EMCOR Group, Inc. (EME) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Description

We are one of the largest specialty contractors in the United States and a leading provider of electrical and mechanical construction and facilities services, building services, and industrial services. Our services are provided to a broad range of commercial, industrial, healthcare, utility, and institutional customers through approximately 100 operating subsidiaries. Such operating subsidiaries are organized into the following reportable segments:

•United States electrical construction and facilities services;

•United States mechanical construction and facilities services;

•United States building services;

•United States industrial services; and

•United Kingdom building services.

We refer to our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment together as our United States construction segments.

For a more complete description of our operations, refer to Item 1. Business.

Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.

Market Update

Throughout 2022, our business and end markets remained resilient despite the impact of uncertain global economic conditions, including supply chain, production, and other logistical issues, an inflationary cost environment, rising interest rates, skilled labor shortages in certain regions, and the lingering effects of the COVID-19 pandemic.

For example, we experienced pressures in our supply chain, which resulted in material and equipment lead times significantly in excess of normal levels. These disruptions, which are expected to persist to varying degrees in 2023, have manifested themselves through project delays or scheduling impacts and reduced labor productivity and efficiency, particularly within our United States construction segments and our United States building services segment. Delays in critical material and equipment deliveries have additionally resulted in us funding purchases at earlier stages of project progression, or in advance of project commencement, which has and will continue to apply pressure on working capital requirements. During 2022, we also experienced the effects of inflation through increases in fuel, material, and other commodity prices. While current economic indicators suggest that inflation will slow, we anticipate that our business will continue to be impacted by wage and general inflation to some extent throughout 2023. Further, in an effort to mitigate inflation, the Federal Reserve Board has increased the federal funds rate throughout 2022, raised it further in February 2023, and it is anticipated that rate increases will continue through the remainder of 2023. These actions have resulted, and may continue to result, in an increase in our interest expense.

Beyond these impacts, the Russian invasion of Ukraine in February 2022 has created another layer of uncertainty, especially with respect to energy costs as the resulting sanctions imposed on Russian oil and gas exports caused the prices of crude oil and natural gas to increase significantly for several months. While higher energy prices have historically led to an increase in demand for certain of our services, such as those performed by our United States industrial services segment, significant increases in the price or demand for crude oil may also result in the short-term curtailment or deferral of spending by our customers, as facility downtime to perform certain of the services we provide comes at a higher opportunity cost.

In response to these challenges, we continue to strive to manage our business more effectively through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging our relationships with our suppliers and customers. While we believe the actions we have taken continue to be effective, as evidenced in part by the sequential improvement in our operating performance throughout each quarter of 2022, the impact of these disruptions continues to evolve and there can be no assurance that our actions will serve to mitigate such impacts in future periods. Further, while we believe our remaining performance obligations are firm, and we have not experienced any material project cancellations to date, prolonged delays in the receipt of critical equipment could impact our ability to convert such remaining performance obligations to revenues in the near term, or result in our customers seeking to delay or terminate existing or pending agreements. Lastly, rising interest rates may cause a decline in capital or maintenance spending of our customers or prospective customers and, therefore, the demand for our services. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.

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2022 versus 2021

Overview

The following table presents selected financial data for the fiscal years ended December 31, 2022 and 2021 (in thousands, except percentages and per share data):

Revenues of $11.08 billion for the year ended December 31, 2022 set a new annual record for the Company and represent an increase of 11.8% from revenues of $9.90 billion for the year ended December 31, 2021. Demand for our services continues to be strong and, as described in further detail below, we experienced revenue growth within all of our reportable segments except for our United Kingdom building services segment, the reduction in revenues of which was entirely due to unfavorable exchange rate movements during 2022, which more than offset revenue growth that was experienced on a local currency basis.

Operating income for 2022 was $564.9 million, or 5.1% of revenues, compared to operating income of $530.8 million, or 5.4% of revenues, in 2021. This increase resulted from greater operating income contribution, largely as a result of the aforementioned increase in revenues, from each of our reportable segments, other than our United States electrical construction and facilities services segment. The decrease in operating margin period over period was driven by a 70 basis point reduction in consolidated gross profit margin, due to reduced gross profit margins within each of our United States construction segments. Partially offsetting the decrease in gross profit margin was a reduction in the ratio of selling, general and administrative expenses to revenues as we were able to leverage our overhead cost structure during this period of revenue growth. Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.

Net income of $406.1 million, or $8.10 per diluted share, for the year ended December 31, 2022, compares favorably to net income of $383.5 million, or $7.06 per diluted share, for the year ended December 31, 2021. In addition to the increase in operating income referenced above, our diluted earnings per share for 2022 benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 2021 and 2022.

Impact of Acquisitions

In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses, and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.

During 2022, we acquired six companies for total consideration of $100.8 million. Such acquisitions include: (a) a company that provides electrical construction services in the Greater Boston area, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (b) five companies that enhance our presence in geographies where we have existing operations, the results of operations of which were de minimis, consisting of: (i) two companies that provide fire protection services in the Northeastern and Southern regions of the United States, respectively, and that have been included within our United States mechanical construction and facilities services segment, (ii) two companies that specialize in either building automation and controls or mechanical services in the Southwestern and Southern regions of the United States, respectively, and that have been included within our United States building services segment, and (iii) a company that provides electrical construction services in the Midwestern region of the United States and that has been included within our United States electrical construction and facilities services segment.

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We acquired eight companies during 2021 for total consideration of $131.2 million. Such acquisitions include: (a) two companies, the results of operations of which were de minimis, included within our United States mechanical construction and facilities services segment, consisting of: (i) a company that provides mechanical services within the Southern region of the United States and (ii) a company that provides fire protection services in the Midwestern region of the United States, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of: (i) a company that provides mobile mechanical services across North Texas and (ii) three companies, the results of operations of which were de minimis, that enhance our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.

Companies acquired in 2022 and 2021 generated incremental revenues of $149.7 million and incremental operating income of $3.9 million, inclusive of $7.3 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2022.

Discussion and Analysis of Results of Operations

Revenues

The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

As described in more detail below, revenues for the year ended December 31, 2022 increased to $11.08 billion compared to revenues of $9.90 billion for the year ended December 31, 2021. During 2022, we experienced increases in revenues from all of our reportable segments, except for our United Kingdom building services segment, the reduction in revenues of which was entirely due to unfavorable exchange rate movements, which more than offset revenue growth that was experienced on a local currency basis. Companies acquired in 2022 and 2021 generated incremental revenues of $149.7 million in 2022.

Revenues of our United States electrical construction and facilities services segment were $2,433.1 million for the year ended December 31, 2022 compared to revenues of $2,029.9 million for the year ended December 31, 2021. This segment’s results for the year ended December 31, 2022 included $135.1 million of incremental revenues from acquired companies. Excluding the impact of acquisitions, revenues of this segment increased by $268.1 million primarily as a result of an increase in revenues from: (a) the commercial market sector, predominantly within the telecommunications sub-market sector, inclusive of our data center projects, and the technology sub-market sector, (b) the healthcare market sector due to large project activity, and (c) certain transmission and distribution projects, including those to support sustainable energy solutions such as solar and wind. These revenue increases were partially offset by a reduction in transportation and institutional market sector activity due to the completion or substantial completion of various projects.

Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2022 were $4,326.7 million, a $374.1 million increase compared to revenues of $3,952.6 million for the year ended December 31, 2021. The increase in this segment’s revenues for the year ended December 31, 2022 was primarily attributable to revenue growth within: (a) the commercial market sector, as a result of increased demand: (i) for our mechanical construction and/or fire protection services by certain customers engaged in the design and manufacturing of semiconductors as well as customers within the biotech, life-sciences, and pharmaceutical industries, (ii) for our fire protection services within various warehousing and distribution facilities to support the build-out of our customers’ e-commerce supply chains, and (iii) from certain of our data center customers, (b) the institutional market sector, due to project activity throughout several of the regions in which we operate, (c) the manufacturing market sector, driven by certain large food processing projects currently in process, and (d) the water and wastewater market sector, given greater project activity within the Southern region of the United States.

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Revenues of our United States building services segment were $2,720.5 million and $2,424.7 million for the years ended December 31, 2022 and 2021, respectively. Excluding incremental acquisition revenues within this segment’s mobile mechanical services division of $14.6 million during 2022, this segment’s revenue growth was primarily attributable to: (a) its mobile mechanical services division, due to: (i) increased project work, including incremental demand for HVAC system retrofits and building automation and controls services, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, and (ii) greater service repair and maintenance volumes, partially as a result of incremental repair opportunities driven by supply chain delays, which have created a need to extend the life of existing equipment in instances when replacement equipment is not readily available, and (b) its commercial site-based services division, due to the award of facilities maintenance contracts with new customers, as well as scope or site expansion and increased project work with existing customers.

Revenues of our United States industrial services segment for the year ended December 31, 2022 were $1,118.8 million, a $132.4 million increase compared to revenues of $986.4 million for the year ended December 31, 2021. While there remains significant disruption and uncertainty within the broader oil and gas industry, most notably within the upstream and midstream energy sectors, we began to experience a resumption in downstream energy demand within this segment during the second half of 2021. Such increased demand continued into 2022, resulting in revenue growth within this segment. Specifically, more normalized turnaround project demand and an increase in maintenance and capital project activity, when compared to the prior year, has resulted in increased revenues from this segment’s field services operations. In addition, revenues of this segment’s shop services operations have increased as a result of greater maintenance, repair, and hydro blast cleaning services and a slight increase in new build heat exchanger sales.

Our United Kingdom building services segment revenues were $477.1 million in 2022 compared to $510.0 million in 2021. The year-over-year decrease in this segment’s revenues was entirely a result of unfavorable exchange rate movements for the British pound versus the United States dollar, which negatively impacted this segment’s revenues by $53.5 million for the year ended December 31, 2022. Excluding the impact of foreign exchange rate movements, this segment’s revenues for 2022 increased as a result of growth in project activities with existing customers, primarily within the commercial market sector, including certain telecommunication projects, and the transportation market sector.

Cost of sales and gross profit

The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

Our gross profit for the year ended December 31, 2022 was $1,603.6 million, a $101.9 million increase compared to gross profit of $1,501.7 million for the year ended December 31, 2021. Companies acquired in 2022 and 2021 generated incremental gross profit of approximately $21.1 million in 2022. Excluding the impact of acquisitions, the increase in gross profit for 2022 was largely a result of increased revenue volume, which despite the decrease in gross profit margin discussed below, resulted in an increase in consolidated gross profit.

Our gross profit margin was 14.5% and 15.2% for 2022 and 2021, respectively. The decrease in gross profit margin for the year ended December 31, 2022 was primarily attributable to a reduction in gross profit margin within each of our United States construction segments, partially as a result of a less favorable project mix. For the year ended December 31, 2022, certain discrete project losses within both our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment negatively impacted our consolidated gross profit margin by 40 basis points. Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments, including the above referenced losses.

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Selling, general and administrative expenses

The following table presents selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

Our selling, general and administrative expenses for the year ended December 31, 2022 were $1,038.7 million compared to selling, general and administrative expenses of $970.9 million for the year ended December 31, 2021. For the year ended December 31, 2022, selling, general and administrative expenses included $17.2 million of incremental expenses directly related to companies acquired in 2022 and 2021, including amortization expense attributable to identifiable intangible assets of $4.5 million. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $50.6 million for the year ended December 31, 2022. The organic increase in selling, general and administrative expenses was primarily attributable to an increase in: (a) salaries and related employment expenses, largely as a result of an increase in headcount to support our organic revenue growth, (b) incentive compensation expense within those of our reportable segments which had higher operating results than in the prior year, (c) travel and entertainment expenses, given a resumption in travel and business meals as COVID-19 related restrictions have eased, (d) rent and other occupancy costs driven by: (i) the expansion or addition of certain fabrication facilities, which support our operations, and (ii) the impact of inflation on the real estate market, and (e) computer hardware and software costs, as a result of various information technology and cybersecurity initiatives currently in process.

Selling, general and administrative expenses as a percentage of revenues were 9.4% and 9.8% for 2022 and 2021, respectively. The year-over-year decrease in SG&A margin was largely a result of an increase in revenues without a commensurate increase in overhead costs, as we were able to leverage our existing overhead cost structure.

Operating income (loss)

The following table presents by segment our operating income (loss) and each segment’s operating margin (operating income (loss) as a percentage of such segment’s revenues) for the years ended December 31, 2022 and 2021 (in thousands, except for percentages):

As described in more detail below, operating income was $564.9 million for the year ended December 31, 2022, compared to operating income of $530.8 million for the year ended December 31, 2021. Largely as a result of increases in revenues, we experienced greater operating income contribution from each of our reportable segments other than our United States electrical construction and facilities services segment. Companies acquired in 2022 and 2021 generated incremental operating income of $3.9 million, inclusive of $7.3 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2022.

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Operating margin was 5.1% and 5.4% for the years ended December 31, 2022 and 2021, respectively. The decrease in operating margin year-over-year was driven by a reduction in gross profit margin within our United States construction segments, due to a change in project mix as well as the impact of certain discrete project losses, described in further detail below. These declines in gross profit margin were partially offset by increased gross profit margins from the remainder of our reportable segments as well as a reduction in the ratio of selling, general and administrative expenses to revenues across each of our reportable segments.

Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2022 was $148.7 million, or 6.1% of revenues, compared to operating income for the year ended December 31, 2021 of $169.4 million, or 8.3% of revenues. This segment’s results for the year ended December 31, 2022 included incremental operating income from acquired companies of $6.3 million, inclusive of $4.7 million of amortization expense associated with identifiable intangible assets. Excluding the contribution from acquisitions, operating income of this segment decreased by $26.9 million year-over-year. A less favorable project mix within the institutional and transportation market sectors, coupled with certain discrete project losses recognized during 2022, due, in part, to supply chain disruptions and delays, resulted in a decrease in gross profit and gross profit margin. Based on an evaluation of individual projects that had revisions to total estimated costs or anticipated contract value, which resulted in a reduction of profitability in excess of $1.0 million, the operating results of our United States electrical construction and facilities services segment were negatively impacted by approximately $33.5 million during the year ended December 31, 2022. These reductions in estimated project profitability negatively affected the operating margin of this segment by 140 basis points in 2022. In addition to the impact of supply chain disruptions, a portion of these losses were attributable to project completion delays and time extensions, beyond our control, on certain projects which were bid a number of years ago under different economic conditions. We continue to evaluate our contractual rights and are pursuing recovery for such impacts to the extent permitted. The aforementioned reductions in gross profit margin were partially offset by a reduction in the ratio of selling, general and administrative expense to revenues as: (a) this segment was able to successfully leverage its overhead cost structure during this period of revenue growth and (b) the reduced profitability has resulted in a decrease in incentive compensation expense for certain of the operating subsidiaries within this segment.

Our United States mechanical construction and facilities services segment’s operating income for the year ended December 31, 2022 was $332.3 million, a $17.9 million increase compared to operating income of $314.4 million for the year ended December 31, 2021. Operating margins within this segment for the years ended December 31, 2022 and 2021 were 7.7% and 8.0%, respectively. The increase in operating income for the year ended December 31, 2022 was primarily a result of increased gross profit contribution from the commercial market sector, including profit recognized on: (a) certain construction projects for customers engaged in the manufacturing of semiconductors and (b) several fire protection projects. Partially offsetting the growth in operating income for the year ended December 31, 2022, and the primary factor resulting in the decline in operating margin for such period, were certain project write-downs, partially a result of supply chain disruptions and/or material price escalations, a portion of which we are seeking recovery from our customers. Based on an evaluation of individual projects that had revisions to total estimated costs or anticipated contract value, which resulted in a reduction of profitability in excess of $1.0 million, the operating results of our United States mechanical construction and facilities services segment were negatively impacted by approximately $13.7 million during the year ended December 31, 2022. These reductions in estimated project profitability negatively affected the operating margin of this segment by 30 basis points in 2022. Similar to our United States electrical construction and facilities services segment, operating margin of this segment for 2022 benefited from a reduction in the ratio of selling, general and administrative expenses to revenues, given an increase in revenues without a commensurate increase in certain overhead costs.

Operating income of our United States building services segment for the year ended December 31, 2022 was $144.7 million compared to operating income of $122.7 million for the year ended December 31, 2021. The year-over-year increase in operating income was largely due to greater gross profit contribution from this segment’s mobile mechanical services division resulting from improved profitability across the majority of its service lines, including projects, service repair and maintenance, and building automation and controls. Further contributing to the increase in operating income of this segment was an increase in gross profit contribution from its commercial site-based services division. Despite certain economic headwinds which have impacted this segment throughout the year, including supply chain disruptions, increased fuel prices, material and wage inflation, and skilled labor shortages, operating margin of this segment was 5.3% for the year ended December 31, 2022, an increase from the operating margin of 5.1% for the year ended December 31, 2021. This improvement in operating margin reflects our continued focus on project execution and pricing as well as disciplined cost management.

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Our United States industrial services segment reported operating income of $19.8 million for the year ended December 31, 2022 compared to an operating loss of $1.7 million for the year ended December 31, 2021. Operating margin of this segment was 1.8% and (0.2)% for 2022 and 2021, respectively. The improved performance for the year ended December 31, 2022 was primarily due to: (a) the growth in this segment’s revenues referenced above, which resulted in both incremental gross profit contribution as well as greater absorption of certain indirect costs of sales, and (b) an improvement in gross profit margin, most notably from this segment’s shop services division given: (i) a greater percentage of repair and cleaning projects, which tend to carry higher profit margins, and (ii) more favorable pricing across this division’s portfolio of work. Operating performance of our United States industrial services segment for the year ended December 31, 2022 also benefited from a reduction in selling, general and administrative expenses as well as a decrease in the ratio of selling, general and administrative expenses to revenues, when compared to the prior year. In addition to successfully leveraging its overhead cost structure during 2022, the year-over-year comparison was impacted by an increase in the provision for credit losses in 2021, which included $5.8 million of expense associated with two customer bankruptcies, that negatively impacted this segment’s 2021 operating margin by 60 basis points.

Our United Kingdom building services segment operating income for the year ended December 31, 2022 was $29.8 million, or 6.3% of revenues, which compares favorably to operating income of $28.0 million, or 5.5% of revenues, for the year ended December 31, 2021. This segment’s operating income for the year ended December 31, 2022 was negatively impacted by $3.1 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. Excluding the impact of foreign exchange rate movements, operating income of this segment increased by $4.9 million year-over-year. The improvement in this segment’s operating income and operating margin for 2022 was primarily a result of: (a) an increase in gross profit and gross profit margin, primarily as a result of a change in the mix of work, which included a greater amount of revenue generated from project activity as opposed to traditional facilities maintenance services, including an increased number of telecommunication projects as referenced in the revenue commentary for this segment, and (b) the favorable close-out of certain other contracts throughout 2022.

Our corporate administration expenses were $110.4 million for 2022 compared to $102.0 million in 2021. The increase in corporate administration expenses for the year ended December 31, 2022 was primarily due to greater: (a) incentive compensation expense and (b) employment costs, given an increase in headcount to support the revenue growth within our business as well as annual cost of living wage increases.

Other items

Interest expense was $13.2 million and $6.1 million for 2022 and 2021, respectively, and interest income was $2.8 million and $0.9 million for 2022 and 2021, respectively. The increase in both interest expense and interest income for 2022 resulted from higher average interest rates when compared to 2021. In addition, the increase in interest expense was attributable to greater average outstanding borrowings year-over-year.

Our income tax provision for the year ended December 31, 2022 was $152.6 million, based on an income tax rate of 27.3%, compared to an income tax provision and an income tax rate of $145.6 million and 27.5%, respectively, for the year ended December 31, 2021. The increase in our income tax provision for 2022 was due to increased income before income taxes, while the slight decrease in our income tax rate for 2022 was attributable to the favorable impact of certain discrete tax items.

Remaining Unsatisfied Performance Obligations

The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages):

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Our remaining performance obligations at December 31, 2022 were $7.46 billion compared to $5.60 billion at December 31, 2021. The increase in remaining performance obligations year-over-year was attributable to an increase in remaining performance obligations within all of our reportable segments. Most notably, we experienced an increase in remaining performance obligations from: (a) our United States construction segments, driven by the award of various construction projects within the majority of the market sectors in which we operate, and (b) our United States building services segment given increased project opportunities within its mobile mechanical services division and the award or renewal of several facilities maintenance contracts within its commercial site-based services division. From a market sector perspective, we experienced the largest growth in remaining performance obligations within the commercial market sector, inclusive of data center, semiconductor, and other projects for customers: (i) within the biotech, life-sciences, and pharmaceutical industries or (ii) engaged in the production and development of electric vehicles and/or lithium batteries. Remaining performance obligations of our United Kingdom building services segment increased by $42.4 million since December 31, 2021, despite unfavorable exchange rates for the British pound versus the United States dollar, which negatively impacted this segment’s remaining performance obligations by $19.0 million.

While the continued growth in our remaining performance obligations is largely due to the strength in demand for our services, a portion of this increase can likely be attributed to external market factors such as material and labor inflation, which has increased the price of certain of our project work, as well as supply chain delays, which has impacted the timing of conversion of our remaining performance obligations to revenue, in certain instances.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further disclosure regarding our remaining performance obligations.

2021 versus 2020

For discussion and analysis of results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for the year ended December 31, 2021.

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Liquidity and Capital Resources

The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash.

We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on our outstanding indebtedness, and shareholder return through dividend payments and share repurchases. We strive to maintain a balanced approach to capital allocation in order to achieve growth, deliver value, and minimize risk.

Management monitors financial markets and overall economic conditions for factors that may affect our liquidity and capital resources and adjusts our capital allocation strategy as necessary. Negative macroeconomic trends could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms, an increase in credit losses, or significant increases in the price of commodities or the materials and equipment utilized for our project and service work, beyond those experienced to date. In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Our liquidity is also impacted by: (a) the type and length of construction contracts in place, as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within our United States industrial services segment, as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within our United States and United Kingdom building services segments. While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers.

As of December 31, 2022, we had cash and cash equivalents, excluding restricted cash, of $456.4 million, which are maintained in depository accounts and highly liquid investments with original maturity dates of three months or less. Both our short-term and long-term liquidity requirements are expected to be met through our cash and cash equivalent balances, cash generated from our operations, and, as necessary, the borrowing capacity under our revolving credit facility. Our credit agreement provides for a $1.30 billion revolving credit facility, for which there is $1.23 billion of available capacity as of December 31, 2022.

Refer to Note 9 - Debt of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding our credit agreement. Based upon our current credit rating and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives; however, no assurances can be made that such debt financing will be available on favorable terms. We believe that we have sufficient financial resources available to meet our short-term and foreseeable long-term liquidity requirements.

Cash Flows

The following table presents a summary of our operating, investing, and financing cash flows (in thousands):

For the year ended December 31, 2022, our cash balance, including cash equivalents and restricted cash, decreased by $365.5 million from $822.6 million at December 31, 2021 to $457.1 million at December 31, 2022. Changes in our cash position from December 31, 2021 to December 31, 2022 are described in further detail below. For a discussion of the changes in our cash position from December 31, 2020 to December 31, 2021, refer to the Liquidity and Capital Resources section included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for the year ended December 31, 2021.

Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities. For 2022, net cash provided by operating activities was approximately $497.9 million compared to approximately $318.8 million of net cash provided by operating activities in 2021. The $179.1 million increase in operating cash flows during 2022, when compared to 2021, was primarily a result of the collection of advanced billings on certain of our uncompleted construction projects, as evidenced in part by the growth in our contract liabilities, net of the increase in outstanding accounts receivable.

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Investing Activities – Investing cash flows consist primarily of payments for the acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment. For 2022, we utilized approximately $140.8 million of cash for investing activities compared to $153.1 million in 2021. The decrease in investing cash outflows year-over-year was primarily driven by a decrease in payments for business acquisitions, partially offset by higher capital expenditures used to invest in organic growth.

Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payments of dividends to stockholders, and the issuance of common stock through certain equity plans. Net cash used in financing activities for 2022 was $710.1 million compared to $245.5 million in 2021.

The increase in cash used in financing activities in 2022, when compared to 2021, was primarily due to the increase in funds used for the repurchase of our common stock. During the year ended December 31, 2022, cash payments related to share repurchases were $660.6 million compared to $195.5 million for the year ended December 31, 2021. The timing of common stock repurchases is at management’s discretion subject to securities laws and other legal requirements and depends upon several factors, including market and business conditions, current and anticipated future liquidity, share price, and share availability, among others. For additional detail regarding our share repurchase program, refer to Note 12 - Common Stock of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

We currently pay a regular quarterly dividend of $0.15 per share. For the years ended December 31, 2022 and 2021, cash payments related to dividends were $27.2 million and $28.2 million, respectively. Subsequent to December 31, 2022, our Board of Directors announced its intention to increase the regular quarterly dividend to $0.18 per share commencing with the dividend to be paid in April 2023. Our credit agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay such quarterly dividends for the foreseeable future.

Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash – We are exposed to fluctuations in foreign currency exchange rates, almost entirely with respect to the British pound. Therefore, the $11.2 million variance between the years ended December 31, 2022 and 2021 was a direct result of unfavorable exchange rate movements for the British pound versus the United States dollar.

Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2022, our short-term and long-term material cash requirements for known contractual and other obligations were as follows:

Outstanding Debt and Interest Payments – As of December 31, 2022, there were no direct borrowings outstanding under our revolving credit facility and the amount outstanding under our term loan was $242.8 million. We are required to make annual principal payments on our term loan of $13.9 million on December 31 of each year until maturity. All remaining unpaid amounts are due on March 2, 2025, when the credit agreement governing our term loan and revolving credit facility expires. Until such time, we are required to make periodic interest payments on our outstanding indebtedness. Future interest payments will be determined based on prevailing interest rates during that time, which are anticipated to increase in the near term. Refer to Note 9 - Debt of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further detail of our debt obligations, including our term loan and revolving credit facility.

Operating and Finance Leases – In the normal course of business, we lease real estate, vehicles, and equipment under various arrangements which are classified as either operating or finance leases. Future payments for such leases, excluding leases with initial terms of one year or less, were $325.7 million at December 31, 2022, with $78.3 million payable within the next 12 months. Refer to Note 16 - Leases of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further detail surrounding our lease obligations and the timing of expected future payments.

Open Purchase Obligations – As of December 31, 2022, we had $2.24 billion of open purchase obligations, of which payments totaling approximately $1.94 billion are expected to become due within the next 12 months. These obligations represent open purchase orders to suppliers and subcontractors related to our construction and services contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and are not expected to impact future liquidity as amounts should be recovered through customer billings.

Insurance Obligations – As described in further detail in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, we have loss payment deductibles and/or self-insured retentions for certain insurance matters. As of December 31, 2022, our insurance liabilities, net of estimated recoveries, were $201.5 million. Of this net amount, approximately $38.8 million is estimated to be payable within the next 12 months. Due to many uncertainties inherent in resolving these matters, it is not practical to estimate these payments beyond such period. To the extent that the amount required to settle claims covered by insurance continues to increase, the cost of our insurance coverage, including premiums and deductibles, is likely to increase.

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Retirement Plan Obligations – As of December 31, 2022, expected future payments relating to our defined benefit post retirement plans were approximately $1.5 million per year. We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations. In determining the minimum funding required, we utilize current actuarial assumptions and exchange rates to forecast amounts that may be payable. In our judgment, minimum funding estimates cannot be reliably estimated beyond a five-year time horizon. Refer to Note 14 - Retirement Plans of the notes to consolidated financial statements in Item 8. Financial Statements and Supplementary Data for further information about our post retirement plans.

Contingent Consideration Liabilities – We have incurred liabilities related to contingent consideration arrangements associated with certain acquisitions, payable in the event discrete performance objectives are achieved by the acquired businesses during designated post-acquisition periods. The aggregate amount of these liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, changes in the fair value of amounts owed based on performance during such post-acquisition periods, and accretion in present value. As of December 31, 2022, the present value of expected future payments relating to these contingent consideration arrangements was $16.9 million. Of this amount, $10.0 million is estimated as being payable during 2023, with the remainder due pursuant to the terms of our contractual agreements some of which extend through 2025.

In addition, material cash requirements for other potential obligations, for which we cannot reasonably estimate future payments, include the following:

Legal Proceedings – We are involved in several legal proceedings in which damages and claims have been asserted against us. While litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance, we do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. Refer to Note 15 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information regarding legal proceedings.

Multiemployer Benefit Plans – In addition to our Company sponsored benefit plans, we participate in certain multiemployer pension and other post retirement plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining agreements. During 2022, 2021, and 2020, contributions made to these plans were $449.9 million, $399.5 million, and $360.4 million, respectively; however, our future contributions to the multiemployer plans are dependent upon a number of factors. Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated. Refer to Note 14 - Retirement Plans of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information regarding these multiemployer benefit plans.

Off-Balance Sheet Arrangements and Other Commercial Commitments

The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts. These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf. As of December 31, 2022, based on the percentage-of-completion of our projects covered by surety bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.5 billion, which represents approximately 20% of our total remaining performance obligations.

Surety bonds expire at various times ranging from final completion of a project to a period extending beyond contract completion in certain circumstances. Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity. For example, public sector contracts require surety bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. Our estimated maximum exposure as it relates to the value of the surety bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a surety bond generally extinguishes concurrently with the expiration of its related contractual obligation.

Surety bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees. In addition, surety bonds or letters of credit may be issued as collateral for certain insurance obligations. As of December 31, 2022, we satisfied approximately $48.1 million and $71.2 million of the collateral requirements of our insurance programs by utilizing surety bonds and letters of credit, respectively. All such letters of credit were issued under our revolving credit facility, therefore reducing the available capacity of such facility.

We are not aware of any losses in connection with surety bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.

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From time to time, we discuss with our current and other surety bond providers the amounts of surety bonds that may be available to us based on our financial strength and the absence of any default by us on any surety bond issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may: (a) seek to satisfy certain customer requests for surety bonds by posting other forms of collateral in lieu of surety bonds, such as letters of credit, parent company guarantees, or cash, in order to convince customers to forego the requirement for surety bonds, (b) increase our activities in our businesses that rarely require surety bonds, and/or (c) refrain from bidding for certain projects that require surety bonds.

There can be no assurance that we would be able to effectuate alternatives to providing surety bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require surety bonds. Accordingly, a reduction in the availability of surety bonds could have a material adverse effect on our financial position, results of operations, and/or cash flows.

In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.

We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.

Other Items

To help mitigate the impacts of greenhouse gas emissions on climate change, EMCOR has established initial carbon-based fuel consumption and greenhouse gas emission reduction targets, and has committed to setting science-based targets. Although to date we have not incurred any material costs or capital expenditures associated with achieving our targets, we could be required to expend amounts in future periods as we continue to work towards our goals. During 2022, EMCOR purchased carbon credits totaling 31,000 metric tons, for approximately $0.2 million. It is not possible, at this time, to estimate the impact that future costs and/or capital expenditures may have on our business, financial condition, results of operations, or liquidity.

New Accounting Pronouncements

We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is based on the application of significant accounting policies, which require management to make estimates and assumptions. Our significant accounting policies are described further in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. We base our estimates on historical experience, known or expected trends, third-party valuations, and various other assumptions that we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. There have been no significant changes to our critical accounting policies or methods for the year ended December 31, 2022. We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition from Contracts with Customers

The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by applying the following five step model: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue as performance obligations are satisfied.

The nature of our contracts gives rise to several types of variable consideration, including pending change orders and claims; contract bonuses and incentive fees; and liquidated damages and penalties. We recognize revenue for such variable consideration when it is probable, in our judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled.

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Due to uncertainties inherent in the estimation process, as well as the significant judgment involved in determining variable consideration, it is possible that estimates of costs to complete a performance obligation, and/or our estimates of transaction prices, will be revised in the near term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, or changes in the estimate of transaction prices, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.

Based on an evaluation of individual projects that had revisions to total estimated costs or anticipated contract value, which resulted in a reduction of profitability in excess of $1.0 million, our operating results were negatively impacted by approximately $48.5 million during the year ended December 31, 2022. Of this amount, approximately $33.5 million was reported within our United States electrical construction and facilities services segment, approximately $13.7 million was reported within our United States mechanical construction and facilities services segment, and approximately $1.3 million was reported within our United States building services segment. There were no increases in total estimated costs or reductions to anticipated contract value that had a significant impact on our operating results during each of the years ended December 31, 2021 and 2020. Additionally, there were no significant amounts of revenue recognized during the years ended December 31, 2022 or 2021 related to performance obligations satisfied in prior periods. During the year ended December 31, 2020, we recognized revenue of $6.1 million associated with the final settlement of contract value for two projects within our United States electrical construction and facilities services segment that were completed or substantially completed in prior periods.

Due to the significant judgments utilized in the estimation process described above, if subsequent actual results and/or updated assumptions, estimates, or projections related to our underlying project positions were to change from those utilized at December 31, 2022, it could result in a material impact to our results of operations. For example, a 50 basis point increase or decrease in the estimated gross profit margin on our uncompleted construction projects, in the aggregate, as a result of a revision in estimated costs to complete a performance obligation or a revision in estimated transaction price, would have resulted in an increase or decrease to operating income of nearly $90 million for the year ended December 31, 2022.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further disclosure regarding revenue recognition.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.

At December 31, 2022 and 2021, our accounts receivable of $2,567.4 million and $2,204.5 million, respectively, were recorded net of allowances for credit losses of $22.4 million and $23.5 million, respectively. The decrease in our allowance for credit losses was attributable to the write-off of specific amounts deemed uncollectible, partially offset by the provision for credit losses recorded during 2022. We have adjusted our allowance for credit losses during 2022 to account for the impact of changing economic conditions, including rising interest rates. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received.

The provision for credit losses during 2022, 2021, and 2020 amounted to approximately $5.2 million, $8.0 million, and $3.3 million, respectively. The decrease in the provision for credit losses for the year ended December 31, 2022, when compared to the year ended December 31, 2021, was a result of the impact, in 2021, of $5.8 million of reserves established in connection with two customer bankruptcies within our United States industrial services segment. Such reduction was partially offset by incremental expense taken during 2022, which primarily resulted from the aforementioned change in economic conditions.

Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our allowances for credit losses. For example, if economic conditions were to significantly deteriorate, such as to those experienced during the last global financial crisis, the portion of our allowance for credit losses, which is estimated based on our historical credit loss experience, could increase by up to approximately $12.5 million.

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Insurance Liabilities

We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability, and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on the Consolidated Balance Sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences, and effectiveness of safety and risk management programs. Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known. In addition, as discussed above, an increase in the cost to settle insurance claims could result in higher insurance costs and deductibles. Our estimated net insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims increased by $22.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, partially as a result of greater potential exposures and an increase in certain of our deductibles or self-insured retentions. If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims were to increase by 10%, it would have resulted in $20.1 million of additional expense for the year ended December 31, 2022.

Income Taxes

As of December 31, 2022 and 2021, we had net deferred income tax liabilities of $61.6 million and $51.0 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets. Included within these net deferred income tax liabilities are $211.9 million and $212.3 million of deferred income tax assets as of December 31, 2022 and 2021, respectively. The total valuation allowance on deferred income tax assets was approximately $3.6 million and $2.5 million as of December 31, 2022 and 2021, respectively. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on our taxable income, which has generally exceeded the amount of our net deferred income tax asset balance, as well as current projections of future taxable income, we have determined that it is more likely than not that our net deferred income tax assets will be realized. However, revisions to our forecasts or declining macroeconomic conditions could result in changes to our assessment of the realization of these deferred income tax assets. Refer to Note 11 - Income Taxes of the notes to consolidated financial statements in Item 8. Financial Statements and Supplementary Data for further detail regarding our deferred income taxes.

Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets

Goodwill

As of December 31, 2022 and 2021, we had goodwill of $919.2 million and $890.3 million, respectively, arising out of the acquisition of businesses. Goodwill is not amortized but instead allocated to its respective reporting unit and evaluated for impairment annually, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have determined that our reporting units are consistent with the reportable segments identified in Note 18 - Segment Information of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. As of December 31, 2022, approximately 19.4% of our goodwill related to our United States electrical construction and facilities services segment, approximately 34.3% related to our United States mechanical construction and facilities services segment, approximately 33.9% related to our United States building services segment, and approximately 12.4% related to our United States industrial services segment.

Absent any earlier identified impairment indicators, we perform our annual goodwill impairment assessment on October 1 each fiscal year. Qualitative indicators that may trigger the need for interim quantitative impairment testing include, among others, a deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test may be triggered by a significant change in business climate, a loss of a significant customer, increased competition, or a sustained decrease in share price. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations.

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We performed our annual impairment assessment of all reporting units as of October 1, 2022 and determined there was no impairment of goodwill. Based on these impairment assessments, the fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment exceeded their carrying values by approximately $1,135.3 million, $2,580.5 million, $1,035.9 million, and $48.0 million, respectively.

In completing our annual impairment assessment, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital. The weighted average cost of capital used in our annual impairment testing was 10.3% for our United States construction segments, 10.2% for our United States building services segment, and 11.2% for our United States industrial services segment. These weighted average cost of capital estimates were developed with the assistance of an independent third-party valuation specialist and reflect the overall level of inherent risk within the respective reporting unit and the rate of return a market participant would expect to earn.

Our cash flow projections were derived from our most recent internal forecasts of anticipated revenue growth rates and operating margins, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate used for our annual testing was 2.5% for all of our reporting units.

Due to the inherent uncertainties involved in making estimates, our assumptions may change in future periods. Estimates and assumptions made for purposes of our goodwill impairment testing may prove to be inaccurate predictions of the future, and other factors used in assessing fair value, such as the weighted average cost of capital, are outside the control of management. Unfavorable changes in certain of these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average cost of capital would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $90.9 million, $172.1 million, $92.8 million, and $24.1 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $45.0 million, $94.2 million, $48.1 million, and $9.2 million, respectively. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests. Further, for each of our reporting units, other than our United States industrial services segment, a 10% decline in the estimated fair value of such reporting unit, due to other changes in our assumptions, including forecasted future cash flows, would not have significantly impacted the results of our impairment tests. In the case of our United States industrial services segment, however, a 10% decrease would cause the estimated fair value of this reporting unit to approximate its carrying value.

Identifiable Intangible Assets and Other Long-Lived Assets

As of December 31, 2022 and 2021, net identifiable intangible assets (primarily consisting of our customer relationships, subsidiary trade names, developed technology/vendor network, and contract backlog) arising out of the acquisition of businesses were $594.0 million and $589.4 million, respectively. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short- and long-term projections of future performance. These forecasts reflect assumptions regarding anticipated macroeconomic conditions as well as our ability to successfully integrate acquired businesses.

Absent earlier indicators of impairment, we test for impairment of subsidiary trade names that are not subject to amortization on an annual basis (October 1). In addition, we review for impairment of identifiable intangible assets that are being amortized as well as other long-lived assets whenever facts and circumstances indicate that their carrying values may not be fully recoverable.

As of October 1, 2022, we performed our annual impairment testing of all subsidiary trade names that are not subject to amortization and determined that there was no impairment of these assets. In performing this impairment assessment, we considered the sensitivity of the reported amounts to the methods, assumptions, and estimates underlying our testing. For example, we performed sensitivity analyses and concluded that, individually, none of the following changes in estimates or assumptions would have significantly impacted the results of our testing or resulted in a material impairment of our subsidiary trade names: (a) a 50 basis point increase in the discount rate utilized in our testing, (b) a 50 basis point decline in the perpetual growth rate utilized in our testing, or (c) a 10% decrease in the estimated fair value of each trade name.

With respect to identifiable intangible assets that are being amortized as well as other long-lived assets, no impairment was recognized during the year ended December 31, 2022.

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Other Considerations

As referenced above, impairment testing is based upon assumptions and estimates determined by management from a review of our operating results and business plans as well as forecasts of anticipated growth rates and margins, among other considerations. In addition, estimates of weighted average costs of capital are developed with the assistance of an independent third-party valuation specialist. These assumptions and estimates may change in future periods. Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges, particularly with respect to our United States industrial services segment given that the fair value of this reporting unit more closely approximates its carrying value. It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.

Refer to Note 8 - Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information about our goodwill and identifiable intangible assets as well as our impairment testing, including the $232.8 million of impairment charges recorded during the year ended December 31, 2020. For the year ended December 31, 2021, no impairment of our goodwill, identifiable intangible assets, or other long-lived assets was recognized.

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