COMFORT SYSTEMS USA INC

Previous wording

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 manufacturing, healthcare, education, office, technology, retail and government facilities. We operate our business in two business segments: mechanical and electrical.

Current wording

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 manufacturing, healthcare, education,

Previous wording

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.

Current wording

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 and electrical service work.

Previous wording

Approximately 89.0% 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.

Current wording

Approximately 91.1% 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.

Previous wording

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.

Current wording

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 costs 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.

Previous wording

As of December 31, 2023, we had 10,481 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $1.1 million. 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.

Current wording

As of December 31, 2024, we had 7,935 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $1.8 million. 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

Previous wording

We also perform larger projects. Taken together, projects with contract prices of $2 million or more totaled $10.2 billion of aggregate contract value as of December 31, 2023, or approximately 86%, out of a total contract value for all projects in progress of $12.0 billion. Generally, projects closer in size to $2 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

Current wording

We also perform larger projects. Taken together, projects with contract prices of $2 million or more totaled $12.78 billion of aggregate contract value as of December 31, 2024, or approximately 89%, out of a total contract value for all projects in progress of $14.35 billion. Generally, projects closer in size to $2 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

Previous wording

In addition to project work, approximately 11.0% 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.

Current wording

In addition to project work, approximately 8.9% 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.

Previous wording

We manage our 44 operating units based on a variety of factors. Financial measures we emphasize include profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, safety, management and execution practices, labor utilization, 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.

Current wording

We manage our 47 operating units based on a variety of factors. Financial measures we emphasize include profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, safety, management and execution practices, labor utilization, 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.

Previous wording

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.

Current wording

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.

Previous wording

In 2020, the advent of a global pandemic led to some delays in service and construction, including delayed project starts and air pockets or pauses during 2020 and 2021. We experienced increasing demand in 2022 and 2023, and we expect that the demand environment, especially for industrial and technology customers, will remain at high levels in 2024. Although we have largely recovered from negative impacts caused by the COVID-19 pandemic, we continue to experience increased labor costs, supply constraints and cost increases, and delays in delivery of various materials and equipment. We expect that constraints and delays will continue to abate in 2024; however, we anticipate that pressure on cost and availability, especially for skilled labor, will continue throughout 2024.

Current wording

In 2020, the advent of a global pandemic led to some delays in service and construction, including delayed project starts and air pockets or pauses during 2020 and 2021. We experienced increasing demand in 2022, 2023 and 2024 and we expect that the demand environment, especially for manufacturing and technology customers, will remain at high levels leading into 2025. While the impacts from the supply chain shortages have improved, we continue to experience increased labor costs and delays in delivery of certain materials and equipment. We expect that constraints and delays in our supply chain will continue to abate in the near term; however, we anticipate that pressure on cost and availability, especially for skilled labor, will continue in 2025.

Previous wording

We have a credit facility in place with terms we believe are favorable that does not expire until July 2027. As of December 31, 2023, we had $779.8 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-five 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.

Current wording

We have a credit facility in place with terms we believe are favorable that does not expire until July 2027. As of December 31, 2024, we had $770.0 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-six 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.

Previous wording

Revenue Recognition – The Company recognizes revenue based on the extent of progress towards completion of the performance obligation using the cost-to-cost input method of accounting, 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. The cost-to-cost input 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. Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation from change orders collected from customers.

Current wording

Revenue Recognition – The Company recognizes revenue based on the extent of progress towards completion of the performance obligation using the cost-to-cost input method of accounting, 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. The cost-to-cost input 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. Variations from

Previous wording

deferred tax assets based on assumptions about future taxable income. We record liabilities for uncertain tax positions when we determine whether it is more likely than not that the positions will be sustained based on their technical merits, and we recognize tax benefits that are more than 50 percent likely to be realized upon ultimate settlement with the relevant taxing authority.

Current wording

Accounting for Income Taxes – Our provision for income taxes, deferred tax assets and liabilities, and liabilities for uncertain tax positions reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of our income taxes, including the ability to recover our deferred tax assets based on assumptions about future taxable income. We record liabilities for uncertain tax positions when we determine whether it is more likely than not that the positions will be sustained based on their technical merits, and we recognize tax benefits that are more than 50 percent likely to be realized upon ultimate settlement with the relevant taxing authority.

Previous wording

We had 42 operating locations as of December 31, 2022. In the first quarter of 2023, we completed the acquisition of Eldeco, Inc. (“Eldeco”), which reports as a separate operating location. In the fourth quarter of 2023, we completed the acquisition of DECCO, Inc. (“DECCO”), which reports as a separate operating location. We had 44 operating locations as of December 31, 2023. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2023 to 2022, as described below, excludes Eldeco, which was acquired on February 1, 2023, DECCO, which was acquired on October 2, 2023, and three months of results for Atlantic Electric, LLC (“Atlantic”), which was acquired on April 1, 2022. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

Current wording

We had 44 operating locations as of December 31, 2023. In the first quarter of 2024, we split one of our operating locations into two separate operating locations. Additionally, we completed the acquisitions of Summit Industrial Construction, LLC (“Summit”) and J & S Mechanical Contractors, Inc. (“J&S”), which both report as separate operating locations. We had 47 operating locations as of December 31, 2024. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2024 to 2023, as described below, excludes Summit, which was acquired on February 1, 2024, J&S, which was acquired on February 1, 2024, nine months of results for DECCO, Inc. (“DECCO”), which was acquired on October 2, 2023, and one month of results for Eldeco, Inc (“Eldeco”), which was acquired on February 1, 2023. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

Previous wording

Revenue—Revenue increased $1.07 billion, or 25.8%, to $5.21 billion in 2023 compared to 2022. The increase included a 3.3% increase related to the Eldeco, DECCO and Atlantic acquisitions, as well as a 22.5% increase in revenue related to same-store activity. The same-store revenue growth was largely driven by strong market conditions. The increase in demand has been particularly strong in the technology and manufacturing sectors such as data centers, chip plants, food, pet food and pharmaceuticals.

Current wording

Revenue—Revenue increased $1.82 billion, or 35.0%, to $7.03 billion in 2024 compared to 2023. The increase included a 12.1% increase related to the Summit, J&S, DECCO, and Eldeco acquisitions, as well as a 22.9% increase in revenue related to same-store activity. The same-store revenue growth was largely driven by strong market conditions, including the increase in our backlog. The increase in demand has been particularly strong in the technology sector such as data centers and chip plants.

Previous wording

Revenue for our mechanical segment increased $767.5 million, or 24.1%, to $3.95 billion in 2023 compared to 2022. Of this increase, $12.8 million resulted from the acquisition of DECCO, and $754.7 million was attributable to same-store activity. The same-store revenue increase primarily resulted from an increase in activity in the technology sector at one of our Texas operations ($260.0 million) and our North Carolina operation ($158.0 million), and in the manufacturing sector at one of our Indiana operations ($92.4 million) and another one of our Texas operations ($49.2 million).

Current wording

Revenue for our mechanical segment increased $1.58 billion, or 40.1%, to $5.53 billion in 2024 compared to 2023. Of this increase, $619.8 million resulted from the acquisition of Summit, J&S, and DECCO, and $961.8 million was attributable to same-store activity. The same-store revenue increase primarily resulted from an increase in activity in the technology sector at two of our Texas operations ($321.2 million), our North Carolina operation ($147.5 million) and one of our Virginia operations ($129.4 million).

Previous wording

Revenue for our electrical segment increased $298.8 million, or 31.1%, to $1.26 billion in 2023 compared to 2022. The increase primarily resulted from the acquisition of Eldeco ($115.5 million), as well as an additional three months of revenue related to the Atlantic acquisition ($6.7 million). The same-store revenue increase of $176.6 million was primarily attributable to an increase in activity in the technology sector at our Texas electrical operation ($96.3 million) and in the manufacturing sector at our North Carolina electrical operation ($49.4 million).

Current wording

Revenue for our electrical segment increased $239.1 million, or 19.0%, to $1.50 billion in 2024 compared to 2023. The increase primarily resulted from an increase in activity in the technology sector at our Texas electrical operation ($158.0 million) and in the manufacturing sector at one of our South Carolina operations ($41.4 million).

Previous wording

Backlog as of December 31, 2023 was $5.16 billion, a 20.3% increase from September 30, 2023 backlog of $4.29 billion and a 26.9% increase from December 31, 2022 backlog of $4.06 billion. The sequential backlog increase included the acquisition of DECCO ($29.7 million) as well as a same-store increase of $840.1 million, or 19.6%. The same-store sequential backlog increase was primarily a result of increased project bookings in the manufacturing sector at our North Carolina operation ($268.2 million), in the technology sector at one of our Texas operations ($266.9 million) and in the healthcare sector at one of our Virginia operations ($203.6 million). The year-over-year backlog increase included the acquisitions of Eldeco ($150.7 million) and DECCO ($29.7 million) as well as a same-store increase of $913.3 million, or 22.5%. Same-store year-over-year backlog was broad-based, and increased primarily due to increased project bookings in the healthcare and office building sectors at one of our Virginia operations ($271.5 million), in the manufacturing sector at our North Carolina operation ($202.9 million) and in the technology sector at our Texas electrical operation ($84.0 million).

Current wording

Backlog as of December 31, 2024 was $5.99 billion, a 5.5% increase from September 30, 2024 backlog of $5.68 billion and a 16.2% increase from December 31, 2023 backlog of $5.16 billion. Thesequential backlog increase was primarily a result of increased project bookings and strong market conditions in the technology sector at one of our Texas operations ($345.8 million). The sequential backlog increase was partially offset by the completion of project work in the technology sector at our Texas electrical operation ($52.6 million). The year-over-year backlog increase included the acquisitions of Summit ($297.9 million) and J&S ($97.0 million) as well as a same-store increase of $441.6 million, or 8.6%. Same-store year-over-year backlog increased primarily due to increased project bookings in the technology sector at our Texas electrical operation ($206.3 million) and at one of our Texas operations ($183.2 million), in the healthcare sector at our Mississippi operation ($76.6 million) and in the education sector at one of our Florida operations ($74.0 million). The year-over-year backlog increase was partially offset by the completion of project work in the manufacturing sector at our North Carolina operations ($68.9 million) and in the manufacturing and technology sectors at one of our Indiana operations ($67.1 million).

Previous wording

Gross Profit—Gross profit increased $248.9 million, or 33.6%, to $990.5 million in 2023 as compared to 2022. The increase included a $14.2 million, or 1.9%, increase related to the Eldeco, DECCO and Atlantic acquisitions, as well as a $234.7 million, or 31.7%, increase on a same-store basis. The same-store increase in gross profit was broad-based and was primarily driven by higher revenues in the current year including increased volumes at one of our Texas operations ($40.8 million), our North Carolina operation ($29.5 million) and our Texas electrical operation ($25.9 million). Additionally, we achieved improvements in project execution at our Kentucky electrical operation ($30.0 million) and another one of our Texas operations ($23.6 million). As a percentage of revenue, gross profit increased from 17.9% in 2022 to 19.0% in 2023, primarily due to the factors discussed above and improvements in our electrical segment gross profit margin. Our overall margin increases were partially offset by growth in modular construction jobs in 2023, which have lower margins than any of our other businesses.

Current wording

Gross Profit—Gross profit increased $485.9 million, or 49.1%, to $1.48 billion in 2024 as compared to 2023. The increase included a $86.8 million, or 8.8%, increase related to the Summit, J&S, DECCO, and Eldeco acquisitions, as well as a $399.1 million, or 40.3%, increase on a same-store basis. The same-store increase in gross profit was primarily driven by both higher revenues in the current year as well as improved execution in our operations, including improvements in project execution at our Texas electrical operation ($90.8 million) and one of our South Carolina operations ($19.9 million). Two of our Texas operations achieved both higher volumes and improvements in project execution ($131.7 million). Additionally, we achieved increased volumes at one of our Virginia operations ($28.0 million), one of our Tennessee operations ($22.6 million) and our North Carolina operation ($19.8 million). As a percentage of revenue, gross profit increased from 19.0% in 2023 to 21.0% in 2024, primarily due to the factors discussed above and improvements in our electrical segment gross profit margin.

Previous wording

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $85.1 million, or 17.4%, to $574.4 million for 2023 as compared to 2022. On a same-store basis, excluding amortization expense, SG&A increased $67.3 million, or 14.9%. The same-store increase is primarily due to higher same-store revenue and increased compensation costs ($59.9 million), largely attributable to increased headcount. This increase was partially offset by a decrease in professional fees of $3.3 million as compared to the prior year related to the credit for increasing research activities (the “R&D tax credit”) for prior tax years. Amortization expense increased $1.8 million during the period primarily as a result of the Eldeco, Atlantic and DECCO acquisitions. As a percentage of revenue, SG&A decreased from 11.8% in 2022 to 11.0% in 2023 due to leverage resulting from the increase in revenue.

Current wording

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $155.6 million, or 27.1%, to $730.1 million for 2024 as compared to 2023. On a same-store basis, excluding amortization expense, SG&A increased $116.6 million, or 21.7%. The same-store increase is primarily due to higher same-store revenue and increased compensation costs ($90.7 million), largely attributable to increased headcount and increased cost of labor. Amortization expense increased $17.1 million during the period primarily as a result of the Summit, J&S and DECCO acquisitions. As a percentage of revenue, SG&A decreased from 11.0% in 2023 to 10.4% in 2024 due to leverage resulting from the increase in revenue.

Previous wording

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.

Current wording

We have included same-store SG&A, excluding amortization expense, 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.

Previous wording

Interest Income—Interest income increased $3.4 million in 2023 as compared to 2022. The increase in interest income is primarily due to interest awarded to us related to a dispute with a customer.

Current wording

Interest Income—Interest income increased $8.1 million, or 230.9%, in 2024 as compared to 2023. The increase in interest income is due to both an increase in our average cash balance and higher interest rates compared to the prior year.

Previous wording

Interest Expense—Interest expense decreased $3.1 million, or 23.0%, in 2023 as compared to 2022. The decrease in interest expense is primarily due to a decrease in our average outstanding balance, partially offset by an increase in our average interest rate on our borrowings in 2023 as compared to the prior year.

Current wording

Interest Expense—Interest expense decreased $3.6 million, or 35.3%, in 2024 as compared to 2023. The decrease in interest expense is primarily due to a decrease in our average outstanding debt balance compared to the prior year.

Previous wording

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. Expense from changes in the fair value of contingent earn-out obligations increased $18.8 million in 2023 compared to 2022. This increase was primarily caused by higher expenses at our Kentucky electrical operation and Eldeco, driven by stronger actual current earnings and forecasted results. Expense or income from changes in earn-out valuations may be more volatile in future periods due to large earn-out agreements for acquisitions that closed in the first quarter of 2024.

Current wording

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. Expense from changes in the fair value of contingent earn-out obligations increased $64.5 million, or 273.4%, in 2024 compared to 2023. This increase was primarily caused by higher expenses at Summit, driven by stronger actual current earnings and forecasted results. Expense or income from changes in earn-out valuations may be more volatile in future periods due to large earn-out agreements for acquisitions that closed in 2024.

Previous wording

Provision (Benefit) 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 the federal and various state jurisdictions with differing tax rates and rules. In addition, discrete items, such as tax law changes, judgments and legal structures can impact our effective 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, uncertain tax positions, and accounting for losses associated with underperforming operations.

Current wording

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 the federal and various state jurisdictions with differing tax rates and rules. In addition, discrete items, such as tax law changes, judgments and legal structures can impact our effective 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, uncertain tax positions, and accounting for losses associated with underperforming operations.

Previous wording

2023 was lower than the 21% federal statutory rate due to the current year R&D tax credit (6.3%) and an increase in the R&D tax credit for the 2022 tax year (2.8%). These R&D tax credit benefits were partially offset by net state income taxes (3.7%) and nondeductible expenses (1.5%). The effective rate for 2022 was significantly lower than the 21% federal statutory rate due to a reduction in net unrecognized tax benefits primarily from settlement with the Internal Revenue Service (the “IRS”) for 2016, 2017, and 2018 tax years (7.6%), the filing of returns to claim the R&D tax credit for 2019, 2020 and 2021 tax years (15.1%) and inclusion of the R&D tax credit for 2022 (6.7%). These benefits were partially offset by net state income taxes (4.0%) and nondeductible expenses related to TAS Energy Inc. (1.7%). 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.

Current wording

Our provision for income taxes for 2024 was $144.1 million with an effective tax rate of 21.6%, as compared to the provision for income taxes of $64.8 million with an effective tax rate of 16.7% for 2023. The effective rate for 2024 was slightly higher than the 21% federal statutory rate primarily due to net state income taxes (3.9%) and nondeductible expenses (1.5%), partially offset by the credit for increasing research activities (the “R&D tax credit”) (4.1%). The effective rate for 2023 was lower than the 21% federal statutory rate due to the R&D tax credit (6.3%) and an increase in the R&D tax credit for the 2022 tax year (2.8%). These R&D tax credit benefits were partially offset by net state income taxes (3.7%) and nondeductible expenses (1.5%). Refer to Note 11 in the Consolidated Financial Statements for a reconciliation of the federal statutory rate to the effective tax rates reflected in our financial statements.

Previous wording

We experienced strong ongoing demand in 2023, and, although we have largely recovered from negative impacts caused by the COVID-19 pandemic, we continue to experience increased labor costs, supply constraints, and delays in delivery of various materials and equipment. We are recognizing these challenges in our job planning and pricing, and we are ordering materials on an earlier timeline and seeking to collaborate with customers to share supply risks and to mitigate the effects of these challenges.

Current wording

We experienced strong ongoing demand in 2024, although we continue to experience increased labor costs and impacts from supply chain shortages, including delays in delivery of certain materials and equipment. We are recognizing these challenges in our job planning and pricing, and we are ordering materials on an earlier timeline and seeking to collaborate with customers to share supply risks and to mitigate the effects of these challenges. We have been generally successful in maintaining productivity and in procuring needed materials despite ongoing challenges.

Previous wording

We have a good pipeline of opportunities and potential backlog, and we have been generally successful in maintaining productivity and in procuring needed materials despite ongoing challenges. Considering our substantial advance bookings, we currently anticipate solid earnings and cash flow for 2024. Although we are preparing for a wide range of challenges and economic circumstances, including an eventual recession, we currently expect that supportive conditions for our industry, especially for our industrial and technology customers, are likely to continue in 2024.

Current wording

We have a good pipeline of opportunities and potential backlog. Considering our substantial advance bookings, we currently anticipate solid earnings in 2025. Although we are preparing for a wide range of future challenges and economic circumstances, including a potential recession, we currently expect that supportive conditions for our industry, especially for our industrial and technology customers, are likely to continue in 2025.

Previous wording

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.

Current wording

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.

Previous wording

Cash Used in Investing Activities—Cash used in investing activities was $193.0 million for 2023 compared to $97.2 million during 2022. The $95.8 million increase in cash used primarily relates to an increase in cash paid (net of cash acquired) for acquisitions and higher purchases of property and equipment to support the growth in our business in the current year compared to 2022.

Current wording

Cash Used in Investing Activities—Cash used in investing activities was $343.5 million for 2024 compared to $193.0 million during 2023. The $150.5 million increase in cash used primarily relates to an increase in cash paid (net of cash acquired) for acquisitions in the current year compared to 2023.

Previous wording

Cash Used in Financing Activities—Cash used in financing activities was $298.6 million for 2023 compared to $205.9 million during 2022. The $92.7 million increase in cash used is primarily due to higher net repayments on debt in the current year driven by strong operating cash flows.

Current wording

Cash Used in Financing Activities—Cash used in financing activities was $160.8 million for 2024 compared to $298.6 million during 2023. The $137.8 million decrease in cash used is primarily due to higher net repayments of debt

Previous wording

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

Current wording

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.

Previous wording

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 May 17, 2022, 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 10.9 million shares to be repurchased. As of December 31, 2023, we have repurchased a cumulative total of 10.3 million shares at an average price of $26.27 per share under the repurchase program.

Current wording

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 August 7, 2024, the Board approved an extension to the program by increasing the shares authorized for repurchase by 0.4 million shares. Since the inception of the repurchase program, the Board has approved 11.4 million shares to be repurchased. As of December 31, 2024, we have repurchased a cumulative total of 10.4 million shares at an average price of $31.41 per share under the repurchase program.

Previous wording

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, 2023, we repurchased 0.1 million shares for approximately $21.3 million at an average price of $152.75 per share.

Current wording

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, 2024, we repurchased 0.2 million shares for approximately $58.3 million at an average price of $329.14 per share.

Previous wording

On May 25, 2022, we amended our senior credit facility (as amended, the “Facility”) arranged by Wells Fargo Bank, National Association, as administrative agent, and provided by a syndicate of banks, increasing our borrowing capacity to $850 million. As amended, the Facility is composed of a revolving credit line guaranteed by certain of our subsidiaries, in the amount of $850.0 million. The amended Facility also provides for an accordion or increase option not to exceed the greater of (a) $250 million and (b) 1.0x Credit Facility Adjusted EBITDA (as defined below), as well as a sublimit of up to $175.0 million issuable in the form of letters of credit. The Facility expires in July 2027 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and the equity of, and assets held by, certain unrestricted subsidiaries and our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. In 2022, we incurred approximately $2.3 million in financing and professional costs in connection with the amendment to the Facility, which, combined with previously unamortized costs of $1.2 million, are being amortized on a straight-line basis as a non-cash charge to interest expense over the remaining term of the Facility. As of December 31, 2023, we had no outstanding borrowings on the revolving credit facility, $70.2 million in letters of credit and $779.8 million of credit available.

Current wording

We have an $850.0 million senior credit facility (the “Facility”) provided by a syndicate of banks, which is composed of a revolving credit line guaranteed by certain of our subsidiaries. The Facility also provides for an accordion or increase option not to exceed the greater of (a) $250 million and (b) 1.0x Credit Facility Adjusted EBITDA (as defined below), as well as a sublimit of up to $175.0 million issuable in the form of letters of credit. The Facility expires in July 2027 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and the equity of, and assets held by, certain unrestricted subsidiaries and our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. As of December 31, 2024, we had no outstanding borrowings on the revolving credit facility, $80.0 million in letters of credit outstanding and $770.0 million of credit available.

Previous wording

As part of the consideration used to acquire eight companies, we have outstanding notes to the former owners. Together, these notes had an outstanding balance of $44.1 million as of December 31, 2023. At December 31, 2023, future principal payments of notes to former owners by maturity year are as follows (dollars in thousands):

Current wording

As part of the consideration used to acquire eight companies, we have outstanding notes to the former owners of the acquired companies. Together, these notes had an outstanding balance of $67.6 million as of December 31, 2024.

Previous wording

We have generated positive net free cash flow for the last twenty-five calendar years, much of which occurred during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our

Current wording

We have generated positive net free cash flow for the last twenty-six 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.

Previous wording

As of December 31, 2023, we have $70.2 million in letter of credit commitments, of which $44.8 million will expire in 2024, $25.3 million will expire in 2025, and $0.1 million will expire in 2026. The substantial majority of these letters of credit are posted with insurers who disburse funds on our behalf in connection with our workers’

Current wording

As of December 31, 2024, we have $80.0 million in letter of credit commitments, of which $56.1 million will expire in 2025 and $23.9 million will expire in 2026. The substantial majority of these letters of credit are posted with

Previous wording

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 2024, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

Current wording

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 2025, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

Previous wording

As discussed in Note 11 “Income Taxes,” included in our Consolidated Balance Sheet at December 31, 2023 is $20.6 million of liabilities for uncertain tax positions, or unrecognized tax benefits. We believe it is reasonably possible that a reduction of up to $5.3 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 flows related to these liabilities.

Current wording

As discussed in Note 11 “Income Taxes,” included in our Consolidated Balance Sheet at December 31, 2024 is $30.1 million of liabilities for uncertain tax positions, or unrecognized tax benefits. We believe it is reasonably possible that a reduction of up to $5.3 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 flows related to these liabilities.