-than-not these assets will be realized based upon expected future earnings in certain of our subsidiaries.
Pursuant to Section 382 of the Code, utilization of our federal NOL carryforwards is subject to annual
limitations due to the ownership change in TAS. In general, an ownership change, as defined by Section 382, results
from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more
than 50 percentage points over a three-year period.
We regularly update our assessment of the realizability of our deferred tax assets, in particular, those related to
state NOL carryforwards. A return to profitability in our subsidiaries with valuation allowances would result in a release
of a portion of the valuation allowances relating to realizable deferred tax assets. A sustained period of profitability
could cause a change in our judgment of any remaining deferred tax assets. If that were to occur, then it is likely that we
would reverse some or all of the remaining valuation allowances.
76
Liabilities for Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest
and penalties, is as follows (in thousands):
Year Ended
December 31,
2019
2018
2020
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,199 $ 2,966 $ 8,929
—
Additions based on tax positions related to current year . . . .
Additions based on tax positions related to prior years . . . . .
2,726
Reductions for tax positions related to prior years . . . . . . . . .
(8,689)
Reductions for settlements with tax authorities . . . . . . . . . . .
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,756 $ 10,199 $ 2,966
—
26,858
—
(8,301)
—
7,473
(240)
—
As of December 31, 2020, 2019 and 2018, we had $28.8 million, $10.2 million and $3.0 million, respectively,
of unrecognized tax benefits, which if recognized in future periods, would impact our effective tax rates. We also had
accrued zero, zero and $0.6 million for potential interest and penalties related to the unrecognized tax benefits as of
December 31, 2020, 2019 and 2018, respectively. We recognize potential interest and penalties related to unrecognized
tax benefits in our provision for income taxes.
We are subject to taxation in the United States and various state jurisdictions. During 2019, the IRS commenced
an examination of our amended federal returns for 2014 and 2015. The IRS completed its examination and issued an
RAR allowing our refund claims in full, which was reviewed and approved by the JCT during the third quarter of 2020.
As a result, our unrecognized tax benefits were reduced by $8.3 million. In late January 2021, we received notification
from the IRS that our federal returns for 2017 and 2018 were selected for examination. The completion of this IRS
examination could impact our future results of operations and financial condition.
State income tax returns are generally subject to examination for a period of three to four years after filing the
returns. However, the state impact of any federal audit adjustments and/or amendments remains subject to examination
by various states for up to one year after formal notification to the states. We generally remain open to examination by
various state tax authorities for the 2016 tax year forward. As of December 31, 2020, we did not have any state audits
underway that would have a material impact on our financial position or results of operations.
We believe it is reasonably possible that a reduction of up to $28.8 million in unrecognized tax benefits could
occur within the next twelve months. Any reduction in our unrecognized tax benefits, due to the future recognition of
those tax benefits, would affect our effective tax rates.
12. Employee Benefit Plans
We and certain of our subsidiaries sponsor various retirement plans for most full - time and some part - time
employees. These plans primarily consist of defined contribution plans. The defined contribution plans generally provide
for contributions up to 2.5% of covered employees’ salaries or wages. These contributions totaled $16.3 million in 2020,
$14.2 million in 2019 and $10.8 million in 2018. Of these amounts, approximately $0.5 million and $0.3 million were
payable to the plans at December 31, 2020 and 2019, respectively.
Certain of our subsidiaries also participate or have participated in various multi - employer pension plans for the
benefit of employees who are union members. As of December 31, 2020 and 2019, we had 6 and 7, respectively, who
were union members. There were no contributions made to multi - employer pension plans in 2020, 2019 or 2018. The
data available from administrators of other multi - employer pension plans is not sufficient to determine the accumulated
benefit obligations, nor the net assets attributable to the multi - employer plans in which our employees participate or
previously participated.
Certain individuals at one of our operating units are entitled to receive fixed annual payments that reach a
maximum amount, as specified in the related agreements, for a 15 year period following retirement or, in some cases, the
attainment of 65 years of age. We recognize the unfunded status of the plan as a non - current liability in our Consolidated
Balance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vested after
77
20 years of service. We had an unfunded benefit liability of $4.0 million and $4.1 million recorded as of December 31,
2020 and 2019, respectively.
13. Commitments and Contingencies
Claims and Lawsuits
We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of
business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have
estimated and provided accruals for probable losses and related legal fees associated with certain litigation in the
accompanying consolidated financial statements. While we cannot predict the outcome of these proceedings, in
management’s opinion and based on reports of counsel, any liability arising from these matters individually and in the
aggregate will not have a material effect on our operating results, cash flows or financial condition, after giving effect to
provisions already recorded.
We are in a dispute with a customer regarding the outcome of a completed project and also regarding the
obligation to perform subcontract work under two executed letters of intent for subsequent projects that we believe are
not enforceable. The customer is claiming approximately $15 million in damages related to performance of the original
project as well as excess costs to perform the work that was subject to the letters of intent. We are claiming
approximately $9 million composed of unpaid amounts under the completed contract as well as costs and inefficiencies
that we suffered. We have a lien on the project, and this matter is currently scheduled for arbitration in the second
quarter of 2021 with a likely decision in the following months. As of December 31, 2020, we recorded an accrual for
this matter based on our analysis of likely outcomes related to this dispute; however, it is possible that the ultimate
outcome and associated costs will deviate from our estimates and that, in the event of an unexpectedly adverse outcome,
we may experience additional costs and expenses in future periods.
Surety
Many customers, particularly in connection with new construction, require us to post performance and payment
bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety
make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs.
To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf,
and do not expect such losses to be incurred in the foreseeable future.
Current market conditions for surety markets and bonding capacity are adequate with acceptable terms and
conditions. Historically, approximately 15% to 25% of our business has required bonds. While we currently have strong
surety relationships to support our bonding needs, future market conditions or changes in the sureties’ assessment of our
operating and financial risk could cause the sureties to decline to issue bonds for our work. If that were to occur, the
alternatives include doing more business that does not require bonds, posting other forms of collateral for project
performance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also
encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe
our general operating and financial characteristics would enable us to ultimately respond effectively to an interruption in
the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the
near term.
Self - Insurance
We are substantially self - insured for workers’ compensation, employer’s liability, auto liability, general
liability and employee group health claims, in view of the relatively high per - incident deductibles we absorb under our
insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and
industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our
accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and
longer - developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a third - party
actuary quarterly.
78
Our self - insurance arrangements as of December 31, 2020 were as follows:
Workers’ Compensation—The per - incident deductible for workers’ compensation is $250,000. Losses
above $250,000 are determined by statutory rules on a state - by - state basis and are fully covered by excess
workers’ compensation insurance.
Employer’s Liability—For employer’s liability, the per-incident deductible is $250,000 and then we
have several layers of excess loss insurance policies that cover losses up to $132.5 million in aggregate across
this risk area (as well as general liability and auto liability noted below).
General Liability—For general liability, the per-incident deductible is $250,000. We are fully insured
for the next $10.0 million of each loss, and then have several layers of excess loss insurance policies that cover
losses up to $132.5 million in aggregate across this risk area (as well as employer’s liability noted above and
auto liability noted below).
Auto Liability—For auto liability, the per-incident deductible is $250,000. We are fully insured for the
next $10.0 million of each loss, and then have several layers of excess loss insurance policies that cover losses
up to $132.5 million in aggregate across this risk area (as well as employer’s liability and general liability noted
above).
Employee Medical—We have three medical plans. The deductible for employee group health claims is
$350,000 per person, per policy (calendar) year for each plan. Insurance then covers any responsibility for
medical claims in excess of the deductible amount.
Our $132.5 million of aggregate excess loss coverage above applicable per - incident deductibles
represents one policy limit that applies to all lines of risk; we do not have a separate $132.5 million of excess
loss coverage for each of general liability, employer’s liability and auto liability.
14. Stockholders’ Equity
2012 Equity Incentive Plan
In May 2012, our stockholders approved our 2012 Equity Incentive Plan (the “2012 Plan”), which provides for
the granting of incentive or non - qualified stock options, stock appreciation rights, restricted or deferred stock, dividend
equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and
reserved for issuance under the 2012 Plan is 5.1 million shares. As of December 31, 2020, there were 2.9 million shares
available for issuance under this plan; however, following adoption of the 2017 Plan (described below), no additional
shares will be issued under the 2012 Plan. The 2012 Plan will expire in May 2022.
2017 Omnibus Incentive Plan
In May 2017, our stockholders approved our 2017 Omnibus Incentive Plan (the “2017 Plan”), which provides
for the granting of incentive or non - qualified stock options, stock appreciation rights, restricted or deferred stock,
dividend equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized
and reserved for issuance under the 2017 Plan is 2.9 million shares. As of December 31, 2020, there were 2.0 million
shares available for issuance under this plan. The 2017 Plan will expire in May 2027. Additionally, we have outstanding
stock options, stock awards and stock units that were issued under other plans, and no further grants may be made under
those plans.
Share Repurchase Program
On March 29, 2007, our Board of Directors approved a stock repurchase program to acquire up to 1.0 million
shares of our outstanding common stock. Subsequently, the Board has from time to time increased the number of shares
that may be acquired under the program and approved extensions of the program. On December 8, 2020, the Board
approved an extension to the program by increasing the shares authorized for repurchase by 0.7 million shares. Since the
inception of the repurchase program, the Board has approved 10.3 million shares to be repurchased. As of December 31,
79
2020, we have repurchased a cumulative total of 9.3 million shares at an average price of $19.63 per share under the
repurchase program.
The share repurchases will be made from time to time at our discretion in the open market or privately
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve
months ended December 31, 2020, we repurchased 0.7 million shares for approximately $30.1 million at an average
price of $43.99 per share.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted EPS is computed considering the dilutive effect of stock
options, restricted stock, restricted stock units and performance stock units. The vesting of unvested contingently
issuable performance stock units is based on the achievement of certain earnings per share targets and total shareholder
return. These shares are considered contingently issuable shares for purposes of calculating diluted earnings per share.
These shares are not included in the diluted earnings per share denominator until the performance criteria are met, if it is
assumed that the end of the reporting period was the end of the contingency period.
Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per
share, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock
units and performance stock units are included in basic earnings per share weighted outstanding from the vesting date.
There were less than 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the
years ended December 31, 2020, 2019 and 2018, respectively.
The following table reconciles the number of shares outstanding with the number of shares used in computing
basic and diluted earnings per share for each of the periods presented (in thousands):
Year Ended December 31,
2018
2019
2020
Common shares outstanding, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,188 36,658 36,894
Effect of using weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
308
Shares used in computing earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,542 36,854 37,202
Effect of shares issuable under stock option plans based on the treasury stock method . .
283
Effect of restricted and contingently issuable shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107
Shares used in computing earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,738 37,131 37,592
123
73
204
73
354
196
15. Stock - Based Compensation
Grants of stock options, restricted stock and restricted stock units, and performance share units have been,
under the 2012 Plan and under the 2017 Plan, determined and administered by the compensation committee of the Board
of Directors. In 2019, the Board of Directors approved a change to the structure of long-term incentive grants to remove
stock options, commencing with the March 2019 equity grant. Total stock - based compensation expense was
$6.9 million, $5.9 million and $7.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Stock-
based compensation expense is recognized using the straight - line method over the vesting period and generally vests
over a three-year vesting period. Certain awards provide for accelerated vesting when the sum of an employee's age and
years of service is at least 75. We recognize forfeitures as they occur. Total income tax benefit recognized for
stock - based compensation arrangements was $1.5 million, $1.3 million and $1.5 million for each of the years ended
December 31, 2020, 2019 and 2018.
We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not
available. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to
meet their statutory tax withholding requirements. These shares are accounted for as treasury stock based upon the value
of the stock on the date of vesting.
80
Stock Options
The following table summarizes activity under our stock option plans (shares in thousands):
Year Ended
December 31,
2020
Weighted-
Average
Stock Options
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares Exercise Price
27.06
—
18.85
—
—
30.53
382 $
— $
(114) $
— $
— $
268 $
241
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was
$3.2 million, $3.5 million and $6.7 million, respectively. Stock options exercisable as of December 31, 2020 have a
weighted - average remaining contractual term of 5.2 years and an aggregate intrinsic value of $5.7 million. As of
December 31, 2020, we have 0.3 million options that are vested or expected to vest; these options have a weighted
average exercise price of $30.53 per share, have a weighted - average remaining contractual term of 5.4 years and an
aggregate intrinsic value of $5.9 million.
The following table summarizes information about stock options outstanding at December 31, 2020 (shares in
thousands):
Options Outstanding
Weighted-
Average
Remaining
Contractual
Options Exercisable
Weighted-
Average
Number
Exercisable at
Weighted-
Average
Number
Outstanding at
12/31/2020
Life (in years) Exercise Price 12/31/2020
Range of Exercise Prices
$11.21 - $15.00 . . . . . . . . . . . . . . . . . . . . . . . .
$15.01 - $35.00 . . . . . . . . . . . . . . . . . . . . . . . .
$35.01 - $42.50 . . . . . . . . . . . . . . . . . . . . . . . .
$11.21 - $42.50 . . . . . . . . . . . . . . . . . . . . . . . .
14
130
124
268
2.2 $
4.4 $
6.8 $
5.4 $
13.76
23.54
39.78
30.53
Exercise Price
13.76
23.54
39.02
29.18
14 $
130 $
97 $
241 $
The fair value of each option award is estimated, based on several assumptions, on the date of grant using the
Black - Scholes option valuation model. We did not grant any options in 2019 or 2020. The fair values and the
assumptions used for the 2018 grant are shown in the table below:
Weighted-average fair value per share of options granted . . . . . . . . . . . . . . . . . . . . . $
Fair value assumptions:
2018
13.06
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.79%
31.7%
2.66%
5.3 years
Stock options are accounted for as equity instruments. As of December 31, 2020, the unrecognized
compensation cost related to stock options was less than $0.1 million, which is expected to be recognized over a
weighted - average period of 0.3 years. The total fair value of options vested during the year ended December 31, 2020
was $0.7 million.
81
The following table summarizes information about nonvested stock option awards as of December 31, 2020 and
changes for the year ended December 31, 2020 (shares in thousands):
Weighted-Average
Stock Options
Nonvested at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
Grant Date
Fair Value
81 $
— $
(54) $
— $
27 $
12.53
—
12.26
—
13.06
Restricted Stock and Restricted Stock Units
The following table summarizes activity under our restricted stock plans (shares in thousands):
Year Ended
December 31,
2020
Restricted Stock and Restricted Stock Units
Unvested at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average Grant
Shares Date Fair Value
47.58
39.03
39.13
45.21
45.21
91 $
118 $
(85) $
(4) $
120 $
Approximately $1.1 million of compensation expense related to restricted stock and restricted stock units will
be recognized over a weighted - average period of 1.8 years. The total fair value of shares vested during the year ended
December 31, 2020 was $3.3 million. The weighted - average fair value per share of restricted stock shares and units
awarded during 2020, 2019 and 2018 was $39.03, $51.02 and $44.02, respectively. The aggregate intrinsic value of
restricted stock vested during the years ended December 31, 2020, 2019 and 2018 was $2.9 million, $3.5 million and
$3.3 million, respectively.
Performance Stock Units
Under the 2012 Plan, we granted dollar - denominated performance vesting restricted stock units (“PSUs”),
which cliff vest at the end of a three-year performance period. The PSUs are subject to two performance measures; 50%
of the PSUs are based on the annual performance of our stock price relative to a group of our peers (total shareholder
return) and 50% of the PSUs are measured based on meeting or exceeding a pre - determined annual earnings per share
target as set by our Board of Directors (EPS). Depending on the Company’s performance in relation to the established
performance measures, the awards may vest at zero to a maximum of 2.0 times the dollar - denominated award granted at
target. Upon achievement of the necessary performance metrics, the award will be determined in dollars and may be
settled in cash or stock based on the market price of the Company’s common stock at the end of the performance period,
at our discretion.
Compensation expense for dollar - denominated performance units will ultimately be equal to the final dollar
value awarded to the grantee upon vesting, settled either in cash or stock. However, throughout the performance period
we must record and accrue expense based on an estimate of that future payout. For units determined by EPS
performance, the awards are evaluated quarterly against established targets in order to estimate the liability throughout
the vesting period. For units determined by total shareholder return performance, a Monte Carlo simulation model was
used to estimate accruals throughout the vesting period. The model simulates our total shareholder return and compares
it against our peer group over the three-year performance period to produce a predicted distribution of relative share
performance. This is applied to the reward criteria to give an expected value of the total shareholder return element. The
calculated fair market value as of December 31, 2020 was $6.2 million. Of this amount, $2.2 million relates to the PSUs
granted in 2018 whose performance period ended December 31, 2020. These awards will be settled within the upcoming
82
year either in cash or stock. The expense related to performance stock units for the years ended December 31, 2020,
2019 and 2018 was $2.7 million, $1.9 million and $2.9 million, respectively. At the December 31, 2020 calculated fair
market value, approximately $0.7 million of compensation expense related to performance stock units will be recognized
over a weighted - average period of 1.4 years.
16. Segment Information
We have two reportable segments: (a) our mechanical segment, which includes HVAC, plumbing, piping, and
controls, as well as off-site construction, monitoring and fire protection; and (b) our electrical segment, which includes
installation and servicing of electrical systems. We consider these two lines of business to be separate segments because
they require different skill sets, and the business models for providing services have some differences, as a mechanical
system requires ongoing maintenance and monitoring and an electrical system generally does not. However, the business
model for installation of new systems or retrofitting existing systems is very similar between the two segments.
Our activities are within the mechanical services industry and the electrical services industry, which represent
our two reportable segments. We aggregate our operating segments into two reportable segments, as the operating
segments meet all of the aggregation criteria. Substantially all of our revenue is generated, and all of our assets are
located, in the United States, our country of domicile. The following table presents information about our reportable
segments (in thousands):
Total Assets at December 31, 2020 . . . . . . . . . . . . . . . . . . $ 1,215,985 $ 449,588 $
Total Assets at December 31, 2019 . . . . . . . . . . . . . . . . . . $ 1,056,609 $ 372,254 $
Corporate
Consolidated
91,782 $ 1,757,355
76,149 $ 1,505,012
Mechanical
Services
Electrical
Services
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,413,016 $ 443,643 $
37,243 $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,740 $
955 $
22,550 $
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,251,560 $ 363,717 $
36,799 $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 465,144 $
1,504 $
27,933 $
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2020
Mechanical
Services
Electrical
Services
Corporate
Year Ended December 31, 2019
Mechanical
Services
Electrical
Services
Corporate
Year Ended December 31, 2018
Mechanical
Services
Electrical
Services
Corporate
Consolidated
— $ 2,856,659
— $ 546,983
24,131
626 $
Consolidated
— $ 2,615,277
— $ 501,943
31,750
2,313 $
Consolidated
— $ 2,182,879
— $ 446,279
27,268
1,266 $
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,176,223 $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 444,960 $
25,945 $
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,656 $
1,319 $
57 $
17. Selected Quarterly Financial Data
Quarterly financial information for the years ended December 31, 2020 and 2019 is summarized as follows (in
thousands, except per share data):
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME PER SHARE:
Q1
700,131 $
117,093
17,716
2020
Q2
743,468 $
145,695
39,495
Q3
714,099 $
147,196
50,088
Q4
698,961
136,999
42,840
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.48 $
0.48 $
1.08 $
1.08 $
1.37 $
1.36 $
1.18
1.17
83
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME PER SHARE:
Q1
538,473 $
106,665
19,866
2019
Q2
650,302 $
120,016
24,173
Q3
706,918 $
142,702
36,233
Q4
719,584
132,560
34,052
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.54 $
0.53 $
0.65 $
0.65 $
0.98 $
0.98 $
0.93
0.92
(1) In the fourth quarter of 2019, we recorded a $4.8 million gain due to insurance proceeds we received in the
fourth quarter related to the ransomware incident that occurred in April 2019.
The sums of the individual quarterly earnings per share amounts do not necessarily agree with year - to - date
earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during
the quarter, the weighted average stock price during the quarter and the dilutive effects of options and contingently
issuable restricted stock in each quarter.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our executive management is responsible for ensuring the effectiveness of the design and operation of our
disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in
Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered
by this report.
Internal Controls over Financial Reporting
Management’s report on our internal controls over financial reporting can be found in Item 8 of this report. The
Independent Registered Public Accounting Firm’s Attestation Report on the effectiveness of our internal controls over
financial reporting can also be found in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in
Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934) during the three months ended December 31,
2020 that has materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
ITEM 9B. Other Information
None.
84
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
We have adopted a code of ethics that applies to our principal executive officer, our principal financial officer,
and our principal accounting officer, as well as to our other employees. This code of ethics consists of our Code of
Conduct. The Company has made this code of ethics available on our website, as described in Item 1 of this annual
report on Form 10 - K. If we make substantive amendments to this code of ethics or grant any waiver, including any
implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8 - K
within four business days of such amendment or waiver.
The other information called for by this item has been omitted in accordance with the instructions to
Form 10 - K. The Company will file with the Commission a definitive proxy statement including the other information to
be disclosed under this item in the 120 days following December 31, 2020 and such information is hereby incorporated
by reference.
ITEMS 11, 12, 13 AND 14.
These items have been omitted in accordance with the instructions to Form 10 - K. The Company will file with
the Commission a definitive proxy statement including the information to be disclosed under the items in the 120 days
following December 31, 2020 and such information is hereby incorporated by reference.
ITEM 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this annual report on Form 10 - K:
PART IV
(1)
Consolidated Financial Statements: The Index to the Consolidated Financial Statements is included
under Part II, Item 8 of this annual report on Form 10 - K and is incorporated herein by reference.
(2)
Financial Statement Schedules:
None.
(b)
Exhibits
Reference is made to the Index of Exhibits immediately following the signature page thereof, which is
incorporated herein by reference.
(c)
Excluded financial statements:
None.
ITEM 16. Form 10-K Summary
None.
85
INDEX OF EXHIBITS
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
4.1
4.2
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
Description of Exhibits
Second Amended and Restated Certificate of Incorporation of the
Registrant
Certificate of Amendment dated May 21, 1998
Certificate of Amendment dated July 9, 2003
Certificate of Amendment dated May 20, 2016
Amended and Restated Bylaws of Comfort Systems USA, Inc.
Form of certificate evidencing ownership of Common Stock of the
Registrant
Description of Registrant’s Securities
Comfort Systems USA, Inc. 1997 Long - Term Incentive Plan
Comfort Systems USA, Inc. 1997 Non - Employee Directors’ Stock
Plan
Amendment to the 1997 Non - Employee Directors’ Stock Plan dated
May 23, 2002
Comfort Systems USA, Inc. 2006 Equity Incentive Plan
Form of Option Award under the Comfort Systems USA, Inc. 2006
Equity Incentive Plan
Form of Option Award under the Comfort Systems USA, Inc. 2006
Stock Options/SAR Plan for Non - Employee Directors
Employment Agreement between the Company, Eastern Heating &
Cooling, Inc. and Alfred J. Giardinelli, Jr.
Amended and Restated 2006 Equity Compensation Plan for
Non - Employee Directors
2008 Senior Management Annual Performance Plan
*10.10
Form of Change in Control Agreement
*10.11
Form of Comfort Systems USA, Inc. Executive Severance Policy
*10.12
Form of Directors and Officers Indemnification Agreement
10.13
10.14
Second Amended and Restated Credit Agreement by and among
Comfort Systems USA, Inc., as Borrower and Wells Fargo Bank,
National Association, as Administrative Agent/Wells Fargo
Securities LLC, as Sole Lead Arranger and Sole Lead Book
Runner/Bank of Texas, N.A., Capital One, N.A., and Regions Bank
as Co - Syndication Agent/and Certain Financial Institutions as
Lenders
Stock Purchase Agreement, dated July 28, 2010
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
3.1
3.2
3.3
3.1
3.1
4.1
4.2
10.1
10.2
10.3
4.5
10.6
10.7
10.1
A
B
10.2
10.3
10.1
10.1
333 - 24021
1998 Form 10 - K
2003 Form 10 - K
May 20, 2016
Form 8 - K
March 25, 2016
Form 8-K
333 - 24021
2019 Form 10-K
333 - 24021
333 - 24021
Second Quarter 2002
Form 10 - Q/A
333 - 138377
2006 Form 10 - K
2006 Form 10 - K
Second Quarter 2003
Form 10 - Q
Proxy Statement
April 10, 2008
Proxy Statement
April 10, 2008
First Quarter 2008
Form 10 - Q
First Quarter 2008
Form 10 - Q
May 19, 2009
Form 8 - K
July 22, 2010
Form 8 - K/A
10.1
July 30, 2010
Form 8 - K
86
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
10.1
Exhibit
Number Filing or File Number
First Quarter 2011
Form 10 - Q
March 28, 2011
Form 8 - K
Second Quarter 2011
Form 10 - Q
10.1
10.1
10.1
10.1
10.1
10.2
A
B
10.1
10.1
10.2
10.1
10.28
10.29
10.1
10.1
10.2
10.33
10.1
10.1
10.1
Third Quarter 2011
Form 10 - Q
First Quarter 2012
Form 10 - Q
March 30, 2012
Form 8 - K
March 30, 2012
Form 8 - K
April 9, 2012
Proxy Statement
April 9, 2012
Proxy Statement
First Quarter 2013
Form 10 - Q
March 22, 2013
Form 8 - K
March 22, 2013
Form 8 - K
Second Quarter 2013
Form 10 - Q
2013 Form 10 - K
2013 Form 10 - K
First Quarter 2014
Form 10 - Q
March 21, 2014
Form 8 - K
March 21, 2014
Form 8 - K
2014 Form 10 - K
Third Quarter 2014
Form 10 - Q
April 9, 2014
Form 8 - K
April 1, 2015
Form 8 - K
Exhibit
Number
*10.15
*10.16
*10.17
10.18
*10.19
Summary of 2011 Incentive Compensation Plan
Description of Exhibits
Form of Performance Restricted Stock Award Agreement dated
March 24, 2011
First Amendment to Comfort Systems USA, Inc. Amended and
Restated 2006 Equity Compensation Plan for Non - Employee
Directors
Amendment No. 1 to Second Amended and Restated Credit
Agreement, Second Amended and Restated Security Agreement,
and Second Amended and Restated Pledge Agreement
Summary of 2012 Incentive Compensation Plan
*10.20
Form of 2012 Restricted Stock Unit Agreement
*10.21
*10.22
Form of 2012 Dollar - denominated Performance Vesting Restricted
Stock Unit Agreement
2012 Equity Incentive Plan
*10.23
2012 Senior Management Annual Performance Plan
*10.24
Summary of 2013 Incentive Compensation Plan
*10.25
Form of 2013 Restricted Stock Unit Agreement
*10.26
10.27
*10.28
*10.29
*10.30
Form of 2013 Dollar - denominated Performance Vesting Restricted
Stock Unit Agreement
Amendment No. 2 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Letter Agreement between the Company and James Mylett
Form of Change in Control Agreement (2013)
Summary of 2014 Incentive Compensation Plan
*10.31
Form of 2014 Restricted Stock Unit Agreement
*10.32
*10.33
10.34
10.35
*10.36
Form of 2014 Dollar - denominated Performance Vesting Restricted
Stock Unit Agreement
Form of Option Award under the Comfort Systems USA, Inc. 2012
Equity Incentive Plan
Amendment No. 3 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Agreement and Plan of Merger between the Company and Dyna
Ten Corporation, dated April 9, 2014
Form of 2015 Restricted Stock Unit Agreement
87
Exhibit
Number
*10.37
*10.38
Description of Exhibits
Form of 2015 Dollar - denominated Performance Vesting Restricted
Stock Unit Agreement
Summary of 2015 Incentive Compensation Plan
*10.39
Form of Amended Change in Control Agreement
10.40
*10.41
*10.42
*10.43
*10.44
10.45
10.46
*10.47
Amendment No. 4 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Form of 2016 Restricted Stock Unit Agreement
Form of 2016 Dollar-denominated Performance Restricted Stock
Unit Agreement
Form of 2016 Stock Option Notice
Resignation and General Release Agreement between the Company
and James Mylett, dated as of January 10, 2017
Stock Purchase Agreement, dated February 21, 2017, by and among
the Company, BCH, the Selling Shareholders and Daryl Blume, in
his capacity as representative of the Selling Shareholders
Form of Promissory Note, dated April 1, 2017, issued by the
Company in favor of each of the Selling Shareholders
2017 Omnibus Incentive Plan
*10.48
2017 Senior Management Annual Performance Plan
*10.49
*10.50
*10.51
*10.52
*10.53
*10.54
10.55
10.56
10.57
10.58
21.1
23.1
31.1
Form of Restricted Stock Unit Agreement under the Company’s
2012 Equity Incentive Plan
Form of Stock Option Notice under the Company’s 2012 Equity
Incentive Plan
Form of Dollar-denominated Performance Restricted Stock Unit
Agreement under the Company’s 2012 Equity Incentive Plan
Form of Restricted Stock Unit Agreement under the Company’s
2017 Omnibus Incentive Plan
Form of Stock Option Notice under the Company’s 2017 Omnibus
Incentive Plan
Form of Dollar-denominated Performance Restricted Stock Unit
Agreement under the Company’s 2017 Omnibus Incentive Plan
Amendment No. 5 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Purchase Agreement, dated February 21, 2019, by and among the
Company, Walker, the Shareholder Sellers and Scott Walker, in his
capacity as representative of the Shareholder Sellers
Amendment No. 6 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Agreement and Plan of Merger dated as of March 9, 2020 among
Comfort Systems USA, Inc., OSC Acquisition Corp., TAS Energy
Inc., and Element Partners II, L.P., as Stockholder Representative
List of subsidiaries of Comfort Systems USA, Inc.
Consent of Ernst & Young LLP
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002
88
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
10.2
10.1
10.1
10.40
10.1
10.2
10.3
10.1
2.1
10.1
A
B
10.2
10.3
10.4
10.1
10.2
10.3
10.1
2.1
April 1, 2015
Form 8 - K
First Quarter 2015
Form 10 - Q
Third Quarter 2015
Form 10 - Q
2015 Form 10-K
March 25, 2016
Form 8-K
March 25, 2016
Form 8-K
March 25, 2016
Form 8-K
January 11, 2017
Form 8-K
February 23, 2017
Form 8-K
April 3, 2017
Form 8-K
April 10, 2017
Proxy Statement
April 10, 2017
Proxy Statement
First Quarter 2017
Form 10-Q
First Quarter 2017
Form 10-Q
First Quarter 2017
Form 10-Q
First Quarter 2018
Form 10-Q
First Quarter 2018
Form 10-Q
First Quarter 2018
Form 10-Q
Second Quarter 2018
Form 10-Q
February 26, 2019
Form 8-K
10.56
2019 Form 10-K
2.1
March 13, 2020
Form 8-K
Filed Herewith
Filed Herewith
Filed Herewith
Exhibit
Number
31.2
32.1
32.2
Description of Exhibits
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
Filed Herewith
Furnished Herewith
Furnished Herewith
89
Exhibit
Number
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Description of Exhibits
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
Cover Page Interactive Data File (the cover page XBRL tags are
embedded in the Inline XBRL document)
* Management contract or compensatory plan.
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
90
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
COMFORT SYSTEMS USA, INC.
By:
/s/ BRIAN E. LANE
Brian E. Lane
President and Chief Executive Officer
Date: February 25, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ BRIAN E. LANE
Brian E. Lane
President, Chief Executive Officer, and
Director (Principal Executive Officer)
February 25, 2021
/s/ WILLIAM GEORGE
William George
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 25, 2021
/s/ JULIE S. SHAEFF
Julie S. Shaeff
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
February 25, 2021
/s/ FRANKLIN MYERS
Franklin Myers
Chairman of the Board
February 25, 2021
/s/ DARCY G. ANDERSON
Darcy G. Anderson
Director
/s/ HERMAN E. BULLS
Herman E. Bulls
/s/ ALAN P. KRUSI
Alan P. Krusi
/s/ JAMES H. SCHULTZ
James H. Schultz
/s/ PABLO G. MERCADO
Pablo G. Mercado
Director
Director
Director
Director
/s/ WILLIAM J. SANDBROOK
William J. Sandbrook
Director
/s/ CONSTANCE E. SKIDMORE
Constance E. Skidmore
Director
/s/ VANCE W. TANG
Vance W. Tang
Director
91
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
Corporate Offi cers
Board of Directors
BRIAN E. LANE
President and
Chief Executive Offi cer
WILLIAM GEORGE III
Executive Vice President
and Chief Financial Offi cer
TRENT T. MCKENNA
Chief Operating Offi cer and
Senior Vice President
CRAIG SASSER
Vice President—Region 1
R. DEAN TILLISON
Senior Vice President—Region 2
BRISTON BLAIR
Vice President—Region 3
DOUG SAVAGE
Vice President—Region 4
FRANKLIN MYERS
Chairman of the Board
Comfort Systems USA, Inc.
Senior Advisor
Quantum Energy Partners
BRIAN E. LANE
President and Chief Executive Offi cer
Comfort Systems USA, Inc.
DARCY G. ANDERSON
Vice Chairman,
Hillwood
HERMAN E. BULLS
Vice Chairman, Americas
and International Director
Jones Lang LaSalle Incorporated
President and Chief Executive Offi cer
Bulls Advisory Group, LLC
ALAN P. KRUSI
Auditors
Ernst & Young, LLP
Houston, Texas
Transfer Agent
American Stock
Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Stock Exchange Listing
NYSE Symbol: FIX
Stockholders’ Meeting
Tuesday, May 18, 2021, at 11:00 am
Virtual-only Format
Via Live Audio Webcast
Corporate Offi ce
675 Bering Drive, Suite 400
Houston, Texas 77057
(713) 830-9600 Phone
(713) 830-9696 Fax
THOMAS N. TANNER
Senior Vice President—Region 5
Retired President, Strategic Development
AECOM Technology Corporation
Web Site
www.comfortsystemsusa.com
TERRENCE A. YOUNG
Senior Vice President—Service
LAURA F. HOWELL
Vice President and General Counsel
JULIE S. SHAEFF
Senior Vice President and
Chief Accounting Offi cer
ILA PATEL
PABLO G. MERCADO
Executive Vice President and
Chief Financial Offi cer
Enlink Midstream, LLC
WILLIAM J. SANDBROOK
Retired Chairman, President and
Chief Executive Offi cer
U.S. Concrete, Inc.
Vice President—Internal Audit
JAMES H. SCHULTZ
Retired President of Trane
Commercial Air Conditioning Group
CONSTANCE E. SKIDMORE
Retired Partner of PriceWaterhouseCoopers
VANCE W. TANG
President and Owner
Vantegrity Consulting
BYRAN FARRIS
Vice President—Risk Management
& Treasury and Director of Integration
WILLIAM FOURT
Vice President—Construction
MICHAEL GOLDBERG
Vice President and Corporate Controller
STEVE TRICKEL
Vice President of Safety
TERRENCE REED
Senior Vice President of
People and Leadership Development
2020 ANNUAL REPORTfor more information visit comfortsystemsusa.comCOMFORT SYSTEMS USA • 2020 ANNUAL REPORT