000001035983--12-312020Q1falseP3Ytrueus-gaap:OtherLiabilitiesCurrent00010359832019-07-012019-09-3000010359832018-01-012018-12-310001035983fix:StockRepurchaseProgram2007Member2007-03-292020-03-310001035983fix:StockRepurchaseProgram2007Member2020-03-310001035983fix:StockRepurchaseProgram2007Member2019-11-190001035983fix:StockRepurchaseProgram2007Member2007-03-290001035983us-gaap:TreasuryStockMember2020-03-310001035983us-gaap:AdditionalPaidInCapitalMember2020-03-310001035983us-gaap:TreasuryStockMember2019-12-310001035983us-gaap:RetainedEarningsMember2019-12-310001035983us-gaap:AdditionalPaidInCapitalMember2019-12-310001035983us-gaap:TreasuryStockMember2019-03-310001035983us-gaap:RetainedEarningsMember2019-03-310001035983us-gaap:AdditionalPaidInCapitalMember2019-03-310001035983us-gaap:TreasuryStockMember2018-12-310001035983us-gaap:RetainedEarningsMember2018-12-310001035983us-gaap:AdditionalPaidInCapitalMember2018-12-310001035983srt:MinimumMember2019-04-012020-03-310001035983srt:MaximumMember2019-04-012020-03-3100010359832019-04-012020-03-310001035983fix:AmendedSeniorRevolvingCreditFacilityMember2019-12-202019-12-310001035983fix:StockRepurchaseProgram2007Member2020-01-012020-03-310001035983fix:FiveImmaterialAcquisitionMemberus-gaap:LoansPayableMember2020-03-310001035983fix:SubordinateDebtAndPromissoryNoteMember2019-12-310001035983us-gaap:LetterOfCreditMember2019-12-310001035983srt:MinimumMember2020-03-310001035983srt:MaximumMember2020-03-310001035983us-gaap:OperatingSegmentsMemberfix:MechanicalServicesIndustryMember2020-01-012020-03-310001035983us-gaap:OperatingSegmentsMemberfix:ElectricalServicesIndustryMember2020-01-012020-03-310001035983us-gaap:OperatingSegmentsMemberfix:MechanicalServicesIndustryMember2019-01-012019-03-310001035983us-gaap:OperatingSegmentsMemberfix:ElectricalServicesIndustryMember2019-01-012019-03-310001035983fix:MechanicalServicesIndustryMember2020-01-012020-03-310001035983fix:ElectricalServicesIndustryMember2020-01-012020-03-310001035983fix:MechanicalServicesIndustryMember2019-01-012019-12-310001035983fix:ElectricalServicesIndustryMember2019-01-012019-12-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2020-03-310001035983fix:MechanicalServicesIndustryMember2020-03-310001035983fix:ElectricalServicesIndustryMember2020-03-310001035983fix:MechanicalServicesIndustryMember2019-12-310001035983fix:ElectricalServicesIndustryMember2019-12-310001035983fix:MechanicalServicesIndustryMember2018-12-310001035983fix:ContingentConsiderationObligationsMember2020-03-310001035983fix:ContingentConsiderationObligationsMember2019-12-310001035983fix:ContingentConsiderationObligationsMember2020-01-012020-03-310001035983us-gaap:RetainedEarningsMember2020-01-012020-03-310001035983us-gaap:RetainedEarningsMember2019-01-012019-03-310001035983us-gaap:InterestRateSwapMemberus-gaap:SubsequentEventMember2021-11-300001035983us-gaap:InterestRateSwapMemberus-gaap:SubsequentEventMember2020-04-010001035983srt:MinimumMemberfix:FiveImmaterialAcquisitionMemberus-gaap:LoansPayableMember2020-03-310001035983srt:MaximumMemberfix:FiveImmaterialAcquisitionMemberus-gaap:LoansPayableMember2020-03-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:LoansPayableMember2020-03-310001035983fix:ElectricalContractorNorthCarolinaMemberus-gaap:LoansPayableMember2020-03-310001035983fix:BchHoldingsIncMemberus-gaap:LoansPayableMember2020-03-310001035983fix:TermLoanMember2020-03-310001035983us-gaap:RevolvingCreditFacilityMember2019-12-310001035983fix:TermLoanMember2019-12-310001035983fix:AmendedSeniorRevolvingCreditFacilityMember2019-12-190001035983fix:DebtCovenantRatioRangeTwoMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:EurodollarMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeTwoMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:BaseRateMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeThreeMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:EurodollarMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeThreeMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:BaseRateMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeOneMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:EurodollarMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeOneMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:BaseRateMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeFourMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:EurodollarMember2020-01-012020-03-310001035983fix:DebtCovenantRatioRangeFourMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:BaseRateMember2020-01-012020-03-310001035983us-gaap:RetainedEarningsMember2020-03-310001035983srt:RestatementAdjustmentMemberus-gaap:AccountingStandardsUpdate201613Member2020-01-010001035983us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member2019-01-012019-03-310001035983us-gaap:CommonStockMember2020-03-310001035983us-gaap:CommonStockMember2019-12-310001035983us-gaap:CommonStockMember2019-03-310001035983us-gaap:CommonStockMember2018-12-310001035983us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-03-310001035983us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-3100010359832019-03-3100010359832018-12-310001035983us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-03-310001035983us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:TradeNamesMember2019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:OrderOrProductionBacklogMember2019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:CustomerRelationshipsMember2019-04-010001035983fix:StarrMember2020-01-012020-03-310001035983srt:MaximumMemberfix:EmployeeAndNonemployeeStockOptionMember2020-01-012020-03-310001035983srt:MaximumMemberfix:EmployeeAndNonemployeeStockOptionMember2019-01-012019-03-310001035983srt:RestatementAdjustmentMemberus-gaap:AccountingStandardsUpdate201613Member2020-01-012020-01-010001035983us-gaap:ProductAndServiceOtherMember2020-03-310001035983fix:ServicesActivityMember2020-03-310001035983fix:ConstructionActivitiesMember2020-03-310001035983us-gaap:ProductAndServiceOtherMember2019-12-310001035983fix:ServicesActivityMember2019-12-310001035983fix:ConstructionActivitiesMember2019-12-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:TradeNamesMember2019-04-012019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:OrderOrProductionBacklogMember2019-04-012019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMemberus-gaap:CustomerRelationshipsMember2019-04-012019-04-010001035983fix:ServicesActivityMember2020-01-012020-03-310001035983srt:MaximumMember2020-01-012020-03-310001035983us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001035983us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-310001035983us-gaap:TreasuryStockMember2020-01-012020-03-310001035983us-gaap:TreasuryStockMember2019-01-012019-03-310001035983fix:AmendedSeniorRevolvingCreditFacilityMember2019-12-202019-12-200001035983fix:AmendedSeniorRevolvingCreditFacilityMember2019-12-192019-12-190001035983us-gaap:ProductAndServiceOtherMember2020-01-012020-03-310001035983us-gaap:OtherCustomerMember2020-01-012020-03-310001035983fix:ServiceProjectsMember2020-01-012020-03-310001035983fix:ServiceCallsMaintenanceAndMonitoringMember2020-01-012020-03-310001035983fix:RetailRestaurantsAndEntertainmentMember2020-01-012020-03-310001035983fix:OfficeBuildingCustomerMember2020-01-012020-03-310001035983fix:NewConstructionMember2020-01-012020-03-310001035983fix:MultiFamilyAndResidentialMember2020-01-012020-03-310001035983fix:MechanicalServicesMember2020-01-012020-03-310001035983fix:IndustrialPropertyCustomerMember2020-01-012020-03-310001035983fix:HealthcareSectorCustomerMember2020-01-012020-03-310001035983fix:GovernmentCustomerMember2020-01-012020-03-310001035983fix:ExistingBuildingConstructionMember2020-01-012020-03-310001035983fix:ElectricalServicesMember2020-01-012020-03-310001035983fix:EducationMember2020-01-012020-03-310001035983us-gaap:OtherCustomerMember2019-01-012019-03-310001035983fix:ServiceProjectsMember2019-01-012019-03-310001035983fix:ServiceCallsMaintenanceAndMonitoringMember2019-01-012019-03-310001035983fix:RetailRestaurantsAndEntertainmentMember2019-01-012019-03-310001035983fix:OfficeBuildingCustomerMember2019-01-012019-03-310001035983fix:NewConstructionMember2019-01-012019-03-310001035983fix:MultiFamilyAndResidentialMember2019-01-012019-03-310001035983fix:MechanicalServicesMember2019-01-012019-03-310001035983fix:IndustrialPropertyCustomerMember2019-01-012019-03-310001035983fix:HealthcareSectorCustomerMember2019-01-012019-03-310001035983fix:GovernmentCustomerMember2019-01-012019-03-310001035983fix:ExistingBuildingConstructionMember2019-01-012019-03-310001035983fix:ElectricalServicesMember2019-01-012019-03-310001035983fix:EducationMember2019-01-012019-03-310001035983srt:MinimumMember2019-10-012019-12-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2019-10-012019-12-310001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2020-01-012020-03-310001035983srt:MinimumMemberus-gaap:SuretyBondMember2020-01-012020-03-310001035983srt:MaximumMemberus-gaap:SuretyBondMember2020-01-012020-03-310001035983fix:TermLoanMember2019-12-202019-12-310001035983us-gaap:RevolvingCreditFacilityMember2019-12-202019-12-3100010359832019-10-012019-12-310001035983srt:MinimumMember2020-01-012020-03-310001035983fix:AmendedSeniorRevolvingCreditFacilityMember2019-12-310001035983srt:MinimumMemberus-gaap:RevolvingCreditFacilityMember2020-01-012020-03-310001035983srt:MaximumMemberus-gaap:RevolvingCreditFacilityMember2020-01-012020-03-310001035983srt:MinimumMemberfix:ScenarioCovenantRequirementMemberus-gaap:RevolvingCreditFacilityMember2020-03-310001035983srt:MaximumMemberus-gaap:RevolvingCreditFacilityMember2020-03-310001035983fix:ThroughMaturityMemberus-gaap:RevolvingCreditFacilityMember2020-03-310001035983srt:MinimumMemberus-gaap:RevolvingCreditFacilityMember2020-03-310001035983us-gaap:RevolvingCreditFacilityMember2020-03-310001035983us-gaap:RevolvingCreditFacilityMember2020-01-012020-03-310001035983fix:SubordinateDebtAndPromissoryNoteMember2020-03-3100010359832019-12-3100010359832019-01-012019-12-3100010359832019-01-012019-03-310001035983srt:MinimumMemberfix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2019-04-012019-04-010001035983srt:MaximumMemberfix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2019-04-012019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2019-04-010001035983fix:WalkerTxHoldingsInc.AndItsWhollyOwnedSubsidiariesMember2019-04-012019-04-010001035983srt:MinimumMemberfix:TasEnergyMemberus-gaap:SubsequentEventMember2020-04-012020-12-310001035983srt:MaximumMemberfix:TasEnergyMemberus-gaap:SubsequentEventMember2020-04-012020-12-310001035983us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-03-310001035983us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueMeasurementsRecurringMember2020-03-310001035983us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001035983us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-3100010359832020-03-310001035983fix:ConstructionActivitiesMember2020-01-012020-03-3100010359832020-04-2200010359832020-01-012020-03-31xbrli:sharesiso4217:USDxbrli:purefix:itemfix:Optioniso4217:USDxbrli:sharesfix:segment

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (713830-9600

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FIX

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

The number of shares outstanding of the issuer’s common stock as of April 22, 2020 was 36,471,001 (excluding treasury shares of 4,652,364).

Table of Contents

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

    

Page

Part I—Financial Information

2

Item 1—Financial Statements

2

Consolidated Balance Sheets

2

Consolidated Statements of Operations

3

Consolidated Statements of Stockholders’ Equity

4

Consolidated Statements of Cash Flows

5

Condensed Notes to Consolidated Financial Statements

6

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3—Quantitative and Qualitative Disclosures about Market Risk

31

Item 4—Controls and Procedures

32

Part II—Other Information

32

Item 1—Legal Proceedings

32

Item 1A—Risk Factors

32

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

33

Item 6—Exhibits

34

Signatures

35

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

March 31,

December 31,

    

2020

    

2019

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

133,264

$

50,788

Billed accounts receivable, less allowance for credit losses of $10,337 and $6,907, respectively

 

643,748

 

619,037

Unbilled accounts receivable, less allowance for credit losses of $785 and $0, respectively

 

51,058

 

55,542

Other receivables, less allowance for credit losses of $875 and $0, respectively

 

17,908

 

37,632

Inventories

 

10,312

 

10,053

Prepaid expenses and other

 

14,612

 

14,396

Costs and estimated earnings in excess of billings, less allowance for credit losses of $25 and $0, respectively

 

7,541

 

2,736

Total current assets

 

878,443

 

790,184

PROPERTY AND EQUIPMENT, NET

 

113,974

 

109,796

LEASE RIGHT-OF-USE ASSET

82,301

84,073

GOODWILL

 

347,391

 

332,447

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

167,675

 

159,974

DEFERRED TAX ASSETS

21,803

21,923

OTHER NONCURRENT ASSETS

 

6,480

 

6,615

Total assets

$

1,618,067

$

1,505,012

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$

850

$

20,817

Accounts payable

 

184,627

 

196,195

Accrued compensation and benefits

 

81,305

 

102,891

Billings in excess of costs and estimated earnings

 

215,106

 

166,918

Accrued self-insurance

 

42,027

 

39,546

Other current liabilities

 

75,710

 

81,630

Total current liabilities

 

599,625

 

607,997

LONG-TERM DEBT, NET

 

333,113

 

205,318

LEASE LIABILITIES

70,410

 

72,697

DEFERRED TAX LIABILITIES

 

1,425

 

1,425

OTHER LONG-TERM LIABILITIES

 

20,451

 

32,271

Total liabilities

 

1,025,024

 

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

 

411

Treasury stock, at cost, 4,673,627 and 4,465,448 shares, respectively

 

(112,513)

 

(103,960)

Additional paid-in capital

 

323,103

 

320,168

Retained earnings

 

382,042

 

368,685

Total stockholders’ equity

 

593,043

 

585,304

Total liabilities and stockholders’ equity

$

1,618,067

$

1,505,012

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

2

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

Three Months Ended

March 31,

    

2020

    

2019

 

REVENUE

$

700,131

$

538,473

COST OF SERVICES

 

583,038

 

431,808

Gross profit

 

117,093

 

106,665

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

92,924

 

78,905

GAIN ON SALE OF ASSETS

 

(554)

 

(219)

Operating income

 

24,723

 

27,979

OTHER INCOME (EXPENSE):

Interest income

 

64

 

25

Interest expense

 

(2,617)

 

(1,062)

Changes in the fair value of contingent earn-out obligations

 

2,272

 

(158)

Other

 

25

 

15

Other income (expense)

 

(256)

 

(1,180)

INCOME BEFORE INCOME TAXES

 

24,467

 

26,799

PROVISION FOR INCOME TAXES

 

6,751

 

6,933

NET INCOME

$

17,716

$

19,866

INCOME PER SHARE:

Basic

$

0.48

$

0.54

Diluted

$

0.48

$

0.53

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

36,674

 

36,923

Diluted

 

36,905

 

37,234

DIVIDENDS PER SHARE

$

0.105

$

0.095

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

3

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

Three Months Ended

March 31, 2019

Additional

Total

 

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2018

 

41,123,365

$

411

 

(4,229,653)

$

(87,747)

$

316,479

$

268,904

 

$

498,047

Net income (unaudited)

 

19,866

 

19,866

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

41,103

861

(61)

 

800

Issuance of restricted stock & performance stock (unaudited)

 

38,539

817

1,189

 

2,006

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

 

(15,013)

(781)

 

(781)

Stock-based compensation (unaudited)

 

2,084

 

2,084

Dividends (unaudited)

 

(3,506)

 

(3,506)

Share repurchase (unaudited)

 

(67,394)

(3,321)

 

(3,321)

BALANCE AT MARCH 31, 2019 (unaudited)

41,123,365

$

411

(4,232,418)

$

(90,171)

$

319,691

$

285,264

$

515,195

Three Months Ended

March 31, 2020

Additional

Total

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2019

 

41,123,365

$

411

 

(4,465,448)

$

(103,960)

$

320,168

$

368,685

 

$

585,304

Net income (unaudited)

 

17,716

 

17,716

Cumulative-effect adjustment (1)

(515)

(515)

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

 

Issuance of restricted stock & performance stock (unaudited)

 

43,902

1,054

801

 

1,855

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

 

(14,722)

(622)

 

(622)

Stock-based compensation (unaudited)

 

2,134

 

2,134

Dividends (unaudited)

 

(3,844)

 

(3,844)

Share repurchase (unaudited)

 

(237,359)

(8,985)

 

(8,985)

BALANCE AT MARCH 31, 2020 (unaudited)

 

41,123,365

$

411

 

(4,673,627)

$

(112,513)

$

323,103

$

382,042

$

593,043

________________________________________

(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.

4

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Three Months Ended

March 31,

    

2020

    

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

17,716

$

19,866

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

Amortization of identifiable intangible assets

 

6,230

 

4,891

Depreciation expense

 

6,461

 

5,833

Change in right-of-use assets

8,182

3,254

Bad debt expense

 

4,551

 

235

Deferred tax provision

 

300

 

149

Amortization of debt financing costs

 

135

 

96

Gain on sale of assets

 

(554)

 

(219)

Changes in the fair value of contingent earn-out obligations

 

(2,272)

 

158

Stock-based compensation

 

3,631

 

3,176

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

(Increase) decrease in—

Receivables, net

 

(7,894)

 

38,272

Inventories

 

(256)

 

(492)

Prepaid expenses and other current assets

 

5,392

 

(2,083)

Costs and estimated earnings in excess of billings and unbilled accounts receivable

 

(695)

 

671

Other noncurrent assets

 

225

 

(193)

Increase (decrease) in—

Accounts payable and accrued liabilities

 

(45,799)

 

(59,331)

Billings in excess of costs and estimated earnings

 

35,337

 

(10,740)

Other long-term liabilities

 

(8,770)

 

(2,552)

Net cash provided by operating activities

 

21,920

 

991

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(7,497)

 

(8,844)

Proceeds from sales of property and equipment

 

690

 

357

Cash paid for acquisitions, net of cash acquired

 

(8,729)

 

(1,313)

Net cash used in investing activities

 

(15,536)

 

(9,800)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from senior credit facility

 

150,000

 

54,000

Payments on senior credit facility

 

(37,375)

 

(53,000)

Payments on other debt

 

(12,817)

 

(1,030)

Payments of dividends to stockholders

 

(3,844)

 

(3,506)

Share repurchase

 

(8,985)

 

(3,321)

Shares received in lieu of tax withholding

 

(622)

 

(781)

Proceeds from exercise of options

 

 

800

Deferred acquisition payments

(400)

(250)

Payments for contingent consideration arrangements

 

(9,865)

 

(593)

Net cash provided by (used in) financing activities

 

76,092

 

(7,681)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

82,476

 

(16,490)

CASH AND CASH EQUIVALENTS, beginning of period

 

50,788

 

45,620

CASH AND CASH EQUIVALENTS, end of period

$

133,264

$

29,130

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

5

Table of Contents

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We install, maintain, repair and replace products and systems throughout the United States. 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

Basis of Presentation

These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2019 (the “Form 10-K”).

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, the allowance for credit losses, self-insurance accruals, deferred tax assets, warranty accruals, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing.

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 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, 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.

6

Table of Contents

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 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 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within that year. Early adoption is permitted. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

Revenue Recognition

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.

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.

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.

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

7

Table of Contents

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.

In the first three months of 2020 and 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 9 – Segment Information for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and contract type, 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):

Three Months Ended March 31,

Revenue by Service Provided

   

   

2020

   

2019

Mechanical Services

$

565,464

   

80.8

%

$

534,585

   

99.3

%

Electrical Services

134,667

19.2

%

3,888

0.7

%

Total

$

700,131

100.0

%

$

538,473

100.0

%

8

Table of Contents

Three Months Ended March 31,

Revenue by Type of Customer

2020

2019

 

Industrial

$

275,198

39.3

%

$

168,660

31.3

%

Education

109,584

15.7

%

66,743

12.4

%

Office Buildings

75,572

10.8

%

66,212

12.3

%

Healthcare

99,259

14.2

%

92,023

17.1

%

Government

38,981

5.6

%

32,279

6.0

%

Retail, Restaurants and Entertainment

61,203

8.7

%

59,391

11.0

%

Multi-Family and Residential

18,731

2.7

%

30,235

5.6

%

Other

21,603

3.0

%

22,930

4.3

%

Total

$

700,131

100.0

%

$

538,473

100.0

%

Three Months Ended March 31,

Revenue by Activity Type

2020

2019

 

New Construction

$

347,400

49.6

%

$

223,960

41.6

%

Existing Building Construction

207,166

29.6

%

182,296

33.8

%

Service Projects

51,648

7.4

%

50,384

9.4

%

Service Calls, Maintenance and Monitoring

93,917

13.4

%

81,833

15.2

%

Total

$

700,131

100.0

%

$

538,473

100.0

%

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 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 receivable from our insurance carrier.

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.

During the last two weeks of March this year, we experienced negative impacts to our business due to the business 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. At this time, it is difficult to quantify the impact COVID-19 will have on the rest of 2020, but we currently expect it to negatively impact us more in the second quarter than we experienced in the first quarter. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2020.

During the first quarter of 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

9

Table of Contents

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):

Service

Construction

Other

Total

Balance at beginning of year

$

3,192

$

3,400

$

315

$

6,907

Impact of new accounting standard

310

331

54

695

Bad debt expense (benefit)

2,754

1,797

4,551

Deductions for uncollectible receivables written off, net of recoveries

(234)

(6)

(240)

Credit allowance of acquired companies on the acquisition date

352

352

Purchase accounting adjustments

72

72

Reclass to other current liabilities

(315)

(315)

Balance at March 31, 2020

$

6,022

$

5,946

$

54

$

12,022

Contract Assets and Liabilities

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. 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 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):

Three Months Ended March 31,

Year Ended December 31,

2020

2019

Contract

    

Contract

Contract

    

Contract

Assets

Liabilities

Assets

Liabilities

Balance at beginning of period

$

2,736

$

166,918

$

10,213

$

130,986

Change due to acquisitions / disposals

436

12,851

6,573

31,556

Change due to conditional versus unconditional

4,394

(14,050)

Change in timing for performance obligation to be satisfied

35,337

4,376

Change related to credit allowance

(25)

Balance at end of period

$

7,541

$

215,106

$

2,736

 

$

166,918

In the first three months of 2020 and 2019, we recognized revenue of $126.8 million and $105.6 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 the first three months of 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 excludes unexercised contract options. As of March 31, 2020, the aggregate

10

Table of Contents

amount of the transaction price allocated to remaining performance obligations was $1.62 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 less than one year, therefore we do not report unfulfilled performance obligations for service maintenance agreements.

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 $1.9 million in the first three months of both 2020 and 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 both March 31, 2020 and December 31, 2019 was 3.9%. We recognize lease expense, including escalating lease payments and lease incentives, on a straight-line basis over the lease term. Lease expense for the three months ended March 31, 2020 and 2019 was $6.4 million and $5.6 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 7.8 years at March 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 three months ended March 31, 2020 and 2019 was approximately $0.9 million and $1.2 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.

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

March 31, 2020

December 31, 2019

Lease right-of-use assets

$

82,301

$

84,073

Lease liabilities:

Other current liabilities

14,515

14,016

Long-term lease liabilities

70,410

72,697

Total lease liabilities

$

84,925

$

86,713

11

Table of Contents

The maturities of lease liabilities are as follows (in thousands):

Year ending December 31—

2020 (excluding the three months ended March 31, 2020)

$

13,376

2021

15,511

2022

13,261

2023

10,945

2024

9,436

Thereafter

36,982

Total Lease Payments

99,511

Less—Present Value Discount

(14,586)

Present Value of Lease Liabilities

$

84,925

Supplemental information related to leases was as follows (in thousands):

Three Months Ended March 31,

2020

2019

Cash paid for amounts included in the measurement of lease liabilities

$

4,473

$

3,778

Lease right-of-use assets obtained in exchange for lease liabilities

$

2,278

$

174

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, accounting for losses associated with underperforming operations and noncontrolling interests.

In the third quarter of 2019, we filed an amended federal return for 2015 to claim the credit for increasing research activities (“R&D tax credits”) and recorded a $4.6 million tax benefit that was fully offset by an increase in unrecognized tax benefits. We previously filed an amended federal return for 2014 to claim R&D tax credits during 2018 and recorded a $2.7 million tax benefit that was also fully offset by an increase in unrecognized tax benefits. These tax benefits were fully offset by increases in 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 credits claimed have had no impact on our effective tax rates.

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.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, 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.

3. Fair Value Measurements

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.

12

Table of Contents

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 March 31, 2020 and December 31, 2019 (in thousands):

Fair Value Measurements at March 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

133,264

$

$

$

133,264

Life insurance—cash surrender value

$

$

3,898

$

$

3,898

Contingent earn-out obligations

$

$

$

16,414

$

16,414

Fair Value Measurements at December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

50,788

$

$

$

50,788

Life insurance—cash surrender value

$

$

3,905

$

$

3,905

Contingent earn-out obligations

$

$

$

28,497

$

28,497

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 74 employees with a combined face value of $54.2 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 $3.9 million as of March 31, 2020 and 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 March 31, 2020, cash flows were discounted using a weighted average cost of capital ranging from 9.5% - 14.0%.

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

 

Issuances

 

55

Settlements

(9,866)

Adjustments to fair value

 

(2,272)

Balance at March 31, 2020

$

16,414

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 quarter on those assets required to be measured at fair value on a nonrecurring basis.

13

Table of Contents

4. Acquisitions

Walker Acquisition

On April 1, 2019, we acquired all of the issued and outstanding equity interests of Walker TX Holding Company, LLC and each of its wholly owned subsidiaries (collectively “Walker”). 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.

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

$

178,000

Advance to former owners

20,500

Working capital adjustment

(7,809)

Notes issued to former owners

25,000

Tax equalization payment

202

Estimated fair value of contingent earn-out payments

19,500

$

235,393

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents

$

4,850

Billed and unbilled accounts receivable

92,309

Other current assets

8,225

Other long-term assets

53

Property and equipment

4,970

Goodwill

96,786

Identifiable intangible assets

90,200

Lease right-of-use asset

9,195

Accounts payable

(20,220)

Accrued compensation and benefits

(974)

Billings in excess of costs and estimated earnings

(31,553)

Other current liabilities

(11,305)

Long-term lease liabilities

(7,143)

$

235,393

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 this transaction 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 8.5%-11.5%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

14

Table of Contents

The acquired intangible assets include the following (dollars in thousands):

Valuation Method

Estimated Useful Life

Estimated Fair Value

Backlog

Excess earnings

2 years

$

4,600

Trade Names

Relief-from-royalty

25 years

32,600

Customer Relationships

Excess earnings

10 years

53,000

Total

$

90,200

The contingent earn-out obligation is associated with the achievement of specified earnings milestones over a five year period, and the range of estimated milestone payments is from $1 million to $11 million (undiscounted).  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 10.2% 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 remeasured 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.

Pro Forma Impact of the Acquisition

The following unaudited pro forma information presents the consolidated results of the Company and Walker for the three months ended March 31, 2019, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods or the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results that the company will experience after the acquisition. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any operating efficiencies that may be associated with the acquisition.

The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2018, are as follows (in thousands):

Three Months Ended March 31,

2019

Revenue

$

626,834

Pre-tax income

$

23,927

Other Acquisitions

We completed one acquisition in the first quarter of 2020 with a total preliminary purchase price of $41.1 million. This acquisition is reported in our electrical services segment. In 2019, in addition to the Walker acquisition, we completed one acquisition in the first quarter of 2019 with a total purchase price of $1.6 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 acquisition, the acquisitions completed in the current and prior year were not material, individually or in the aggregate. Additional contingent purchase price (“earn-out”) has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs, when they are not subject to the continued employment of the sellers, are estimated as of the purchase date and included as part of the consideration paid for the acquisition. If we have an earn-out under which continued employment is a condition to receive payment, then the earn-out is recorded as compensation expense over the period earned.

15

Table of Contents

5. Goodwill

Goodwill

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

Mechanical Services

Electrical Services

    

Segment

    

Segment

Total

Balance at December 31, 2018

$

235,182

$

$

235,182

Acquisitions and purchase price adjustments (See Note 4)

 

579

 

96,686

97,265

Impact of segment reorganization

(1,101)

1,101

Balance at December 31, 2019

234,660

97,787

332,447

Acquisitions and purchase price adjustments (See Note 4)

14,944

14,944

Balance at March 31, 2020

$

234,660

$

112,731

$

347,391

During the fourth quarter of 2019, the Company performed its annual goodwill impairment test resulting in no impairment charges, as 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 the first quarter of 2020, we considered the economic impacts of COVID-19 to be a triggering event for review of goodwill impairment at each of our reporting units. After performing a qualitative goodwill impairment assessment as of March 31, 2020, we determined that we did not have a goodwill impairment as of that date. However, one reporting unit’s (Walker) fair value exceeded carrying value by approximately 21%, a reduction from the excess of 27% from our 2019 annual impairment test. Walker’s forecast for the current year is lower than previously estimated, primarily due to the impact of COVID-19 on its business. As a result, 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 March 31, 2020, Walker had a goodwill balance of $96.8 million.

6. Debt Obligations

Debt obligations consist of the following (in thousands):

March 31,

December 31,

    

2020

    

2019

 

Revolving credit facility

$

150,000

$

28,000

Term loan

140,625

150,000

Notes to former owners

43,667

 

48,483

Total principal amount

334,292

 

226,483

Less—unamortized debt issuance costs

(329)

(