# EMCOR Group, Inc. (EME) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EMCOR Group, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/105634/000010563424000006/eme-20231231.htm
Accession: 0000105634-24-000006
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EME/
All MD&A years: /company/EME/mda/
Previous year: /company/EME/mda/fy2022/ (FY 2022)
Next year: /company/EME/mda/fy2024/ (FY 2024)

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, technology, manufacturing, 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 due to changes in our internal reporting structure aimed at realigning our service offerings.

Market Update

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, elevated interest rates, and skilled labor shortages in certain regions. The continued strength in demand for our services is reflected in our results of operations for 2023, during which we experienced an increase in both revenue and operating income when compared to 2022. As evidenced by the growth in our remaining performance obligations, which increased to $8.85 billion at December 31, 2023, from $7.46 billion at December 31, 2022, we anticipate a similar level of demand for our services in the near term, provided that the business environment does not significantly deteriorate.

Although improved from 2022, we continued to experience pressures in our supply chain, which resulted in material and equipment lead times significantly in excess of normal levels. Delays in critical material and equipment deliveries additionally resulted in us funding purchases at earlier stages of project progression, or in advance of project commencement. While we generally strive to negotiate advanced payments or billing terms with our customers that allow us to invoice for these amounts, such purchases may apply pressure on our working capital requirements in future periods. Although we experienced a reduction in commodity prices when compared to 2022, and current economic indicators suggest that inflation is slowing, there continues to be volatility in the price of fuel, certain materials, and other commodities used in our operations. Further, in an effort to mitigate inflation, the Federal Reserve Board increased the federal funds rate throughout 2022 and into 2023.

Our management teams continue to adapt to the challenges of the current operating environment in order to manage our business more effectively through diligent contract negotiations, enhanced labor planning and project scheduling, and increased supplier engagement. As contractually permitted, and in order to combat inflationary pressures, we have and will continue to seek increases in pricing to the extent we experience increases in our costs. While we believe the actions we have taken continue to be effective, as evidenced in part by our operating performance and operating cash flow in 2023, 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, the current interest rate environment may cause a decline in capital or maintenance spending of our customers or prospective customers, particularly as it pertains to short duration project work. Any of these events could result in reduced demand for our services or affect our ability to collect payment, and therefore, have a material adverse effect on our business, financial condition, and/or results of operations.

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2023 versus 2022

Overview

The following table presents selected financial data for the fiscal years ended December 31, 2023 and 2022 (in thousands, except percentages and per share data):  

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Revenues","$","12,582,873","","","$","11,076,120"],["Revenues increase from prior year","13.6","%","","11.8","%"],["Gross profit","$","2,089,339","","","$","1,603,594"],["Gross profit as a percentage of revenues","16.6","%","","14.5","%"],["Operating income","$","875,756","","","$","564,877"],["Operating income as a percentage of revenues","7.0","%","","5.1","%"],["Net income attributable to EMCOR Group, Inc.","$","632,994","","","$","406,122"],["Diluted earnings per common share","$","13.31","","","$","8.10"]]
[[/GREPCENT_TABLE]]

Revenues of $12.58 billion for the year ended December 31, 2023 set a new annual record for the Company and represent an increase of 13.6% from revenues of $11.08 billion for the year ended December 31, 2022. Demand for our services continues to be strong across the majority of the market sectors we serve 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.

Operating income for 2023 was $875.8 million, or 7.0% of revenues, establishing new annual records for the Company with respect to both operating income and operating margin. This compares to operating income of $564.9 million, or 5.1% of revenues, in 2022. The $310.9 million increase in operating income, and corresponding 190 basis point improvement in operating margin, were a result of improved operating performance across all of our reportable segments other than our United Kingdom building services segment. As described in further detail below, these improvements in profitability were predominantly a result of: (a) better project execution and productivity, (b) a more favorable mix of work, (c) the successful close-out of several projects and resolution of certain disputes within our United States construction segments, and (d) a reduction in the price of certain commodities and materials utilized in our operations.

Net income of $633.0 million, or $13.31 per diluted share, for the year ended December 31, 2023, compares favorably to net income of $406.1 million, or $8.10 per diluted share, for the year ended December 31, 2022. In addition to the increase in operating income referenced above, our diluted earnings per share for 2023 benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 2022 and 2023.

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 2023, we acquired eight companies for total consideration of $99.6 million. Such acquisitions include: (a) a national energy efficiency specialty services firm, the results of operations of which have been included in our United States building services segment, and (b) seven companies, the results of operations of which were de minimis, consisting of: (i) three companies that have been included within our United States mechanical construction and facilities services segment, one of which provides mechanical and pipe fabrication services in the Midwestern region of the United States, and two of which add capabilities to our national fire protection services, and (ii) four mechanical services companies in the Western and Midwestern regions of the United States that have been included within our United States building services segment and enhance our presence in geographies where we have existing operations.

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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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, 2023 and 2022 (in thousands, except for percentages):

[[GREPCENT_TABLE]]
[["","2023","","% ofTotal","","2022","","% ofTotal"],["Revenues from unrelated entities:"],["United States electrical construction and facilities services","$","2,783,723","","","22","%","","$","2,433,114","","","22","%"],["United States mechanical construction and facilities services","5,074,803","","","41","%","","4,292,208","","","39","%"],["United States building services","3,120,134","","","25","%","","2,754,953","","","25","%"],["United States industrial services","1,167,790","","","9","%","","1,118,767","","","10","%"],["Total United States operations","12,146,450","","","97","%","","10,599,042","","","96","%"],["United Kingdom building services","436,423","","","3","%","","477,078","","","4","%"],["Total operations","$","12,582,873","","","100","%","","$","11,076,120","","","100","%"]]
[[/GREPCENT_TABLE]]

As a result of strong demand for our services across the majority of the market sectors we serve, revenues for the year ended December 31, 2023 increased to $12.58 billion compared to revenues of $11.08 billion for the year ended December 31, 2022. As described in more detail below, we experienced increases in revenues from all of our reportable segments, except for our United Kingdom building services segment. Companies acquired in 2023 and 2022 generated incremental revenues of $107.1 million in 2023.

Revenues of our United States electrical construction and facilities services segment were $2,783.7 million for the year ended December 31, 2023 compared to revenues of $2,433.1 million for the year ended December 31, 2022. This segment’s results included $88.5 million of incremental acquisition revenues for the year ended December 31, 2023. Excluding the impact of acquisitions, revenues of this segment increased by $262.1 million as a result of an increase in revenues within many of the market sectors in which we operate, most notably including: (a) the network and communications market sector, predominantly due to our data center projects, (b) the manufacturing and industrial market sector, from contracts with our energy sector customers, including those for renewable energy projects, (c) the healthcare market sector, as a result of greater activity throughout certain of the regions in which we operate, (d) the hospitality and entertainment market sector, given an increase in projects within the Western region of the United States, and (e) the high-tech manufacturing market sector, due to an increase in projects for various biotech, life-sciences, and pharmaceutical customers as well as certain semiconductor manufacturers. Partially offsetting these increases were modest revenue declines from the commercial market sector and the institutional market sector as well as a reduction in short duration project volume.

Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2023 were $5,074.8 million, a $782.6 million increase compared to revenues of $4,292.2 million for the year ended December 31, 2022. The year-over-year increase in this segment’s revenues was primarily attributable to revenue growth within: (a) the high-tech manufacturing market sector, as a result of increased demand for our mechanical construction and/or fire protection services by certain customers: (i) engaged in either the design and manufacturing of semiconductors or the production and development of electric vehicles and/or lithium batteries, and (ii) within the biotech, life-sciences, and pharmaceutical industries, (b) the network and communications market sector, due to increased data center project activity, and (c) the manufacturing and industrial market sector, due in part to continued re-shoring of critical supply chain by certain of our customers.

Revenues of our United States building services segment were $3,120.1 million and $2,755.0 million for the years ended December 31, 2023 and 2022, respectively. Excluding incremental acquisition contribution of $18.6 million, the $346.6 million increase in this segment’s revenues was primarily attributable to its mechanical services division, due to increased: (a) HVAC project and retrofit work, as a result of greater: (i) project execution stemming from the increased availability of materials and equipment when compared to the prior year, which experienced greater supply chain disruptions and delays, and (ii) demand for system upgrades and replacements, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, (b) service repair and maintenance volumes, given growth in our service contract base, and (c) building automation and controls projects, as we continue to expand our service offerings. In addition to increased revenues from its mechanical services division, this segment also experienced revenue growth from its commercial site-based services and government site-based services divisions, 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. Such increased revenues were despite the loss of certain facilities maintenance contracts not renewed pursuant to rebid.

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Revenues of our United States industrial services segment for the year ended December 31, 2023 were $1,167.8 million, a $49.0 million increase compared to revenues of $1,118.8 million for the year ended December 31, 2022. The results of operations of this segment continued to improve at a modest pace, as evidenced by the revenue growth within both this segment’s field services and shop services divisions during 2023. In addition to steady demand for maintenance and turnaround projects, during 2023, we experienced increased levels of capital spending by our customers, in the form of greater new build heat exchanger orders and the award of certain renewable fuel projects.

Our United Kingdom building services segment revenues were $436.4 million for the year ended December 31, 2023 compared to $477.1 million for the year ended December 31, 2022. Favorable exchange rate movements for the British pound versus the United States dollar positively impacted this segment’s 2023 revenues by $2.6 million. Excluding the impact of foreign exchange rate movements, this segment’s revenues decreased during 2023 as a result of: (a) the loss of certain facilities maintenance contracts not renewed pursuant to rebid, and (b) a reduction in project activity, notably within the network and communications 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 as a percentage of revenues (“gross profit margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):  

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Cost of sales","$","10,493,534","","","$","9,472,526"],["Gross profit","$","2,089,339","","","$","1,603,594"],["Gross profit margin","16.6","%","","14.5","%"]]
[[/GREPCENT_TABLE]]

Our gross profit for the year ended December 31, 2023 was $2,089.3 million, or 16.6% of revenues, compared to gross profit of $1,603.6 million, or 14.5% of revenues, for the year ended December 31, 2022. While the increase in gross profit can be partially attributed to the incremental revenue contribution described above, such increase, and the expansion in gross profit margin, were also the result of stronger operating performance within the majority of our reportable segments due to improved revenue mix, project execution and close-out, and/or favorable pricing. In 2023, acquisitions contributed incremental gross profit of approximately $15.9 million, inclusive of amortization expense attributable to identifiable intangible assets of $3.6 million.

Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.

Selling, general and administrative expenses

The following table presents selling, general and administrative expenses (“SG&A”) and selling, general and administrative expenses as a percentage of revenues (“SG&A margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):  

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Selling, general and administrative expenses","$","1,211,233","","","$","1,038,717"],["SG&A margin","9.6","%","","9.4","%"]]
[[/GREPCENT_TABLE]]

Our selling, general and administrative expenses for the year ended December 31, 2023 were $1,211.2 million, or 9.6% of revenues, compared to selling, general and administrative expenses of $1,038.7 million, or 9.4% of revenues, for the year ended December 31, 2022. For the year ended December 31, 2023, selling, general and administrative expenses included $17.3 million of incremental expenses directly related to companies acquired in 2023 and 2022, including amortization expense attributable to identifiable intangible assets of $4.6 million. Excluding incremental expenses from businesses acquired, the increase in selling, general and administrative expenses, and SG&A margin, was predominantly attributable to increases in incentive compensation expense across the majority of our reportable segments, due to higher operating results than in the prior year, and salaries and related employment expenses, largely as a result of additional headcount to support our organic revenue growth as well as annual cost of living adjustments. In addition to these increases in employment costs, our SG&A for 2023 included incremental: (a) computer hardware and software costs, as a result of various information technology and cybersecurity initiatives currently in process, (b) travel and entertainment expenses, and (c) 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.

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Operating income (loss)

The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues (“operating margin”) for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):

[[GREPCENT_TABLE]]
[["","2023","","% of Segment Revenues","","2022","","% of Segment Revenues"],["Operating income (loss):"],["United States electrical construction and facilities services","$","230,640","","","8.3","%","","$","148,728","","","6.1","%"],["United States mechanical construction and facilities services","530,644","","","10.5","%","","330,325","","","7.7","%"],["United States building services","182,995","","","5.9","%","","146,639","","","5.3","%"],["United States industrial services","35,375","","","3.0","%","","19,787","","","1.8","%"],["Total United States operations","979,654","","","8.1","%","","645,479","","","6.1","%"],["United Kingdom building services","25,681","","","5.9","%","","29,838","","","6.3","%"],["Corporate administration","(127,229)","","","\u2014","","","(110,440)","","","\u2014"],["Impairment loss on long-lived assets","(2,350)","","","\u2014","","","\u2014","","","\u2014"],["Total operations","875,756","","","7.0","%","","564,877","","","5.1","%"],["Other items:"],["Net periodic pension (cost) income","(1,119)","","","","","4,311"],["Interest expense","(17,199)","","","","","(13,199)"],["Interest income","15,415","","","","","2,761"],["Income before income taxes","$","872,853","","","","","$","558,750"]]
[[/GREPCENT_TABLE]]

Operating income for the year ended December 31, 2023 was $875.8 million, an increase of $310.9 million compared to operating income of $564.9 million for the year ended December 31, 2022. Operating margin was 7.0% and 5.1% in 2023 and 2022, respectively. Our performance in 2023 established new annual records for the Company with respect to operating income and operating margin. As described in more detail below, improvements in profitability were a result of: (a) better project execution, (b) a more favorable mix of work, (c) the successful close-out of certain projects within our United States construction segments, and (d) the impact in 2022 of certain supply chain disruptions and delays, which were greater than those experienced in 2023, and which, in the prior year, led to: (i) reduced labor productivity and efficiency, (ii) the under-absorption of labor costs in instances where projects were delayed pending the receipt of materials, or (iii) material and commodity price escalations.

Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2023 was $230.6 million, or 8.3% of revenues, compared to operating income for the year ended December 31, 2022 of $148.7 million, or 6.1% of revenues. The $81.9 million increase in operating income and the 220 basis point improvement in operating margin of this segment were largely a result of greater gross profit and gross profit margin given: (a) a more favorable mix of work, (b) improved project execution and productivity, and (c) the successful close-out of certain construction projects during the year. The largest increases in gross profit and gross profit margin were recognized within the network and communications market sector, the commercial market sector, and the healthcare market sector. Although we continue to experience supply chain disruptions and delays, which are impacting project delivery in various ways, market conditions surrounding equipment availability steadily improved over the last year and our management teams continued to adapt to this environment. Such developments led to improved job-site and labor productivity as well as more normalized project sequencing, resulting in fewer project write-downs when compared to the prior year. For example, 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 $12.5 million during the year ended December 31, 2023, compared to $33.5 million during the year ended December 31, 2022. While these reductions in estimated project profitability negatively affected operating margin of this segment by 40 basis points for 2023, the impact in 2022 was 140 basis points. Partially offsetting the year-over-year improvements in gross profit and gross profit margin were increased selling, general and administrative expenses and SG&A margin, largely as a result of greater incentive compensation expense recognized by several operating subsidiaries of this segment given improvements in profitability year-over-year.

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Our United States mechanical construction and facilities services segment’s operating income for the year ended December 31, 2023 was $530.6 million, a $200.3 million increase compared to operating income of $330.3 million for the year ended December 31, 2022. Operating margin of this segment for the year ended December 31, 2023 was 10.5%, a 280 basis point improvement over its operating margin for the year ended December 31, 2022 of 7.7%. This increased annual operating performance was primarily a result of contribution from projects within: (a) the high-tech manufacturing market sector, including certain mechanical construction or fire protection projects for customers: (i) engaged in either the design or manufacturing of semiconductors or the production and development of electric vehicles and/or lithium batteries, and (ii) within the biotech, life-sciences, and pharmaceutical industries, (b) the commercial market sector, including various fire protection projects, and (c) the manufacturing and industrial market sector, which continues to benefit from customer initiatives to re-shore their critical supply chain. Operating income and operating margin of this segment were also favorably impacted as a result of the successful close-out of certain projects during 2023 and improved productivity, due in part to investments in building information modeling, prefabrication, and digital tools. Similar to our United States electrical construction and facilities services segment, the results of this segment in the prior year were negatively impacted by external market conditions, which manifested themselves through price escalations, particularly for materials and commodities, such as copper and steel, that are used in our mechanical and fire protection operations. Although there remains volatility in the pricing of these commodities, more favorable pricing year-over-year has resulted in improved profitability of this segment during 2023. Increased gross profit and gross profit margin of this segment were partially offset by higher selling, general and administrative expenses and a slight increase in SG&A margin, given greater: (a) incentive compensation expense, due to improved operating results for certain of the operating subsidiaries within this segment, and (b) salaries and related employment costs, largely as a result of additional headcount to support current and anticipated organic revenue growth.

Operating income of our United States building services segment for the year ended December 31, 2023 was $183.0 million, or 5.9% of revenues, compared to operating income of $146.6 million, or 5.3% of revenues, for the year ended December 31, 2022. The $36.4 million increase in operating income and the 60 basis point increase in operating margin for 2023 was almost entirely attributable to this segment’s mechanical services division, as a result of greater gross profit and gross profit margin across all of its service lines, with the largest incremental contribution from projects and retrofits as well as building automation and controls. These improvements were due in part to favorable project execution, greater absorption of indirect costs, and favorable contractual terms.

Our United States industrial services segment’s operating income for the year ended December 31, 2023 was $35.4 million, or 3.0% of revenues, compared to operating income of $19.8 million, or 1.8% of revenues, for the year ended December 31, 2022. In addition to the growth in this segment’s revenues referenced above, which resulted in greater gross profit contribution, the improved year-over-year performance was due to an increase in gross profit margin within both this segment’s field services and shop services divisions. Operating performance of this segment continues to improve steadily and we are beginning to experience better pricing, most notably within the shop services division.

Operating income of our United Kingdom building services segment for the year ended December 31, 2023 was $25.7 million compared to operating income of $29.8 million for the year ended December 31, 2022. The decrease in this segment’s operating income for 2023 was attributable to a reduction in gross profit, due to lower revenues, as well as an increase in selling, general and administrative expenses, resulting from certain initiatives undertaken during the year. This segment’s operating margin for 2023 of 5.9% declined by 40 basis points when compared to an operating margin in 2022 of 6.3%. Despite an increase in gross profit margin, driven by both the successful close-out of certain projects and a more favorable contract mix, operating margin was negatively impacted by an increase in the ratio of selling, general and administrative expenses to revenues, given the aforementioned decline in revenues and the increase in overhead costs in 2023. This segment’s operating income for the year ended December 31, 2023 was positively impacted by $0.5 million related to the effect of favorable exchange rate movements.

Our corporate administration expenses were $127.2 million for 2023 compared to $110.4 million in 2022. The increase in corporate expenses for 2023 was primarily due to greater incentive compensation expense, largely associated with our long-term incentive plans, given higher projected future operating results. In addition, we have experienced increases in: (a) salaries, as a result of annual cost of living adjustments and an increase in headcount to support our operations, (b) computer hardware and software costs, due to various information technology and cybersecurity initiatives currently in process, and (c) travel and entertainment expenses, given a greater level of travel and business meals.

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Other items

Interest expense was $17.2 million and $13.2 million for the years ended December 31, 2023 and 2022, respectively. The year-over-year increase in interest expense was a result of higher interest rates, partially offset by reduced average outstanding borrowings. Interest income was $15.4 million and $2.8 million for the years ended December 31, 2023 and 2022, respectively. The increase in annual interest income resulted from greater returns on our invested cash, due to the previously referenced interest rate environment, as well as an increase in average bank deposits.

Our income tax provision for the year ended December 31, 2023 was $239.5 million, based on an income tax rate of 27.5%, compared to an income tax provision and an income tax rate of $152.6 million and 27.3%, respectively, for the year ended December 31, 2022. Refer to Note 11 - Income Taxes of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further discussion regarding our income tax provision and effective income tax rate.

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):

[[GREPCENT_TABLE]]
[["","December 31, 2023","","% of Total","","December 31, 2022","","% of Total"],["Remaining performance obligations:"],["United States electrical construction and facilities services","$","2,387,844","","","27","%","","$","2,014,079","","","27","%"],["United States mechanical construction and facilities services","4,940,519","","","56","%","","3,987,134","","","53","%"],["United States building services","1,264,818","","","14","%","","1,172,816","","","16","%"],["United States industrial services","113,291","","","1","%","","124,653","","","2","%"],["Total United States operations","8,706,472","","","98","%","","7,298,682","","","98","%"],["United Kingdom building services","140,949","","","2","%","","160,617","","","2","%"],["Total operations","$","8,847,421","","","100","%","","$","7,459,299","","","100","%"]]
[[/GREPCENT_TABLE]]

Our remaining performance obligations at December 31, 2023 were $8.85 billion compared to $7.46 billion at December 31, 2022. The increase in remaining performance obligations year-over-year was attributable to an increase in remaining performance obligations within: (a) each of our United States construction segments, driven by the award of various projects within the majority of the market sectors in which we operate, and (b) our United States building services segment, largely due to increased project opportunities within its mechanical services division. From a market sector perspective, we experienced the most significant growth in remaining performance obligations within: (a) the high-tech manufacturing market sector, inclusive of projects for customers engaged in: (i) the design and manufacturing of semiconductors, and (ii) the production and development of electric vehicles and/or lithium batteries, (b) the network and communications market sector, driven by data center construction projects, (c) the institutional market sector, and (d) the water and wastewater market sector, due to the award of several construction projects within the Southeastern region of the United States. Remaining performance obligations increased by $23.7 million as a result of acquisitions during 2023. These increases were partially offset by a reduction in remaining performance obligations from the commercial market sector, primarily given the completion of several warehouse and distribution center projects.

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.

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.

2022 versus 2021

For discussion and analysis of results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, 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, 2022.

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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 any 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, 2023, we had cash and cash equivalents of $789.8 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 $1.18 billion of available capacity as of December 31, 2023.

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):

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Net cash provided by operating activities","$","899,655","","","$","497,933"],["Net cash used in investing activities","$","(161,291)","","","$","(140,800)"],["Net cash used in financing activities","$","(412,054)","","","$","(710,118)"],["Effect of exchange rate changes on cash, cash equivalents, and restricted cash","$","6,372","","","$","(12,515)"],["Increase (decrease) in cash, cash equivalents, and restricted cash","$","332,682","","","$","(365,500)"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2023, our cash balance, including cash equivalents and restricted cash, increased by $332.7 million from $457.1 million at December 31, 2022 to $789.8 million at December 31, 2023. Changes in our cash position from December 31, 2022 to December 31, 2023 are described in further detail below. For a discussion of the changes in our cash position from December 31, 2021 to December 31, 2022, 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, 2022.

Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities. For 2023, net cash provided by operating activities was approximately $899.7 million compared to approximately $497.9 million of net cash provided by operating activities in 2022. The $401.7 million increase in operating cash flows during 2023, when compared to 2022, was largely a result of increased income, coupled with customer deposits and advanced payments on certain construction contracts, as evidenced by the growth in our contract liabilities.

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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. During 2023, we utilized approximately $161.3 million of cash for investing activities compared to $140.8 million during 2022. The increase in investing cash outflows year-over-year was primarily driven by higher capital expenditures to support our organic growth, partially offset by an increase in proceeds from the sale or disposal of property, plant, and equipment. Payments for the acquisition of businesses were fairly consistent each year as we utilized $96.5 million in 2023, compared to $98.7 million in 2022.

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 during 2023 was $412.1 million compared to $710.1 million during 2022. The $298.1 million reduction in financing cash outflows was primarily due to a decrease in funds used for the repurchase of our common stock during 2023, partially offset by an increase in net repayments of debt under our credit agreement. 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 $0.18 per share. For the years ended December 31, 2023 and 2022, cash payments related to dividends were $32.7 million and $27.2 million, respectively. Subsequent to December 31, 2023, our Board of Directors announced its intention to increase the regular quarterly dividend to $0.25 per share commencing with the dividend to be paid in April 2024. 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 $18.9 million variance between the years ended December 31, 2023 and 2022 was a direct result of favorable exchange rate movements for the British pound versus the United States dollar.

Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2023, 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, 2023, there were no direct borrowings outstanding under our revolving credit facility. Interest payments on any future borrowings will be determined based on prevailing interest rates at that time. 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 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 $381.7 million at December 31, 2023, with $89.7 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, 2023, we had $2.33 billion of open purchase obligations, of which payments totaling approximately $2.02 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, 2023, our insurance liabilities, net of estimated recoveries, were $220.1 million. Of this net amount, approximately $39.2 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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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, 2023, the present value of expected future payments relating to these contingent consideration arrangements was $9.5 million. Of this amount, $6.1 million is estimated as being payable during 2024, with the remainder due in 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 2023, 2022, and 2021, contributions made to these plans were $502.3 million, $449.9 million, and $399.5 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, 2023, 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 $2.2 billion, which represents approximately 25% 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, 2023, we satisfied approximately $48.1 million and $71.1 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.

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.

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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 investigating the establishment of science-based greenhouse gas emissions 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. 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, 2023. 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.

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.

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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 during the years ended December 31, 2023, 2022, and 2021, as summarized in the following table (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["United States electrical construction and facilities services","$","12,535","","","$","33,463","","","$","4,627"],["United States mechanical construction and facilities services","10,864","","","13,679","","","2,264"],["United States building services","5,658","","","1,261","","","\u2014"],["Total impact","$","29,057","","","$","48,403","","","$","6,891"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2023, we recognized revenue of approximately $16.5 million on individual projects that were substantially complete in prior periods but had revisions to total estimated cost or anticipated contract value, which resulted in an increase to profitability in excess of $1.0 million. Of this amount, approximately $3.4 million was reported within our United States electrical construction and facilities services segment and approximately $13.1 million was reported within our United States mechanical construction and facilities services segment. 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.

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, 2023, 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 approximately $100 million for the year ended December 31, 2023.

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.

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 $18.6 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, 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 $22.0 million of additional expense for the year ended December 31, 2023.

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

Goodwill

As of December 31, 2023 and 2022, we had goodwill of $956.5 million and $919.2 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, 2023, approximately 18.6% of our goodwill related to our United States electrical construction and facilities services segment, approximately 33.3% related to our United States mechanical construction and facilities services segment, approximately 36.2% related to our United States building services segment, and approximately 11.9% related to our United States industrial services segment.

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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.

We performed our annual impairment assessment of all reporting units as of October 1, 2023 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 $1,724.3 million, $4,411.7 million, $1,048.0 million, and $89.1 million, respectively. As part of such annual testing, we compared the aggregate fair value of our reporting units to our market capitalization, noting that such comparison supported the reasonableness of the key assumptions utilized in determining the fair value of each of our reporting units.

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 10.9% for our United States construction segments, 11.2% for our United States building services segment, and 11.0% 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 $115.2 million, $249.9 million, $84.2 million, and $25.2 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 $56.5 million, $137.1 million, $40.4 million, and $9.3 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 2023 impairment tests. Further, for each of our reporting units, 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 2023 impairment tests.

Identifiable Intangible Assets and Other Long-Lived Assets

As of December 31, 2023 and 2022, 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 $586.0 million and $594.0 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.

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As of October 1, 2023, 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.

During the quarter ended September 30, 2023, we identified facts and circumstances that indicated the carrying values of certain long-lived assets within our United States mechanical construction and facilities services segment may not be fully recoverable, necessitating a comparison of their carrying values to the undiscounted pre-tax cash flows estimated to result from the use of such assets. As a result of this test, we determined that these assets were impaired, and, during the third quarter of 2023, recognized a $2.4 million impairment charge as calculated using a discounted cash flow model. For the year ended December 31, 2023, there were no other indicators of impairment with respect to identifiable intangible assets that are being amortized as well as other long-lived assets.

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, especially in times of uncertain economic conditions and rising interest rates. 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. No impairment of our goodwill, identifiable intangible assets, or other long-lived assets was recognized during the years ended December 31, 2022 or 2021.

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