FirstService Corp

ASC280 – Segment Reporting

In thefourth quarter of2024, the Company adopted ASU2023-07 applicable to ASC280, Segment Reporting, which primarily requires public entities to disclose significant segment expenses that are (1) regularly provided to (or easily computed from information regularly provided to) the chief operating decision maker and (2) included in the reported measure of segment profit or loss. The Company adopted this standard retrospectively. As a result of the adoption of this standard, Note21 has been updated to include Cost of revenues and Selling, general and administrative expenses attributable to its segments.

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Disaggregated revenues are as follows:

The Company disaggregates revenue by segment. Within the FirstService Brands segment, the Company further disaggregates its company-owned operations revenue; these businesses primarily recognize revenue over time as they perform because of continuous transfer of control to the customer. As such, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally uses the percentage of completion method.

We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of the Company’s revenue and cash flows are affected by economic factors.

The Company’s backlog represents remaining performance obligations and is defined as contracted work yet to be performed. As at* December**31,* 2024, the aggregate amount of backlog was $924,803 (2023 - $838,335). The Company expects to recognize revenue on the majority of the remaining backlog over the next 12 months.

The majority of current unearned revenues as at* December 31, 2023was recognized into income during2024.*

2024 acquisitions:

The Company completed eight acquisitions during the year, two in the FirstService Residential segment andsix in the FirstService Brands segment. In the FirstService Residential segment, the Company acquiredtwo property management firms operating in Tampa, Florida and San Francisco, California, respectively. Within the FirstService Brands segment, the Company acquired an independent restoration company located in Atlanta, Georgia, as well astwo fire protection companies operating in Birmingham, Alabama and Asheboro, North Carolina, respectively. Also, within the FirstService Brands segment, the Company acquired three commercial roofing companies headquartered in Fort Myers, Florida, Malabar, Florida, and Denver, Colorado, respectively.

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Details of these acquisitions are as follows:

Acquisition-related items included both transaction costs and contingent acquisition consideration fair value adjustments. Acquisition-related transaction costs for the year ended* December 31, 2024*totaled $5,621 (2023 - $5,151). Also included in acquisition-related items was a reversal of $20,023 related to contingent acquisition consideration fair value adjustments (2023 - increase of $16,366).

The purchase price allocations for certain transactions completed in the lasttwelve months arenot yet finalized, pending final determination of the fair value of assets acquired, the corresponding deferred tax liabilities, and final working capital adjustments. The acquisitions referred to above were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of earnings donot include any revenues or expenses related to these acquisitions prior to their respective closing dates. There have beenno material changes to the estimated purchase price allocations that were finalized throughout the year ended* December 31, 2024.*

The amount of revenues and earnings contributed from the date of acquisition and included in the Company’s consolidated results for the year ended* December 31, 2024,and the supplemental pro forma revenues and earnings of the combined entity had the acquisition date been January**1,* 2023, are as follows:

Supplemental pro forma results were adjusted for non-recurring items.

2023 acquisitions:

The Company completed twelve acquisitions in2023, three in the FirstService Residential segment andnine in the FirstService Brands segment. In the FirstService Residential segment, the Company acquired three property management firms operating in New York City, Toronto, Canada, and San Ramon, California, respectively. Within the FirstService Brands segment, the Company acquired three Paul Davis franchises, headquartered in Houston, Texas, Denver, Colorado, and Boise, Idaho, respectively. The Company also acquired a fire protection company, located in Houston, Texas, a California Closets franchise operating in Reno, Nevada, two independent restoration companies located in Nashville, Tennessee and Cincinnati, Ohio, respectively, as well as a property services business in Orange County, California. On* December**18th,* the Company announced the acquisition of Roofing Corp of America, a commercial roofing company headquartered in Atlanta, Georgia and operating in11 U.S. states spanning the Sun Belt, Mid-Atlantic, Midwest and West regions.

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Details of these acquisitions are as follows:

(1) Included in the other amount is $14,625 paid in escrow just prior to December 31, 2022.

(2) Intangible assets for Roofing Corp include $212,890 of customer relationships and $21,880 of trademarks.

In all years presented, the fair values of non-controlling interests for all acquisitions were determined using an income approach with reference to a discounted cash flow model using the same assumptions implied in determining the purchase consideration.

The purchase price allocations of all acquisitions resulted in the recognition of goodwill. The primary factors contributing to goodwill are assembled workforces, synergies with existing operations and future growth prospects. For certain acquisitions completed during the year ended* December 31, 2024,*goodwill in the amount of $63,397 is deductible for income tax purposes (2023 - $160,831).

The determination of fair values of assets acquired and liabilities assumed in business combinations required the use of estimates and judgement by management, particularly in determining fair values of intangible assets acquired. Intangible assets acquired at fair value on the date of acquisition are recorded using the income approach on an individual asset basis. The assumptions used in estimating the fair values of intangible assets include future EBITDA margins, revenue growth rates, revenue attributable to returning customers, expected attrition rates of acquired customer relationships and the discount rates.

The Company typically structures its business acquisitions to include contingent consideration. Vendors, at the time of acquisition, are entitled to receive a contingent consideration payment if the acquired businesses achieve specified earnings levels during theone- totwo-year periods following the dates of acquisition. The ultimate amount of payment is determined based on a formula, the key inputs to which are (i) a contractually agreed maximum payment; (ii) a contractually specified earnings level and (iii) the actual earnings for the contingency period. If the acquired business doesnot achieve the specified earnings level, the maximum payment is reduced for any shortfall, potentially tonil.

The fair value of the contingent consideration liability recorded on the consolidated balance sheet as at* December 31, 2024was $67,248 (see note18*). The estimated range of outcomes (undiscounted) for these contingent consideration arrangements is determined based on the formula price and the likelihood of achieving specified earnings levels over the contingency period, and ranges from $57,939 to a maximum of $68,163. These contingencies will expire during the period extending to* October 2026.During the year ended December 31, 2024,*$29,404 was paid with reference to such contingent consideration (2023 - $20,136).

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The Company has operating leases for corporate offices, copiers, and certain equipment. Its leases have remaining lease terms of 1 year to 14 years, some of which* mayinclude options to extend the leases for up to 15 years, and some of which mayinclude options to terminate the leases within1* year. The Company evaluates renewal terms on a lease by lease basis to determine if the renewal is reasonably certain. The amount of operating lease expense recorded in the statement of earnings for thetwelve months ended* December**31,* 2024 was $65,418 (2023 - $53,906).

Other information related to leases was as follows (in thousands, except lease term and discount rate):

Future minimum operating lease payments under non-cancellable leases as of* December 31, 2024*were as follows:

During thesecond quarter of the prior year, the Company sold a building in South Florida for proceeds of $7,350. The pre-tax gain on the sale was $4,351. The sale was in the FirstService Residential segment.

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(1) Non-current portion of value appreciation plans of $75,006 is included in Other Liabilities

Included in fixed assets are vehicles, office and computer equipment under finance lease at a cost of $50,474 (2023 - $36,915) and net book value of $30,681 (2023 - $21,298).

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During the year ended* December 31, 2024,*the Company acquired the following intangible assets:

The following is the estimated annual amortization expense for recorded intangible assets for each of the nextfive years ending* December**31:*

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Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. A test for goodwill impairment is required to be completed annually, in the Company’s case as of* August**1,* or more frequently if events or changes in circumstances indicate the asset might be impaired. Based on the quantitative assessment in2024, the Company has concluded that goodwill isnot impaired. There wereno triggering events since the impairment test in* August.*

As at* December 31, 2024,the Company had $30,000 of Senior Notes bearing interest at a rate of 3.84%. The Senior Notes were paid off in full on January**16,* 2025.

In* February 2022,the Company entered into asecond* amended and restated credit agreement providing for a $1,000,000 revolving credit facility on an unsecured basis. The maturity date of the revolving credit facility is* February 2027.The revolving credit facility bears interest at 0.20% to 2.50% over floating reference rates, depending on certain leverage ratios. The weighted average interest rate for2024* was 7.0%. As of* December 31, 2024,letters of credit in the amount of $29,471 were outstanding ($19,050 as at December 31, 2023).In December 2023,the Company exercised the Credit Agreement’s $250,000 accordion feature to fund its acquisition of Roofing Corp of America, which brought the total borrowing capacity of the Credit Agreement to US$1.25 billion. The Facility had $133,029 of available un-drawn credit as at December 31, 2024.*

In* September 2022 (and as amended in April 2024as noted below), the Company entered intotwo* revolving, uncommitted financing facilities for potential future private placement issuances of senior unsecured notes (the “Notes”) aggregating $550,000 with its existing lenders, NYL Investors LLC (“New York Life”) of up to $250,000 and PGIM Private Capital (“Prudential”), of up to $300,000, in each case, net of any existing notes held by them. The facility with Prudential has a term ending* September 29, 2025,and the facility with New York Life has a term ending April 3, 2027.As part of the closing of the New York Life facility, the Company issued, on a private placement basis to New York Life, $60,000 of 4.53% Notes, which are due in full on September 29, 2032,with interest payable semi-annually. In April 2024,the facility with New York Life was amended to increase the potential financing capacity by $100,000, to the current $250,000, and to extend the term of the New York Life facility from September 29, 2025to the current April 3, 2027.*The Company has the ability to issue incremental Note tranches under the facilities, subject to acceptance by New York Life or Prudential, with varying maturities as determined by the Company, and with coupon pricing determined at the time of each Note issuance.

In* January 2024,the Company issued, on a private placement basis to New York Life, $50,000 of 5.48% Notes, which are due in full on January 30, 2029,as well as $25,000 of 5.60% Notes, which are due in full on January 30, 2031,both with interest payable semi-annually. Also in January 2024,the Company issued, on a private placement basis to Prudential, $50,000 of 5.64% Notes, which are due in full on January 30, 2031,*with interest payable semi-annually.

The indebtedness under the Credit Agreement, the Senior Notes, and the Notes rank equally in terms of seniority. The Company is prohibited under the Credit Agreement and the Senior Notes from undertaking certain acquisitions and dispositions, and incurring certain indebtedness and encumbrances, without prior approval of the lenders under the Credit Agreement and the holders of the Senior Notes.

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The effective interest rate on the Company’s long-term debt for the year ended* December 31, 2024was 6.7% (2023 –6.0%). The estimated aggregate amount of principal repayments on long-term debt required in each of the nextfive* years ending* December**31* and thereafter to meet the retirement provisions are as follows:

The minority equity positions in the Company’s subsidiaries are referred to as redeemable non-controlling interests (“RNCI”). The RNCI are considered to be redeemable securities. The following table provides a reconciliation of the beginning and ending RNCI amounts:

The Company has shareholders’ agreements in place at each of its non-wholly owned subsidiaries. These agreements allow the Company to “call” the non-controlling interest at a price determined with the use of a formula price, which is usually equal to a fixed multiple of average annual net earnings before extraordinary items, income taxes, interest, depreciation, and amortization. The agreements also have redemption features which allow the owners of the RNCI to “put” their equity to the Company at the same price subject to certain limitations. The formula price is referred to as the redemption amount and* maybe paid in cash or in Common Shares. The redemption amount as of December 31, 2024was $402,122 (2023 - $293,911). The redemption amount is lower than that recorded on the balance sheet as the formula price of certain RNCI are lower than the amount initially recorded at the inception of the minority equity position. If all put or call options were settled with Common Shares as at December 31, 2024,approximately 2,100,000 such shares would be issued, and would have resulted in an increase of $0.80 to earnings per share for the year ended December**31,* 2024.

The authorized capital stock of the Company is as follows:

An unlimited number of Common Shares havingone vote per share.

The following table provides a summary of total capital stock issued and outstanding:

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The Company has a stock option plan for certain directors, officers and key full-time employees of the Company and its subsidiaries, other than its Founder and Chairman. The stock option plan came into existence on* June 1, 2015.Options are granted at the market price for the underlying shares on the date of grant. Each option vests over athree-to-five-year term, expires five tosix years from the date granted and allows for the purchase ofone* Common Share. All Common Shares issued are new shares. As at* December 31, 2024,*there were 1,350,240 options available for future grants. A portion of the options outstanding will vest upon the Company achieving a certain threshold percentage of Adjusted Earnings per Share compounded annual growth over specified measurement periods.

Grants under the Company’s stock option plan are equity-classified awards. The Company estimates the probability of achievement of performance conditions at each reporting period and reflects the estimates in the number of options expected to vest with any changes recognized through stock-based compensation expense. Stock option activity for the year ended* December 31, 2024*is as follows:

The Company incurred stock-based compensation expense related to these awards of $25,311 during the year ended* December 31, 2024 (2023 - $21,385). As at December 31, 2024,*the range of option exercise prices was $111.36 to $164.15 per share.

The following table summarizes information about option exercises during year ended* December 31, 2024:*

As at* December 31, 2024,there was $28,058 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 4 years. During the year ended December 31, 2024,*the fair value of options vested was $17,767(2023 - $16,204).

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, utilizing the following weighted average assumptions:

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The risk-free interest rate is based on the implied yield of azero-coupon US Treasury bond with a term equal to the option’s expected term. The expected life in years represents the estimated period of time until exercise and is based on historical experience. The expected volatility is based on the historical prices of the Company’s shares over the previousfour years.

Income tax differs from the amounts that would be obtained by applying the statutory rate to the respective year’s earnings before tax. Differences result from the following items:

(1) The Canadian federal and provincial statutory rate is comprised of the basic Part 1 federal tax rate of 38%, net 15% after federal abatement and general tax reduction, plus the additional provincial tax of 11.5%. Where subsidiaries are taxed in a different jurisdiction, the impact of the difference in statutory rates is included in "Foreign, state and provincial tax rate differential" within the table.

Earnings before income tax by jurisdiction comprise the following:

Income tax expense (recovery) comprises the following:

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The significant components of deferred income tax are as follows:

The recoverability of deferred income tax assets is dependent on generating sufficient taxable income before the 20 year loss carry-forward limitation. Although realization isnot assured, the Company believes it is more likely thannot that the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.

The Company has gross operating loss carry-forwards as follows:

These amounts above are available to reduce future federal, state, and provincial income taxes in their respective jurisdictions. Net operating loss carry-forward balances attributable to the United States and Canada expire over the next 3 to 18 years.

Cumulative unremitted earnings of US and foreign subsidiaries approximated $1,128,678 as at* December 31, 2024 (*2023 - $950,864). Income tax isnot provided on the unremitted earnings of US and foreign subsidiaries because it has been the practice and is the intention of the Company to reinvest these earnings indefinitely in these subsidiaries.

The gross unrecognized tax benefits are $148 (2023 - $148). Of this balance, $148 (2023 - $148) would affect the Company’s effective tax rate if recognized. For the year ended* December 31, 2024,there wasno adjustment to interest and penalties related to provisions for income tax (2023 -nil). As at December 31, 2024,*the Company had accrued $38 (2023 - $38) for potential income tax related interest and penalties.

The Company’s significant tax jurisdictions include the United States and Canada. The number of years with open tax audits varies depending on the tax jurisdictions. Generally, income tax returns filed with the Canada Revenue Agency and related provinces are open forthree tofour years and income tax returns filed with the U.S. Internal Revenue Service and related states are open forthree tofive years.

The Company doesnot currently expect any other material impact on earnings to result from the resolution of matters related to open taxation years, other than noted above. Actual settlements* maydiffer from the amounts accrued. The Company has, as part of its analysis, made its current estimates based on facts and circumstances known to date and cannot predict changes in facts and circumstances that may*affect its current estimates.

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The following table reconciles the denominator used to calculate earnings per common share:

Concentration of credit risk

The Company is subject to credit risk with respect to its cash and cash equivalents, accounts receivable and other receivables. Concentrations of credit risk with respect to cash and cash equivalents are limited by the use of multiple large and reputable banks. Concentrations of credit risk with respect to the receivables are limited due to the large number of entities comprising the Company’s customer base and their dispersion across many different service lines.

Interest rate risk

The Company maintains an interest rate risk management strategy that uses interest rate hedging contracts from time to time. The Company’s specific goals are to: (i) manage interest rate sensitivity by modifying the characteristics of its debt and (ii) lower the long-term cost of its borrowed funds.

Foreign currency risk

Foreign currency risk is related to the portion of the Company’s business transactions denominated in currencies other than U.S. dollars. A portion of revenue is generated by the Company’s Canadian operations. The Company’s head office expenses are incurred in Canadian dollars which is economically hedged by Canadian dollar denominated revenue.

Fair values of financial instruments

The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of* December 31, 2024:*

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The Company hastwo interest rate swaps in place to exchange the floating interest rate on $200,000 of debt under its Credit Agreement for a fixed rate. The fair value of the interest rate swap asset was calculated through discounting future expected cash flows using the appropriate prevailing interest rate swap curve adjusted for credit risk. The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level3 inputs using a discounted cash flow model; significant model inputs were expected future operating cash flows (determined with reference to each specific acquired business) and discount rates (which range from 8% to 10%). The range of discount rates is attributable to level of risk related to economic growth factors combined with the length of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these contingent payments. Within the range of discount rates, there is a data point concentration at 9%. A 2% increase in the weighted average discount rate wouldnot have a significant impact on the fair value of the contingent consideration balance.

The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short maturity of these instruments, unless otherwise indicated. The inputs to the measurement of the fair value of long term debt are Level2 inputs. The fair value measurements were made using a net present value approach; significant model inputs were expected future cash outflows and discount rates (which range from 4.5% to 5.0%). The following are estimates of the fair values for other financial instruments:

Other receivables include notes receivable from non-controlling shareholders and other non-current receivables.

In the normal course of operations, the Company is subject to routine claims and litigation incidental to its business. Litigation currently pending or threatened against the Company includes disputes with former employees and commercial liability claims related to services provided by the Company. The Company believes resolution of such proceedings, combined with amounts set aside, willnot have a material impact on the Company’s financial condition or the results of operations.

The Company has entered into office space rental arrangements and property management contracts with senior managers of certain subsidiaries. These senior managers are usually also minority shareholders of the subsidiaries. The business purpose of the transactions is to rent office space for the Company and to generate property management revenues for the Company. The recorded amount of the rent expense for the year ended* December**31,* 2024 was $8,497 (2023 - $4,555). These amounts are settled monthly in cash, and are priced at market rates. The rental arrangements have fixed terms of up to 10 years.

As at* December31,* 2024, the Company had $5,397 of loans receivable from minority shareholders (* December31,* 2023 - $6,554). The business purpose of the loans receivable was to finance the sale of non-controlling interests in subsidiaries to senior managers. The loan amounts are measured based on the formula price of the underlying non-controlling interests, and interest rates are determined based on market rates plus a spread. The loans generally have terms of 5 to 10 years, but are open for repayment without penalty at any time.

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Operating segments

The Company hastwo reportable segments as determined by the chief operating decision maker (CODM), who is the Chief Executive Officer of the Company. The segments are grouped with reference to the nature of services provided and the types of clients that use those services. The CODM assesses each segment’s performance based on operating earnings. Specifically, the CODM uses operating earnings to monitor results against expectations for each reportable segment. FirstService Residential provides property management and related property services to residential communities in North America. FirstService Brands provides company-owned and franchised property services to customers in North America. Corporate includes the costs of operating the Company’s corporate head office.

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Geographic information

Revenues in each geographic region are reported by customer locations.

In* December 2023,the FASB issued ASU2023*-9 –Income Taxes –Improvements to Income Tax Disclosures. This ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The guidance is effective for annual periods beginning after* December 14, 2024*and should be adopted prospectively with the option for retroactive application. The Company is currently assessing the impact of this ASU on its financial disclosures.

In* November 2024,the FASB issued ASU2024*-03 –Income Statement–* Reporting Comprehensive Income*–* Expense Disaggregation Disclosures (Subtopic220-40): Disaggregation of Income Statement Expenses (DISE).* This ASU requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. The new guidance is effective for fiscal years beginning after* December 15, 2026,and interim reporting periods beginning after December 15, 2027,*with early adoption permitted, and can be adopted prospectively or retrospectively. The Company is currently assessing the impact of this ASU on its financial disclosures.