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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, 2021

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 23, 2021 was 36,285,379 (excluding treasury shares of 4,837,986).

Table of Contents

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

    

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

31

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

32

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,

    

2021

    

2020

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

52,116

$

54,896

Billed accounts receivable, less allowance for credit losses of $7,993 and $9,087, respectively

 

585,594

 

619,544

Unbilled accounts receivable, less allowance for credit losses of $815 and $784, respectively

 

46,834

 

45,596

Other receivables, less allowance for credit losses of $789 and $759, respectively

 

38,396

 

44,212

Inventories

 

15,653

 

13,472

Prepaid expenses and other

 

13,812

 

15,510

Costs and estimated earnings in excess of billings, less allowance for credit losses of $34 and $79, respectively

 

10,167

 

18,622

Total current assets

 

762,572

 

811,852

PROPERTY AND EQUIPMENT, NET

 

115,039

 

117,206

LEASE RIGHT-OF-USE ASSET

96,782

94,727

GOODWILL

 

472,778

 

464,392

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

230,408

 

231,807

DEFERRED TAX ASSETS

29,811

29,401

OTHER NONCURRENT ASSETS

 

8,140

 

7,970

Total assets

$

1,715,530

$

1,757,355

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

$

184,499

$

204,145

Accrued compensation and benefits

 

104,590

 

121,864

Billings in excess of costs and estimated earnings

 

248,397

 

226,237

Accrued self-insurance

 

48,106

 

49,166

Other current liabilities

 

106,096

 

91,492

Total current liabilities

 

691,688

 

692,904

LONG-TERM DEBT, NET

 

171,752

 

235,733

LEASE LIABILITIES

82,661

 

80,576

DEFERRED TAX LIABILITIES

 

1,339

 

1,339

OTHER LONG-TERM LIABILITIES

 

44,987

 

50,374

Total liabilities

 

992,427

 

1,060,926

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, 4,868,862 and 4,935,186 shares, respectively

 

(128,589)

 

(129,243)

Additional paid-in capital

 

326,143

 

322,451

Retained earnings

 

525,138

 

502,810

Total stockholders’ equity

 

723,103

 

696,429

Total liabilities and stockholders’ equity

$

1,715,530

$

1,757,355

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,

    

2021

    

2020

 

REVENUE

$

669,761

$

700,131

COST OF SERVICES

 

546,292

 

583,038

Gross profit

 

123,469

 

117,093

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

88,214

 

92,924

GAIN ON SALE OF ASSETS

 

(350)

 

(554)

Operating income

 

35,605

 

24,723

OTHER INCOME (EXPENSE):

Interest income

 

3

 

64

Interest expense

 

(1,497)

 

(2,617)

Changes in the fair value of contingent earn-out obligations

 

1,186

 

2,272

Other

 

(69)

 

25

Other income (expense)

 

(377)

 

(256)

INCOME BEFORE INCOME TAXES

 

35,228

 

24,467

PROVISION FOR INCOME TAXES

 

8,737

 

6,751

NET INCOME

$

26,491

$

17,716

INCOME PER SHARE:

Basic

$

0.73

$

0.48

Diluted

$

0.73

$

0.48

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

36,286

 

36,674

Diluted

 

36,499

 

36,905

DIVIDENDS PER SHARE

$

0.115

$

0.105

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)

(Unaudited)

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

 

17,716

 

17,716

Cumulative-effect adjustment (1)

(515)

(515)

Issuance of Stock:

Issuance of shares for options exercised

 

 

Issuance of restricted stock & performance stock

 

43,902

1,054

801

 

1,855

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

 

(14,722)

(622)

 

(622)

Stock-based compensation

 

2,134

 

2,134

Dividends

 

(3,844)

 

(3,844)

Share repurchase

 

(237,359)

(8,985)

 

(8,985)

BALANCE AT MARCH 31, 2020

41,123,365

$

411

(4,673,627)

$

(112,513)

$

323,103

$

382,042

$

593,043

Three Months Ended

March 31, 2021

Additional

Total

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2020

 

41,123,365

$

411

(4,935,186)

$

(129,243)

$

322,451

$

502,810

$

696,429

Net income

 

26,491

 

26,491

Issuance of Stock:

Issuance of shares for options exercised

 

61,454

1,616

(211)

 

1,405

Issuance of restricted stock & performance stock

 

29,544

777

1,431

 

2,208

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

 

(11,424)

(854)

 

(854)

Stock-based compensation

 

2,472

 

2,472

Dividends

 

(4,163)

 

(4,163)

Share repurchase

 

(13,250)

(885)

 

(885)

BALANCE AT MARCH 31, 2021

 

41,123,365

$

411

 

(4,868,862)

$

(128,589)

$

326,143

$

525,138

$

723,103

________________________________________

(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.

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,

    

2021

    

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

26,491

$

17,716

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

Amortization of identifiable intangible assets

 

8,925

 

6,230

Depreciation expense

 

7,051

 

6,461

Change in right-of-use assets

4,377

8,182

Bad debt expense (benefit)

 

(1,018)

 

4,551

Deferred tax provision (benefit)

 

(410)

 

300

Amortization of debt financing costs

 

133

 

135

Gain on sale of assets

 

(350)

 

(554)

Changes in the fair value of contingent earn-out obligations

 

(1,186)

 

(2,272)

Stock-based compensation

 

4,711

 

3,631

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

(Increase) decrease in—

Receivables, net

 

49,684

 

(7,894)

Inventories

 

(2,181)

 

(256)

Prepaid expenses and other current assets

 

(390)

 

5,392

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

 

6,840

 

(695)

Other noncurrent assets

 

(284)

 

225

Increase (decrease) in—

Accounts payable and accrued liabilities

 

(33,087)

 

(45,799)

Billings in excess of costs and estimated earnings

 

20,550

 

35,337

Other long-term liabilities

 

(5,209)

 

(8,770)

Net cash provided by operating activities

 

84,647

 

21,920

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(4,812)

 

(7,497)

Proceeds from sales of property and equipment

 

498

 

690

Cash paid for acquisitions, net of cash acquired

 

(10,716)

 

(8,729)

Net cash used in investing activities

 

(15,030)

 

(15,536)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facility

 

10,000

 

150,000

Payments on revolving credit facility

 

(70,000)

 

(28,000)

Payments on term loan

(7,500)

(9,375)

Payments on other debt

 

 

(12,817)

Payments of dividends to stockholders

 

(4,163)

 

(3,844)

Share repurchase

 

(885)

 

(8,985)

Shares received in lieu of tax withholding

 

(854)

 

(622)

Proceeds from exercise of options

 

1,405

 

Deferred acquisition payments

(400)

(400)

Payments for contingent consideration arrangements

 

 

(9,865)

Net cash provided by (used in) financing activities

 

(72,397)

 

76,092

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(2,780)

 

82,476

CASH AND CASH EQUIVALENTS, beginning of period

 

54,896

 

50,788

CASH AND CASH EQUIVALENTS, end of period

$

52,116

$

133,264

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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(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, 2020 (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, self-insurance accruals, deferred tax assets, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within that year. We adopted ASU No. 2019-12 on January 1, 2021, and the impact was not material to our overall financial statements.

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Revenue Recognition

We recognize revenue over time for all of our services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process, as evidenced either by contractual termination clauses or by our rights to payment for work performed to date, plus a reasonable profit, for delivery of products or services that do not have an alternative use to the Company.

For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost to cost measure of progress for our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under the cost to cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, subcontractors’ costs, other direct costs and an allocation of indirect costs.

For a small portion of our business in which our services are delivered in the form of service maintenance agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is to maintain the customer’s mechanical system for a specific period of time. Similar to construction jobs, we recognize revenue over time; however, for service maintenance agreements in which the full cost to provide services may not be known, we generally use an input method to recognize revenue, which is based on the amount of time we have provided our services out of the total time we have been contracted to perform those services. Our revenue recognition policy is further discussed in Note 3 “Revenue from Contracts with Customers.”

Accounts Receivable and Allowance for Credit Losses

We are required to estimate and record the expected credit losses over the contractual life of our financial assets measured at amortized cost, including billed and unbilled accounts receivable, other receivables and costs and estimated earnings in excess of billings. Accounts receivable include amounts from work completed in which we have billed or have an unconditional right to bill our customers. Our trade receivables are contractually due in less than a year.

We estimate our credit losses using a loss-rate method for each of our identified portfolio segments. Our portfolio segments are construction, service and other. While our construction and service financial assets are often with the same subset of customers and industries, our construction financial assets will generally have a lower loss-rate than service financial assets due to lien rights, which we are more likely to have on construction jobs. These lien rights result in lower credit loss expenses on average compared to receivables that do not have lien rights. Financial assets classified as Other include receivables that are not related to our core revenue producing activities, such as receivables related to our acquisition activity from former owners, our vendor rebate program or receivables for estimated losses in excess of our insurance deductible, which are accrued with a corresponding accrued insurance liability.

Loss rates for our portfolios are based on numerous factors, including our history of credit loss expense by portfolio, the financial strength of our customers and counterparties in each portfolio, the aging of our receivables, our expectation of likelihood of payment, macroeconomic trends in the U.S. and the current and forecasted non-residential construction market trends in the U.S.

In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables (e.g., when we hold concerns about a specific customer going bankrupt and no longer being able to pay the receivables due to us).

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

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the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions and accounting for losses associated with underperforming operations.

In early October 2020, we filed amended federal returns for 2016, 2017 and 2018 to claim the credit for increasing research activities (the “R&D tax credit”) and energy efficient commercial buildings deduction (the “179D deduction”) and recorded tax benefits of $6.1 million, $8.5 million and $11.9 million, respectively. The $26.5 million of tax benefits have been offset by additions to unrecognized tax benefits of $26.4 million due to the uncertainty of the outcome of our current Internal Revenue Service examination. The R&D tax credit and 179D deduction for 2016, 2017 and 2018, therefore, had no material impact on our effective tax rates. At this time, we cannot reasonably estimate the R&D tax credit for years after 2018 or 179D deduction for years after 2017.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, interest rate swaps, life insurance policies, notes to former owners, a revolving credit facility and a term loan. We believe that the carrying values of these instruments in the accompanying Balance Sheets approximate their fair values.

3. Revenue from Contracts with Customers

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Sales-based taxes are excluded from revenue.

We provide mechanical and electrical contracting services. Our mechanical segment principally includes HVAC, plumbing, piping and controls, as well as off-site construction, monitoring and fire protection. Our electrical segment includes installation and servicing of electrical systems. We install, maintain, repair and replace products and systems throughout the United States. All of our revenue is recognized over time as we deliver goods and services to our customers. Revenue can be earned based on an agreed-upon fixed price or based on actual costs incurred, marked up at an agreed-upon percentage.

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 have not incurred 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 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

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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 2021 and 2020, net revenue recognized from our performance obligations satisfied in previous periods was not material.

Disaggregation of Revenue

Our consolidated 2021 revenue was derived from contracts to provide service activities in the mechanical and electrical services segments we serve. Refer to Note 11 – Segment Information for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and service provided, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the following tables (dollars in thousands):

Three Months Ended March 31,

Revenue by Service Provided

   

2021

   

2020

   

Mechanical Services

$

565,620

   

84.5

%

$

570,751

   

81.5

%

Electrical Services

104,141

15.5

%

129,380

18.5

%

Total

$

669,761

100.0

%

$

700,131

100.0

%

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Three Months Ended March 31,

Revenue by Type of Customer

2021

2020

 

Industrial

$

269,583

40.3

%

$

275,198

39.3

%

Education

92,457

13.8

%

109,584

15.7

%

Office Buildings

78,996

11.8

%

75,572

10.8

%

Healthcare

95,091

14.2

%

99,259

14.2

%

Government

43,165

6.4

%

38,981

5.6

%

Retail, Restaurants and Entertainment

44,576

6.7

%

61,203

8.7

%

Multi-Family and Residential

24,660

3.7

%

18,731

2.7

%

Other

21,233

3.1

%

21,603

3.0

%

Total

$

669,761

100.0

%

$

700,131

100.0

%

Three Months Ended March 31,

Revenue by Activity Type

2021

2020

 

New Construction

$

302,061

45.1

%

$

347,400

49.6

%

Existing Building Construction

216,601

32.3

%

207,166

29.6

%

Service Projects

60,060

9.0

%

51,648

7.4

%

Service Calls, Maintenance and Monitoring

91,039

13.6

%

93,917

13.4

%

Total

$

669,761

100.0

%

$

700,131

100.0

%

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 or 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,

2021

2020

Contract

    

Contract

Contract

    

Contract

Assets

Liabilities

Assets

Liabilities

Balance at beginning of period

$

18,622

$

226,237

$

2,736

$

166,918

Change due to acquisitions / disposals

472

1,610

9,509

39,885

Change related to credit allowance

45

(79)

Other changes in the period

(8,972)

20,550

6,456

19,434

Balance at end of period

$

10,167

$

248,397

$

18,622

 

$

226,237

In the first three months of 2021 and 2020, we recognized revenue of $167.8 million and $126.8 million related to our contract liabilities at January 1, 2021 and January 1, 2020, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in the first three months of 2021 and 2020.

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Remaining Performance Obligations

Remaining construction performance obligations represent the remaining transaction price of firm orders for which work has not been performed and exclude unexercised contract options. As of March 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.66 billion. The Company expects to recognize revenue on approximately 80-85% of the remaining performance obligations over the next 12 months, with the remaining recognized thereafter. Our service maintenance agreements are generally one-year renewable agreements. We have adopted the practical expedient that allows us to not include service maintenance contracts with a total term of less than one year; therefore, we do not report unfulfilled performance obligations for service maintenance agreements.

4. Fair Value Measurements

Interest Rate Risk Management and Derivative Instruments

In April 2020, we entered into interest rate swap agreements to reduce our exposure to variable interest rates on our term loan and revolving credit facility. The notional amount covered by these interest rate swaps was $130.0 million as of March 31, 2021 and decreases to $80.0 million by November 30, 2021 until the termination date of September 30, 2022.

We use derivative instruments to manage exposure to market risk, including interest rate risk. Unsettled amounts under our interest rate swaps are recorded on the Balance Sheet at fair value in “Other Receivables” or “Other Current Liabilities.” Gains and losses on our interest rate swaps are recorded on the Income Statement in “Interest Expense.” For the three months ended March 31, 2021, we recognized a net loss of $0.1 million related to our interest rate swaps. We currently do not have any derivatives that are accounted for as hedges under ASC 815.

Fair Value 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.

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, 2021 and December 31, 2020 (in thousands):

Fair Value Measurements at March 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

52,116

$

$

$

52,116

Life insurance—cash surrender value

$

$

5,708

$

$

5,708

Contingent earn-out obligations

$

$

$

28,048

$

28,048

Interest rate swap liability

$

$

45

$

$

45

Fair Value Measurements at December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

54,896

$

$

$

54,896

Life insurance—cash surrender value

$

$

5,420

$

$

5,420

Contingent earn-out obligations

$

$

$

25,979

$

25,979

Interest rate swap liability

$

$

42

$

$

42

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 fair value for our interest rate swaps is based upon inputs corroborated by observable market data with similar tenors, which are considered Level 2 inputs. The Company’s outstanding term loan held by

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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 89 employees with a combined face value of $63.2 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 $5.7 million as of March 31, 2021 and $5.4 million as of December 31, 2020. 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, 2021, cash flows were discounted using a weighted average cost of capital ranging from 10.0% - 17.5%.

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):

    

Three Months Ended

Year Ended

    

March 31, 2021

December 31, 2020

Balance at beginning of period

    

$

25,979

$

28,497

 

Issuances

 

3,255

 

16,715

Settlements

(10,114)

Adjustments to fair value

 

(1,186)

 

(9,119)

Balance at end of period

$

28,048

$

25,979

5. Acquisitions

TAS Energy Inc. Acquisition

On April 1, 2020, we consummated a merger through which TAS Energy Inc. (“TAS”) became a wholly owned subsidiary of the Company. TAS is headquartered in Houston, Texas and is a leading engineering, design and construction provider of modular construction systems serving the technology, power and industrial sectors. As a result of the acquisition, TAS is a wholly owned subsidiary of the Company reported in our mechanical services segment.

The following summarizes the acquisition date fair value of consideration transferred and the acquisition date fair value of the identifiable assets acquired and liabilities assumed, including an amount for goodwill (in thousands):

Consideration transferred:

Cash paid at closing

$

105,950

Working capital adjustment

40,455

Notes issued to former owners

14,000

Estimated fair value of contingent earn-out payments

9,100

$

169,505

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Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents

$

47,460

Billed and unbilled accounts receivable

18,702

Other current assets

15,634

Other long-term assets

1,556

Property and equipment

7,709

Goodwill

72,788

Identifiable intangible assets

53,400

Lease right-of-use asset

19,736

Accounts payable

(16,453)

Billings in excess of costs and estimated earnings

(24,196)

Current lease liabilities

(2,337)

Accrued expenses and other current liabilities

(4,109)

Long-term lease liabilities

(17,398)

Other long-term liabilities

(2,987)

$

169,505

Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recognized as a result of the TAS acquisition is not deductible for tax purposes.

In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 15% - 23.5%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

As a result of the TAS acquisition, we acquired $53.2 million of federal net operating loss (“NOL”) carryforwards and $6.5 million of state NOL carryforwards. Our ability to utilize these NOL carryforwards to reduce taxable income in future years is subject to significant limitations under Section 382 of the Internal Revenue Code (the “Code”) due to the ownership change in TAS on April 1, 2020. While we expect to fully utilize the federal NOL carryforwards before they begin to expire in 2031, a full valuation allowance was recorded against virtually all of the state NOL carryforwards. We do not believe it is more-likely-than-not that TAS will have sufficient revenue-generating operations in those states in the future.

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

Valuation Method

Estimated Useful Life

Estimated Fair Value

Backlog

Excess earnings

1 year

$

5,200

Trade Name

Relief-from-royalty

25 years

8,200

Customer Relationships

Excess earnings

10 years

40,000

Total

$

53,400

The contingent earn-out obligation is associated with the achievement of two earnings milestones over a 27-month period, and the range of each estimated milestone payment is $1 million to $8 million. We determined the initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method, which represents a Level 3 measurement.  Cash flows were discounted using a 17.7% discount rate, which we believe is appropriate and representative of a market participant assumption.  Subsequent to the acquisition date, the contingent earn-out obligation

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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.

Other Acquisitions

We completed the acquisition of an electrical contractor in North Carolina in the first quarter of 2020 with a total purchase price of $41.6 million. This acquisition is reported in our electrical services segment. In the fourth quarter of 2020, we acquired all outstanding equity interest of Tennessee Electric Company, Inc. dba TEC Industrial Maintenance and Construction (“T E C”) for a total preliminary purchase price of $89.6 million which included $73.0 million in cash, $7.0 million in notes payable to former owners, a $7.6 million contingent earn-out obligation and a $2.0 million working capital adjustment. As a result of the acquisition, T E C is a wholly owned subsidiary of the Company reported in our electrical services segment. In the first quarter of 2021, we completed an acquisition of a mechanical contractor in Utah with a total preliminary purchase price of $19.6 million, which is reported in our mechanical services segment.

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. 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 receipt of payment, then the earn-out is recorded as compensation expense over the period earned.

6. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

Mechanical Services

Electrical Services

    

Segment

    

Segment

Total

Balance at December 31, 2019

$

234,660

$

97,787

$

332,447

Acquisitions and purchase price adjustments (See Note 5)

 

72,788

59,157

131,945

Balance at December 31, 2020

307,448

156,944

464,392

Acquisitions and purchase price adjustments (See Note 5)

7,726

660

8,386

Impact of segment reorganization

1,101

(1,101)

Balance at March 31, 2021

$

316,275

$

156,503

$

472,778

During the fourth quarter of 2020, the Company performed a qualitative assessment for all of our reporting units except one for which we performed a quantitative assessment, which considered various factors, including changes in the carrying value of the reporting unit, forecasted operating results, long-term growth rates and discount rates. Additionally, we considered qualitative key events and circumstances (i.e. macroeconomic environment, industry and market specific conditions, cost factors and events specific to the reporting unit, etc.). Based on this assessment, we concluded that it was more likely than not that the fair value of each of the reporting units was greater than its carrying value. Accordingly, no further testing was required. For our Texas electrical operation, we performed a step 1 quantitative assessment, and the calculated fair value exceeded the carrying value by 24%. As a result of uncertainty caused by COVID-19 and the reporting unit’s smaller excess of fair value percentage, this reporting unit is more susceptible to impairment risk from additional adverse changes in its operating environment, including micro- and macroeconomic environment conditions that could negatively impact them. Such adverse changes could include worsening economic conditions in the locations or markets they primarily serve, whether due to COVID-19 or other events and conditions. As of March 31, 2021, the Texas electrical operation had a goodwill balance of $96.8 million.

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Identifiable Intangible Assets, Net

At March 31, 2021, future amortization expense of identifiable intangible assets is as follows (in thousands):

Year ended December 31—

    

    

2021 (remainder of the year)

    

$

25,738

 

2022

28,400

2023

 

24,217

2024

 

22,867

2025

 

20,680

Thereafter

 

108,506

Total

$

230,408

7. Debt Obligations

Debt obligations consist of the following (in thousands):

March 31,

December 31,

    

2021

    

2020

 

Revolving credit facility

$

10,000

$

70,000

Term loan

127,500

135,000

Notes to former owners

34,500

 

31,000

Total principal amount

172,000

 

236,000

Less—unamortized debt issuance costs

(248)

(267)

Total debt, net of unamortized debt issuance costs

171,752

235,733

Less—current portion

 

Total long-term portion of debt, net

$

171,752

$

235,733

Revolving Credit Facility and Term Loan

We have a $600.0 million senior credit facility (the “Facility”) provided by a syndicate of banks. The Facility is composed of a revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility provides for a $150.0 million accordion or increase option for the revolving portion of the Facility. As of March 31, 2021, the Facility capacity was $577.5 million as the term loan was paid down by $22.5 million since the inception of the Facility. The amended Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The Facility expires in January 2025 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. As of March 31, 2021, we had $10.0 million of outstanding borrowings on the revolving credit facility, $49.5 million in letters of credit outstanding and $390.5 million of credit available.

There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the Eurodollar Rate Loan Option. These rates are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. Additional margins are then added to these two rates.

The following is a summary of the additional margins:

Consolidated Total Indebtedness to