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MarketScreener Homepage  >  Equities  >  Nyse  >  EMCOR Group, Inc.    EME

EMCOR GROUP, INC.

(EME)
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EMCOR : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

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04/30/2020 | 07:37am EDT
We are one of the largest electrical and mechanical construction and facilities
services firms in the United States. In addition, we provide a number of
building services and industrial services. Our services are provided to a broad
range of commercial, industrial, utility and institutional customers through
approximately 80 operating subsidiaries and joint venture entities. Our offices
are located in the United States and the United Kingdom.
Operating Segments
We have the following reportable segments: (a) United States electrical
construction and facilities services (involving systems for electrical power
transmission and distribution; premises electrical and lighting systems; process
instrumentation in the refining, chemical processing, food processing, and
mining industries; low-voltage systems, such as fire alarm, security, and
process control; voice and data communication; roadway and transit lighting; and
fiber optic lines); (b) United States mechanical construction and facilities
services (involving systems for heating, ventilation, air conditioning,
refrigeration, and clean-room process ventilation; fire protection; plumbing,
process, and high-purity piping; controls and filtration; water and wastewater
treatment; central plant heating and cooling; cranes and rigging; millwrighting;
and steel fabrication, erection and welding); (c) United States building
services; (d) United States industrial services; and (e) United Kingdom building
services. The "United States building services" and "United Kingdom building
services" segments principally consist of those operations which provide a
portfolio of services needed to support the operation and maintenance of
customers' facilities, including commercial and government site-based operations
and maintenance; facility maintenance and services, including reception,
security, and catering services; outage services to utilities and industrial
plants; military base operations support services; mobile mechanical maintenance
and services, including maintenance and service of mechanical, electrical,
plumbing, and building automation systems; floor care and janitorial services;
landscaping, lot sweeping, and snow removal; facilities management; vendor
management; call center services; installation and support for building systems;
program development, management and maintenance for energy systems; technical
consulting and diagnostic services; infrastructure and building projects for
federal, state and local governmental agencies and bodies; and small
modification and retrofit projects, which services are not generally related to
customers' construction programs. The "United States industrial services"
segment principally consists of those operations which provide industrial
maintenance and services for refineries, petrochemical plants, and other
customers within the oil and gas industry. Services of this segment include
refinery turnaround planning and engineering; specialty welding; overhaul and
maintenance of critical process units; specialty technical services; on-site
repairs, maintenance and service of heat exchangers, towers, vessels, and
piping; design, manufacturing, repair, and hydro blast cleaning of shell and
tube heat exchangers and related equipment; and other support services for
customers within the upstream and midstream sectors.
Overview
The following table presents selected financial data for the three months ended
March 31, 2020 and 2019 (in thousands, except percentages and per share data):
                                                For the three months ended
                                                        March 31,
                                                   2020             2019
Revenues                                     $    2,299,832$ 2,158,728
Revenues increase from prior year                       6.5 %          13.6 %
Operating income                             $      105,995$   102,310
Operating income as a percentage of revenues            4.6 %           4.7 %
Net income                                   $       75,665$    72,410
Diluted earnings per common share            $         1.35     $      1.28


The results for the three months ended March 31, 2020 set new company records
for a first quarter in terms of revenues, operating income, net income, and
diluted earnings per common share.
Revenues for the first quarter of 2020 increased by 6.5% from $2.16 billion for
the three months ended March 31, 2019 to $2.30 billion for the three months
ended March 31, 2020. Such increase in revenues was attributable to revenue
growth within all of our reportable segments, except for our United States
electrical construction and facilities services segment, which experienced a
slight decrease in revenues period over period.


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Operating income for the three months ended March 31, 2020 of $106.0 million
increased by $3.7 million compared to operating income of $102.3 million for the
three months ended March 31, 2019. Operating margin (operating income as a
percentage of revenues) for the first quarter of 2020 was 4.6% compared to 4.7%
for the first quarter of 2019. The overall increase in operating income was a
result of improved operating performance from all of our reportable segments,
except for our United States building services segment, which experienced both a
decline in operating income and operating margin when compared to the prior
year.
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.
In January 2020, we acquired a company for an immaterial amount. This company
provides building automation and controls solutions within the Northeastern
region of the United States, and its results of operations have been included
within our United States building services segment.
During calendar year 2019, we completed the acquisition of Batchelor & Kimball,
Inc. ("BKI"), a leading full service provider of mechanical construction and
maintenance services. This acquisition strengthens our position and broadens our
capabilities in the Southern and Southeastern regions of the United States, and
the results of its operations have been included within our United States
mechanical construction and facilities services segment. In addition to BKI,
during 2019, we acquired: (a) a company which provides electrical contracting
services in central Iowa, the results of operations of which have been included
within our United States electrical construction and facilities services
segment, (b) a company which provides mechanical contracting services in
south-central and eastern Texas, the results of operations of which have been
included within our United States mechanical construction and facilities
services segment, and (c) four companies included within our United States
building services segment, consisting of: (i) a company which provides mobile
mechanical services in the Southern region of the United States and (ii) three
companies, the results of operations of which were de minimis, which bolster our
presence in geographies where we have existing operations and provide either
mobile mechanical services or building automation and controls solutions.
Companies acquired in 2020 and 2019 generated incremental revenues of $82.5
million and incremental operating income of $3.6 million, inclusive of $4.1
million of amortization expense associated with identifiable intangible assets,
for the three months ended March 31, 2020.
Results of Operations
Revenues
The following table presents our operating segment revenues from unrelated
entities and their respective percentages of total revenues (in thousands,
except for percentages):
                                                         For the three months ended March 31,
                                                                        % of                     % of
                                                        2020           Total        2019        Total
Revenues:
United States electrical construction and
facilities services                             $      525,229           23 %   $   528,070       24 %
United States mechanical construction and
facilities services                                    834,112           36 %       752,409       35 %
United States building services                        518,083           23 %       512,079       24 %
United States industrial services                      310,031           13 %       258,645       12 %
Total United States operations                       2,187,455           95 %     2,051,203       95 %
United Kingdom building services                       112,377            5 %       107,525        5 %
Total worldwide operations                      $    2,299,832          100 %   $ 2,158,728      100 %


As described below in more detail, our revenues for the three months ended March
31, 2020 increased to $2.30 billion compared to $2.16 billion for the three
months ended March 31, 2019. The increase in revenues for the three months ended
March 31, 2020 was attributable to increased revenues from all of our reportable
segments, except for our United States electrical construction and facilities
services segment. Companies acquired in 2020 and 2019, which are reported in our
United States electrical construction and facilities services segment, our
United States mechanical construction and facilities services segment, and our
United States building services segment, generated incremental revenues of $82.5
million for the three months ended March 31, 2020.


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Revenues of our United States electrical construction and facilities services
segment were $525.2 million for the three months ended March 31, 2020 compared
to revenues of $528.1 million for the three months ended March 31, 2019. The
slight decrease in revenues for the three months ended March 31, 2020 was
attributable to: (a) a decrease in revenues from construction projects within
the commercial and transportation market sectors, partially as a result of the
completion or substantial completion of certain projects in the Northeastern and
Western regions of the United States, and (b) a decrease in short duration
project activities within this segment. These decreases were partially offset by
increased project activity within the manufacturing and institutional market
sectors. The results for the three months ended March 31, 2020 additionally
included $25.4 million of incremental revenues generated by a company acquired
in 2019.
Our United States mechanical construction and facilities services segment
revenues for the three months ended March 31, 2020 were $834.1 million, an $81.7
million increase compared to revenues of $752.4 million for the three months
ended March 31, 2019. Excluding the impact of acquisitions, the increase in
revenues for the three months ended March 31, 2020 was primarily attributable to
revenue growth within the majority of the market sectors in which we operate,
including: (a) the manufacturing market sector, inclusive of certain large food
processing construction projects, and (b) the healthcare, institutional, and
transportation market sectors, primarily as a result of increased project
activity. In addition, the results for the three months ended March 31, 2020
included $55.5 million of incremental revenues generated by companies acquired
in 2019. These increases were partially offset by decreased revenues within the
commercial and hospitality market sectors as a result of the completion or
substantial completion of certain large projects.
For the first quarter of 2020, revenues of our United States building services
segment were $518.1 million, compared to revenues of $512.1 million for the
first quarter of 2019. The increased revenues period over period were primarily
a result of greater project, service, and controls activities within our mobile
mechanical services operations. Increased revenues from such operations were
partially offset by decreased revenues from: (a) our commercial site-based
services operations, partially as a result of a decrease in snow removal
activity, (b) our energy services operations due to a reduction in large project
activity, and (c) our government services business due to the loss of certain
contracts not renewed pursuant to rebid, which resulted in a reduction to both
base maintenance and indefinite-delivery, indefinite-quantity project revenues.
The results of this segment for the three months ended March 31, 2020 included
$1.6 million of incremental revenues generated by a company acquired in 2020
within our mobile mechanical services operations.
Revenues of our United States industrial services segment for the three months
ended March 31, 2020 were $310.0 million, a $51.4 million increase compared to
revenues of $258.6 million for the three months ended March 31, 2019. The
increase in revenues period over period was due to greater maintenance and
capital project activity within our field services operations, partially offset
by a slight decline in revenues from our shop services operations due to a
reduction in new build heat exchanger sales.
Our United Kingdom building services segment revenues for the three months ended
March 31, 2020 were $112.4 million compared to revenues for the three months
ended March 31, 2019 of $107.5 million. The increase in revenues within this
segment was attributable to: (a) new maintenance contract awards within the
commercial market sector, and (b) increased project activity with existing
customers within the commercial and water and wastewater market sectors.
Unfavorable exchange rates for the British pound versus the United States dollar
negatively impacted this segment's revenues for the quarter ended March 31, 2020
by $2.2 million.
Cost of sales and Gross profit
The following table presents our cost of sales, gross profit (revenues less cost
of sales) and gross profit margin (gross profit as a percentage of revenues) (in
thousands, except for percentages):
                                             For the three months ended
                                                     March 31,
                                                2020             2019
Cost of sales                             $    1,966,771$ 1,849,974
Gross profit                              $      333,061$   308,754
Gross profit, as a percentage of revenues           14.5 %          14.3 %


Our gross profit increased by $24.3 million for the three months ended March 31,
2020 compared to the three months ended March 31, 2019, and our gross profit
margin increased to 14.5% from 14.3%. The increase in gross profit was the
result of an increase in gross profit from all of our reportable segments,
except for our United States building services segment. The increase in gross
profit margin was primarily attributable to improved operating performance
within our United States construction segments.



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Selling, general and administrative expenses
The following table presents our selling, general and administrative expenses
and SG&A margin (selling, general and administrative expenses as a percentage of
revenues) (in thousands, except for percentages):
                                                                   For the three months ended
                                                                           March 31,
                                                                      2020              2019
Selling, general and administrative expenses                    $     

226,997 $ 206,169 Selling, general and administrative expenses, as a percentage of revenues

                                                               9.9 %            9.6 %


Our selling, general and administrative expenses for the three months ended
March 31, 2020 increased by $20.8 million to $227.0 million compared to $206.2
million for the three months ended March 31, 2019. Selling, general and
administrative expenses as a percentage of revenues were 9.9% and 9.6% for the
three months ended March 31, 2020 and 2019, respectively. For the first quarter
of 2020, selling, general and administrative expenses included $9.0 million of
incremental expenses directly related to companies acquired in 2020 and 2019,
including amortization expense attributable to identifiable intangible assets of
$2.7 million. In addition to the impact of acquisitions, the increase in
selling, general and administrative expenses, and SG&A margin, for the three
months ended March 31, 2020 was a result of: (a) an increase in the provision
for credit losses and (b) the favorable impact of a legal settlement within our
United States industrial services segment during the prior year, that resulted
in the recovery of $3.6 million, which was recorded as a reduction to selling,
general, and administrative expenses for the three months ended March 31, 2019.
Restructuring expenses
Restructuring expenses, relating to employee severance obligations, were $0.1
million and $0.3 million for the three months ended March 31, 2020 and 2019,
respectively. As of March 31, 2020, the balance of restructuring obligations yet
to be paid was $1.1 million. Such remaining amounts will be paid pursuant to our
contractual obligations throughout 2020 and 2021. Based on current plans in
place, no material expenses in connection with restructuring are expected to be
incurred during the remainder of 2020.
Operating income
The following table presents our operating income (loss) and operating income
(loss) as a percentage of segment revenues from unrelated entities (in
thousands, except for percentages):
                                                         For the three months ended March 31,
                                                                     % of                       % of
                                                                    Segment                    Segment
                                                     2020          Revenues        2019       Revenues
Operating income (loss):
United States electrical construction and
facilities services                             $     43,903          8.4 %     $  42,951        8.1 %
United States mechanical construction and
facilities services                                   45,171          5.4 %        40,985        5.4 %
United States building services                       20,838          4.0 %        27,483        5.4 %
United States industrial services                     12,257          4.0 %         9,636        3.7 %
Total United States operations                       122,169          5.6 %       121,055        5.9 %
United Kingdom building services                       5,764          5.1 %         4,141        3.9 %
Corporate administration                             (21,869 )          -         (22,611 )        -
Restructuring expenses                                   (69 )          -            (275 )        -
Total worldwide operations                           105,995          4.6 %       102,310        4.7 %
Other corporate items:
Net periodic pension (cost) income                       742                          406
Interest expense, net                                 (2,488 )                     (2,823 )
Income before income taxes                      $    104,249$  99,893


As described below in more detail, operating income was $106.0 million and
$102.3 million for the three months ended March 31, 2020 and 2019, respectively.
The increase in operating income for the three months ended March 31, 2020 was
the result of an increase in gross profit from all of our reportable segments,
except for our United States building services segment, partially offset by an
increase in selling, general, and administrative expenses as discussed above.
Operating margin was 4.6% and 4.7% for the three months ended March 31, 2020 and
2019, respectively.


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Operating income of our United States electrical construction and facilities
services segment for the three months ended March 31, 2020 was $43.9 million, or
8.4% of revenues, compared to operating income of $43.0 million, or 8.1% of
revenues, for the three months ended March 31, 2019. A company acquired in 2019
contributed incremental operating income of $1.6 million, inclusive of $0.1
million of amortization expense associated with identifiable intangible assets,
during the first quarter of 2020. Excluding such incremental contribution,
operating income within this segment remained relatively consistent with that of
the prior year. The increase in operating margin for the three months ended
March 31, 2020 was attributable to an increase in gross profit margin resulting
from favorable project execution, including the successful close out of certain
large projects. Increased gross profit margin was partially offset by an
increase in the ratio of selling, general and administrative expenses to
revenues.
Our United States mechanical construction and facilities services segment
operating income for the quarter ended March 31, 2020 was $45.2 million compared
to operating income of $41.0 million for the quarter ended March 31, 2019.
Companies acquired in 2019 contributed incremental operating income of $2.0
million, inclusive of $3.9 million of amortization expense associated with
identifiable intangible assets, for the three months ended March 31, 2020.
Excluding the impact of acquired businesses, operating income of this segment
increased by approximately $2.2 million, primarily due to increased gross profit
within the manufacturing market sector, inclusive of certain large food
processing contracts. Operating margin within this segment was 5.4% for each of
the three months ended March 31, 2020 and 2019.
Operating income of our United States building services segment for the three
months ended March 31, 2020 was $20.8 million, or 4.0% of revenues, compared to
operating income for the three months ended March 31, 2019 of $27.5 million, or
5.4% of revenues. The decrease in operating income for the three months ended
March 31, 2020 was primarily attributable to decreased gross profit from: (a)
our commercial site-based services operations, primarily as a result of a
reduction in revenues from snow removal activities, and (b) our energy services
operations, as a result of a decrease in large project activity. The decline in
operating margin for the three months ended March 31, 2020 was attributable to:
(a) an increase in the ratio of selling, general, and administrative expenses to
revenues, partially as a result of (i) under-absorption of certain overhead
costs within our commercial site-based services operations due to the reduction
in revenue previously referenced, as well as (ii) an increase in the provision
for credit losses, primarily within our mobile mechanical services operations,
and (b) a reduction in gross profit margin, as a result of a change in the mix
of work.
Our United States industrial services segment operating income for the three
months ended March 31, 2020 increased by approximately $2.6 million to $12.3
million, or 4.0% of revenues, compared to operating income of $9.6 million, or
3.7% of revenues, for the three months ended March 31, 2019. The increase in
operating income for the quarter ended March 31, 2020 was primarily attributable
to improved operating performance within our field services operations as we
experienced stronger demand for our service offerings when compared to the prior
year. The increase in operating margin for the three months ended March 31, 2020
was attributable to: (a) a decrease in the ratio of selling, general, and
administrative expenses to revenues, as a result of revenue growth without a
commensurate increase in this segment's overhead cost structure, and (b) an
increase in gross profit margin, partially as a result of a more favorable mix
of work within our field services operations.
For the quarter ended March 31, 2020, operating income of our United Kingdom
building services segment was $5.8 million compared to operating income of $4.1
million for the quarter ended March 31, 2019. Operating margins within this
segment for the three months ended March 31, 2020 and 2019 were 5.1% and 3.9%,
respectively. Operating income increased primarily as a result of increased
gross profit within the commercial market sector due to: (a) greater project
activity with existing customers and (b) incremental gross profit from new
maintenance contract awards. This segment's operating income for the first
quarter of 2020 was negatively impacted by approximately $0.1 million related to
the effect of unfavorable exchange rates for the British pound versus the United
States dollar. The increase in operating margin for the three months ended March
31, 2020 was attributable to an increase in gross profit margin and a decrease
in the ratio of selling, general, and administrative expenses to revenues.
Our corporate administration operating loss for the three months ended March 31,
2020 was $21.9 million compared to $22.6 million for the three months ended
March 31, 2019. The decrease in corporate administration expenses for the three
months ended March 31, 2020 was primarily due to a decrease in employment costs,
such as incentive compensation.
Net interest expense for the three months ended March 31, 2020 and 2019 was $2.5
million and $2.8 million, respectively. The decrease in net interest expense for
the quarter ended March 31, 2020 resulted from lower interest rates, partially
offset by higher average outstanding borrowings.
For the three months ended March 31, 2020 and 2019, our income tax provision was
$28.6 million and $27.5 million, respectively, based on an effective income tax
rate, before discrete items, of 27.6% and 28.0%, respectively. The actual income
tax rate for the three months ended March 31, 2020 and 2019, inclusive of
discrete items, was 27.4% and 27.5%, respectively. The actual income tax rates
differed from the statutory tax rate due to state and local income taxes and
other permanent book to tax differences. The increase in the 2020 income tax
provision was primarily due to increased income before income taxes.


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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):
                                                                        

December 31,

                                     March 31, 2020      % of Total         2019         % of Total      March 31, 2019      % of Total
Remaining performance obligations:
United States electrical
construction and facilities
services                           $      1,032,611           23 %     $  1,036,216           26 %     $      1,125,052           27 %
United States mechanical
construction and facilities
services                                  2,601,659           59 %        2,229,090           55 %            2,256,936           54 %
United States building services             545,803           12 %          542,269           13 %              544,618           13 %
United States industrial services           109,192            3 %          104,613            3 %               78,861            2 %
Total United States operations            4,289,265           97 %        3,912,188           97 %            4,005,467           96 %
United Kingdom building services            134,634            3 %          124,176            3 %              151,124            4 %
Total worldwide operations         $      4,423,899          100 %     $  4,036,364          100 %     $      4,156,591          100 %


Remaining performance obligations increase with awards of new contracts and
decrease as we perform work and recognize revenue on existing contracts. We
include a project within our remaining performance obligations at such time as
the project is awarded and agreement on contract terms has been reached. Our
remaining performance obligations include amounts related to contracts for which
a fixed price contract value is not assigned when a reasonable estimate of the
total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized
from uncompleted construction contracts. Although many of our construction
contracts are subject to cancellation at the election of our customers, in
accordance with industry practice, we do not limit the amount of unrecognized
revenue included within remaining performance obligations for these contracts
due to the inherent substantial economic penalty that would be incurred by our
customers upon cancellation.
Remaining performance obligations also include unrecognized revenues expected to
be realized over the remaining term of service contracts. However, to the extent
a service contract includes a cancellation clause which allows for the
termination of such contract by either party without a substantive penalty, the
remaining contract term, and therefore, the amount of unrecognized revenues
included within remaining performance obligations, is limited to the notice
period required for the termination.
Our remaining performance obligations are comprised of: (a) original contract
amounts, (b) change orders for which we have received written confirmations from
our customers, (c) pending change orders for which we expect to receive
confirmations in the ordinary course of business, (d) claim amounts that we have
made against customers for which we have determined we have a legal basis under
existing contractual arrangements and as to which the variable consideration
constraint does not apply, and (e) other forms of variable consideration to the
extent that such variable consideration has been included within the transaction
price of our contracts. Such claim and other variable consideration amounts were
immaterial for all periods presented.
Our remaining performance obligations at March 31, 2020 were $4.42 billion
compared to $4.04 billion at December 31, 2019 and $4.16 billion at March 31,
2019. The increase in remaining performance obligations at March 31, 2020
compared to December 31, 2019 was attributable to an increase in remaining
performance obligations within all of our reportable segments, except for our
United States electrical construction and facilities services segment, which
experienced a slight decline in remaining performance obligations.
Novel Coronavirus
In December 2019, a novel strain of coronavirus ("COVID-19") emerged and has
spread around the world. On March 11, 2020, the World Health Organization
declared COVID-19 to be a global pandemic and recommended containment and
mitigation measures worldwide. On March 13, 2020, U.S. President Trump announced
a National Emergency relating to the pandemic. Government authorities in the
U.S. and U.K. have recommended or imposed various social distancing, quarantine,
and isolation measures on large portions of the population, which include
limitations on travel and mandatory cessation of certain business activities.
Both the outbreak and the containment and mitigation measures could have a
serious adverse impact on the economy, the severity and duration of which are
uncertain. It is likely that government stabilization efforts will only
partially mitigate the consequences to the economy. The extent to which the
COVID-19 pandemic will impact our business and results of operations is highly
uncertain and will be affected by a number of factors. These include the
duration and extent of the pandemic; the duration

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and extent of imposed or recommended containment and mitigation measures; the
extent, duration, and effective execution of government stabilization and
recovery efforts; the impact of the pandemic on economic activity, including on
construction projects, our customers' demand for our services and our vendors'
ability to supply us with raw materials; our ability to effectively operate,
including as a result of travel restrictions and mandatory business and facility
closures; the ability of our customers to pay us for services rendered; any
further closures of our and our customers' offices and facilities; and any
additional project delays or shutdowns. While we believe our remaining
performance obligations are firm, customers may also slow down decision-making,
delay planned work or seek to terminate existing agreements. Any of these events
could have a material adverse effect on our business, financial condition,
and/or results of operations.
Although the ongoing COVID-19 pandemic did not have a material adverse impact on
our result of operations for the first quarter of 2020, we began to experience
disruptions caused by the pandemic, as well as the related containment and
mitigation measures mandated by governmental authorities. As a result, we have
enacted our business continuity plans and have implemented certain short-term
cost reductions, including reducing executive and director compensation. We
continue to bid on projects despite the challenging environment; however, our
ability to execute on such work is impacted by closures, work stoppages, job
site delays, access restrictions to certain facilities, and reduced capital
spending by our customers across the geographies in which we operate. While we
believe these disruptions will be temporary, it is difficult to predict how long
they will last and the impact they will have on us in future periods. We will
continue to evaluate the effect of COVID-19 on our business.
Computer System Attack
On February 15, 2020, we became aware on an infiltration and encryption of
portions of our information technology network. This attack temporarily
disrupted our use of the impacted systems. As part of our investigation into
this incident, we have engaged outside security experts. Although our
investigation is still ongoing, the procedures performed to date have not
identified any exfiltration of customer or employee data or any inappropriate
access to our accounting or finance systems. The Company maintains insurance
coverage for these types of incidents; such policies, however, may not
completely provide coverage for, or completely offset the costs of, this
infiltration.
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. Our
cash and cash equivalents are maintained in highly liquid investments with
original maturity dates of three months or less.
Our short-term liquidity requirements primarily arise from: (a) working capital
requirements, (b) business acquisitions and joint venture investments, (c) cash
dividend payments, (d) interest and principal payments related to our
outstanding indebtedness, and (e) payment of income taxes. We can expect to meet
those requirements through our cash and cash equivalent balances, cash generated
from our operations, and the borrowing capacity available under our revolving
credit facility. However, negative macroeconomic trends, including the impact of
COVID-19, could have an adverse effect on future liquidity if we experience
delays in the payment of outstanding receivables beyond normal payment terms or
an increase in credit losses. 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. Short-term 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 building services segment.
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.
Long-term liquidity requirements can be expected to be met initially through
cash generated from operating activities and the borrowing capacity available
under our revolving credit facility. Based upon our current credit ratings and
financial position, we can also reasonably expect to be able to secure long-term
debt financing if required to achieve our strategic objectives. Over the long
term, our primary revenue risk factor continues to be the level of demand for
non-residential construction and building and industrial services, which are
influenced by macroeconomic trends including interest rates and governmental
economic policy. In addition, our ability to perform work is critical to meeting
our long-term liquidity requirements.
Despite the economic uncertainty described above, we believe that our current
cash and cash equivalents and the borrowing capacity available under our
revolving credit facility or other forms of financing available to us through
borrowings, combined with cash expected to be generated from our operations,
will be sufficient to provide short-term and foreseeable long-term liquidity and
meet our expected capital expenditure requirements.


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Cash Flows The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands):

                                                                 For the three months ended
                                                                         March 31,
                                                                    2020              2019
Net cash used in operating activities                         $     (78,813 )$  (57,435 )
Net cash used in investing activities                         $     (14,421 )$  (44,008 )
Net cash provided by (used in) financing activities           $      86,119

$ (11,808 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash

                                               $      (4,678 

) $ 1,298



Our consolidated cash balance, including cash equivalents and restricted cash,
decreased by approximately $11.8 million from $359.9 million at December 31,
2019 to $348.1 million at March 31, 2020. Net cash used in operating activities
for the three months ended March 31, 2020 was $78.8 million compared to $57.4
million of cash used in operating activities for the three months ended March
31, 2019. The increase in cash used in operating activities was primarily due to
the timing of cash receipts from our customers, partially offset by a decrease
in payments to our vendors. Net cash used in investing activities for the three
months ended March 31, 2020 decreased by approximately $29.6 million compared to
the three months ended March 31, 2019. The decrease in net cash used in
investing activities was primarily due to a decrease in payments for the
acquisitions of businesses. Net cash provided by financing activities for the
three months ended March 31, 2020 was $86.1 million compared to net cash used in
financing activities for the three months ended March 31, 2019 of $11.8 million.
The increase in net cash provided by financing activities was primarily due to
net borrowings of $192.5 million under our credit facility during the first
quarter of 2020, partially offset by a $99.0 million increase in funds used for
the repurchase of our common stock.
Debt
Until March 2, 2020, we had a credit agreement dated as of August 3, 2016, which
provided for a $900.0 million revolving credit facility (the "2016 Revolving
Credit Facility") and a $400.0 million term loan (the "2016 Term Loan")
(collectively referred to as the "2016 Credit Agreement"). On March 2, 2020, we
amended and restated the 2016 Credit Agreement to provide for a $1.3 billion
revolving credit facility (the "2020 Revolving Credit Facility") and a $300.0
million term loan (the "2020 Term Loan") (collectively referred to as the "2020
Credit Agreement") expiring March 2, 2025. We may increase the 2020 Revolving
Credit Facility to $1.9 billion if additional lenders are identified and/or
existing lenders are willing to increase their current commitments. We may
allocate up to $400.0 million of available capacity under the 2020 Revolving
Credit Facility to letters of credit for our account or for the account of any
of our subsidiaries. Obligations under the 2020 Credit Agreement are guaranteed
by most of our direct and indirect subsidiaries and are secured by substantially
all of our assets. The 2020 Credit Agreement contains various covenants
providing for, among other things, maintenance of certain financial ratios and
certain limitations on payment of dividends, common stock repurchases,
investments, acquisitions, indebtedness, and capital expenditures. We were in
compliance with all such covenants as of March 31, 2020 with respect to the 2020
Credit Agreement and, as of December 31, 2019, with respect to the 2016 Credit
Agreement. A commitment fee is payable on the average daily unused amount of the
2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on
certain financial tests. The fee was 0.10% of the unused amount as of March 31,
2020. Borrowings under the 2020 Credit Agreement bear interest at (1) a base
rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or
(2) United States dollar LIBOR (0.87% and 0.99% at March 31, 2020 for our 2020
Revolving Credit Facility and our 2020 Term Loan, respectively) plus 1.00% to
1.75%, based on certain financial tests. The base rate is determined by the
greater of (a) the prime commercial lending rate announced by Bank of Montreal
from time to time (3.25% at March 31, 2020), (b) the federal funds effective
rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d)
0.00%. The interest rates in effect at March 31, 2020 were 1.87% and 1.99% for
our 2020 Revolving Credit Facility and our 2020 Term Loan, respectively. Fees
for letters of credit issued under the 2020 Revolving Credit Facility range from
0.75% to 1.75% of the respective face amounts of outstanding letters of credit,
depending on the nature of the letter of credit, and are computed based on
certain financial tests. We capitalized an additional $3.1 million of debt
issuance costs associated with the 2020 Credit Agreement. Debt issuance costs
are amortized over the life of the agreement and are included as part of
interest expense. We are required to make annual installment payments on the
2020 Term Loan, with a principal payment of $7.5 million on December 31, 2020
and principal payments on December 31 of each subsequent year in the amount of
$15.0 million. All unpaid principal and interest is due on March 2, 2025. As of
March 31, 2020 and December 31, 2019, the balance of the 2020 Term Loan and the
2016 Term Loan was $300.0 million and $254.4 million, respectively. As of
March 31, 2020 and December 31, 2019, we had approximately $79.0 million and
$109.0 million of letters of credit outstanding, respectively. There were $200.0
million in borrowings outstanding under the 2020 Revolving Credit Facility as of
March 31, 2020, and there were $50.0 million in borrowings outstanding under the
2016 Revolving Credit Facility as of December 31, 2019.


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Share Repurchase Program and Dividends
In September 2011, our Board of Directors (the "Board") authorized a share
repurchase program allowing us to begin repurchasing shares of our outstanding
common stock. Subsequently, the Board has from time to time increased the amount
of our common stock that we may repurchase under such program. Since the
inception of the repurchase program, the Board has authorized us to repurchase
up to $1.15 billion of our outstanding common stock. During the first quarter of
2020, we repurchased approximately 1.5 million shares of our common stock for
approximately $99.0 million. Since the inception of the repurchase program
through March 31, 2020, we have repurchased approximately 17.4 million shares of
our common stock for approximately $890.5 million. As of March 31, 2020, there
remained authorization for us to repurchase approximately $259.5 million of our
shares. The repurchase program has no expiration date, does not obligate the
Company to acquire any particular amount of common stock, and may be suspended,
recommenced, or discontinued at any time or from time to time without prior
notice. We may repurchase our shares from time to time to the extent permitted
by securities laws and other legal requirements, including provisions in our
2020 Credit Agreement, placing limitations on such repurchases. The repurchase
program has been and will be funded from our operations.
We have paid quarterly dividends since October 25, 2011. We currently pay a
regular quarterly dividend of $0.08 per share. Our 2020 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 a quarterly dividend of $0.08 per share for the foreseeable future. The
payment of dividends has been and will be funded from our operations.
Off-Balance Sheet Arrangements and Other Commitments
The terms of our construction contracts frequently require that we obtain from
surety companies ("Surety Companies") and provide to our customers payment and
performance bonds ("Surety Bonds") as a condition to the award of such
contracts. 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. 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. In addition, at the
request of labor unions representing certain of our employees, Surety Bonds are
sometimes provided to secure obligations for wages and benefits payable to or
for such employees. As of March 31, 2020, 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 $1.3 billion, which represents approximately 30% of our total
remaining performance obligations. We are not aware of any losses in connection
with Surety Bonds, which 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 business segments that rarely require Surety Bonds, such as
our building and industrial services segments, 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, if we were to experience a reduction in
the availability of Surety Bonds, we could experience 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.








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Contractual Obligations The following is a summary of material contractual obligations and other commercial commitments (in millions):

                                                                    Payments Due by Period
                                                        Less
                                                        than          1-3          3-5         More than
Contractual Obligations                   Total        1 year        years        years         5 years
Revolving credit facility (including
interest at 1.87%) (1)                 $   218.7$     3.8$    7.6$  207.3     $         -
Term loan (including interest at
1.99%) (1)                                 327.1          13.5         41.3        272.3               -
Finance leases                               9.9           4.1          4.6          1.1             0.1
Operating leases                           288.0          61.9         90.9         58.8            76.4
Open purchase obligations (2)            1,250.8       1,094.0        156.1          0.7               -
Other long-term obligations,
including current portion (3)              396.5          66.9        320.4          9.2               -

Total Contractual Obligations $ 2,491.0$ 1,244.2$ 620.9

    $  549.4$      76.5




                                                                Amount of

Commitment Expiration by Period

                                                           Less
                                           Total          than 1          1-3            3-5          More than
Other Commercial Commitments             Committed         year          years          years          5 years
Letters of credit                      $      79.0$     79.0     $        -     $        -     $          -


 _________

(1) On March 2, 2020, we entered into a $1.3 billion revolving credit facility

(the "2020 Revolving Credit Facility") and a $300.0 million term loan (the

"2020 Term Loan") (collectively referred to as the "2020 Credit Agreement").

As of March 31, 2020, the amount outstanding under the 2020 Term Loan was

$300.0 million, and there were borrowings outstanding of $200.0 million under

the 2020 Revolving Credit Facility.

(2) Represents open purchase orders for material and subcontracting costs related

to construction and services contracts. These purchase orders are not

reflected in EMCOR's Consolidated Balance Sheets and should not impact future

cash flows as amounts should be recovered through customer billings.

(3) Primarily represents insurance related liabilities, and liabilities for

deferred income taxes, incentive compensation and deferred compensation,

classified as other long-term liabilities in the Consolidated Balance Sheets.

Cash payments for insurance and deferred compensation related liabilities may

be payable beyond three years, however, it is not practical to estimate these

payments; therefore, these liabilities are reflected in the 1-3 years payment

period. We provide funding to our post retirement plans based on at least the

minimum funding required by applicable regulations. In determining the

minimum required funding, we utilize current actuarial assumptions and

exchange rates to forecast amounts that may be payable for up to five years

in the future. In our judgment, minimum funding estimates beyond a five year

time horizon cannot be reliably estimated and, therefore, have not been

included in the table.



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.
Certain Insurance Matters
As of March 31, 2020 and December 31, 2019, we utilized approximately $78.9
million of letters of credit obtained under our 2020 Revolving Credit Facility
and $108.9 million of letters of credit obtained under our 2016 Revolving Credit
Facility, respectively, as collateral for our insurance obligations.
New Accounting Pronouncements
We review new accounting standards to determine the expected financial impact,
if any, that the adoption of such standards will have. See Note 2 - New
Accounting Pronouncements of the notes to consolidated financial statements
included in Item 1. Financial Statements 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.

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Application of Critical Accounting Policies
Our consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. Our significant accounting policies are described in
Note 2 - Summary of Significant Accounting Policies of the notes to consolidated
financial statements included in Item 8 of our annual report on Form 10-K for
the year ended December 31, 2019. We believe that some of the more critical
judgment areas in the application of accounting policies that affect our
financial condition and results of operations are the impact of changes in the
estimates and judgments pertaining to: (a) revenue recognition from contracts
with customers; (b) collectibility or valuation of accounts receivable;
(c) insurance liabilities; (d) income taxes; and (e) goodwill and identifiable
intangible assets.
Revenue Recognition from Contracts with Customers
We believe our most critical accounting policy is revenue recognition in
accordance with Accounting Standards Codification Topic 606, "Revenue from
Contracts with Customers" ("ASC 606"). In accordance with ASC 606, the Company
recognizes revenue 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 performance obligations in the contract, and (5) recognize revenue as
performance obligations are satisfied.
The Company recognizes revenue at the time the related performance obligation is
satisfied by transferring a promised good or service to its customers. A good or
service is considered to be transferred when the customer obtains control. The
Company can transfer control of a good or service and satisfy its performance
obligations either over time or at a point in time. The Company transfers
control of a good or service over time and, therefore, satisfies a performance
obligation and recognizes revenue over time if one of the following three
criteria are met: (a) the customer simultaneously receives and consumes the
benefits provided by the Company's performance as we perform, (b) the Company's
performance creates or enhances an asset that the customer controls as the asset
is created or enhanced, or (c) the Company's performance does not create an
asset with an alternative use to us, and we have an enforceable right to payment
for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by
measuring the progress toward complete satisfaction of that performance
obligation. The selection of the method to measure progress towards completion
can be either an input method or an output method and requires judgment based on
the nature of the goods or services to be provided.
For our construction contracts, revenue is generally recognized over time as our
performance creates or enhances an asset that the customer controls as it is
created or enhanced. Our fixed price construction projects generally use a
cost-to-cost input method to measure our progress towards complete satisfaction
of the performance obligation as we believe it best depicts the transfer of
control to the customer which occurs as we incur costs on our contracts. Under
the cost-to-cost measure of progress, the extent of progress towards completion
is measured based on the ratio of costs incurred to date to the total estimated
costs at completion of the performance obligation. For our unit price
construction contracts, progress towards complete satisfaction is measured
through an output method, such as the amount of units produced or delivered,
when our performance does not produce significant amounts of work in process or
finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as
the customer simultaneously receives and consumes the benefits of our
performance as we perform the service. For our fixed price service contracts
with specified service periods, revenue is generally recognized on a
straight-line basis over such service period when our inputs are expended
evenly, and the customer receives and consumes the benefits of our performance
throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat
exchangers within our United States industrial services segment depends on the
payment terms of the contract, as our performance does not create an asset with
an alternative use to us. For those contracts for which we have a right to
payment for performance completed to date at all times throughout our
performance, inclusive of a cancellation, we recognize revenue over time. For
these performance obligations, we use a cost-to-cost input method to measure our
progress towards complete satisfaction of the performance obligation as we
believe it best depicts the transfer of control to the customer which occurs as
we incur costs on our contracts. However, for those contracts for which we do
not have a right, at all times, to payment for performance completed to date, we
recognize revenue at the point in time when control is transferred to the
customer. For bill-and-hold arrangements, revenue is recognized when the
customer obtains control of the heat exchanger, which may be prior to shipping,
if certain recognition criteria are met.
For certain of our revenue streams, such as call-out repair and service work,
outage services, refinery turnarounds and specialty welding services that are
performed under time and materials contracts, our progress towards complete
satisfaction of such performance obligations is measured using an output method
as the customer receives and consumes the benefits of our performance completed
to date.

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Due to uncertainties inherent in the estimation process, it is possible that
estimates of costs to complete a performance obligation 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, are
recognized on a cumulative catch-up basis in the period in which the revisions
to the estimates are made. When the current estimate of total costs for a
performance obligation indicate a loss, a provision for the entire estimated
loss on the unsatisfied performance obligation is made in the period in which
the loss becomes evident. For the three months ended March 31, 2020 and 2019,
there were no changes in total estimated costs that had a significant impact on
our operating results. In addition, there were no significant losses recognized
during the three months ended March 31, 2020 and 2019.
The timing of revenue recognition may differ from the timing of invoicing to
customers. Contract assets include unbilled amounts from our long-term
construction projects when revenues recognized under the cost-to-cost measure of
progress exceed the amounts invoiced to our customers, as the amounts cannot be
billed under the terms of our contracts. Such amounts are recoverable from our
customers based upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion of a contract.
In addition, many of our time and materials arrangements, as well as our
contracts to perform turnaround services within the United States industrial
services segment, are billed in arrears pursuant to contract terms that are
standard within the industry, resulting in contract assets and/or unbilled
receivables being recorded, as revenue is recognized in advance of billings.
Also included in contract assets are amounts we seek or will seek to collect
from customers or others for errors or changes in contract specifications or
design, contract change orders or modifications in dispute or unapproved as to
scope and/or price, or other customer-related causes of unanticipated additional
contract costs (claims and unapproved change orders). Our contract assets do not
include capitalized costs to obtain and fulfill a contract. Contract assets are
generally classified as current within the Consolidated Balance Sheets.
Contract liabilities from our long-term construction contracts arise when
amounts invoiced to our customers exceed revenues recognized under the
cost-to-cost measure of progress. Contract liabilities additionally include
advanced payments from our customers on certain contracts. Contract liabilities
decrease as we recognize revenue from the satisfaction of the related
performance obligation and are recorded as either current or long-term,
depending upon when we expect to recognize such revenue. The long-term portion
of contract liabilities is included in "Other long-term obligations" in the
Consolidated Balance Sheets.
See Note 3 - Revenue from Contracts with Customers of the notes to consolidated
financial statements included in Item 1. Financial Statements for further
disclosure regarding revenue recognition.
Accounts Receivable
Accounts receivable are recognized in the period we deliver goods or provide
services to our customers or when our right to consideration is unconditional.
We are required to estimate the collectibility of accounts receivable. Specific
accounts receivable are evaluated when we believe a customer may not be able to
meet its financial obligations due to the deterioration of its financial
condition or its credit ratings. In addition, a considerable amount of judgment
is required in assessing the likelihood of realization of receivables. Relevant
assessment factors include the creditworthiness of the customer, our prior
collection history with the customer, 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. At
March 31, 2020 and December 31, 2019, our accounts receivable of $2,055.5
million and $2,030.8 million, respectively, were recorded net of allowances for
credit losses of $20.0 million and $14.5 million, respectively. Our allowance
for credit losses increased based on our evaluation of forecasts of future
economic conditions and the expected impact on customer collections, in
accordance with Accounting Standards Codification Topic 326, "Financial
Instruments - Credit Losses," as described in Note 2 - New Accounting
Pronouncements of the notes to consolidated financial statements included in
Item 1. Financial Statements. Allowances for credit losses are based on the best
facts available and are re-evaluated and adjusted on a regular basis as
additional information is received. Negative macroeconomic trends, including the
impact of COVID-19, could result in an increase in our credit losses if we
experience delays in the payment of outstanding receivables or if future
economic conditions differ from our forecasts.
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 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

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liabilities, adjustments may be required and will be recorded in the period that
the experience becomes known. Our estimated net insurance liabilities for
workers' compensation, automobile liability, general liability, and property
claims increased by $2.7 million at March 31, 2020 compared to December 31,
2019, partially as a result of greater potential exposures, including the impact
of acquired companies. 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 $17.2 million of additional
expense for the three months ended March 31, 2020.
Income Taxes
We had net deferred income tax liabilities at March 31, 2020 and December 31,
2019 of $75.8 million and $71.7 million, respectively, primarily resulting from
differences between the carrying value and income tax basis of certain
identifiable intangible assets, goodwill, and depreciable fixed assets, which
will impact our taxable income in future periods. Included within these net
deferred income tax liabilities are $169.9 million and $176.2 million of
deferred income tax assets as of March 31, 2020 and December 31, 2019,
respectively. A valuation allowance is required when it is more likely than not
that all or a portion of a deferred income tax asset will not be realized. As of
March 31, 2020 and December 31, 2019, the total valuation allowance on deferred
income tax assets, primarily related to state net operating loss carryforwards,
was approximately $3.5 million. 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 tax
asset balance, as well as current projections of future taxable income, we have
determined that it is more likely than not that the 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 tax assets.
Goodwill and Identifiable Intangible Assets
As of March 31, 2020, we had $1,064.9 million and $597.9 million, respectively,
of goodwill and net identifiable intangible assets (primarily consisting of our
contract backlog, developed technology/vendor network, customer relationships,
and trade names) arising out of the acquisition of companies. As of December 31,
2019, goodwill and net identifiable intangible assets were $1,063.9 million and
$611.4 million, respectively. As of March 31, 2020, approximately 13.4% of our
goodwill related to our United States electrical construction and facilities
services segment, approximately 28.1% related to our United States mechanical
construction and facilities services segment, approximately 27.2% related to our
United States building services segment, and approximately 31.3% related to our
United States industrial services segment. The change to goodwill since December
31, 2019 was the result of an acquisition completed in 2020. Accounting
Standards Codification Topic 350, "Intangibles - Goodwill and Other" ("ASC 350")
requires that goodwill and other identifiable intangible assets with indefinite
useful lives not be amortized, but instead be tested at least annually for
impairment (which we test each October 1, absent any earlier identified
impairment indicators), and be written down if impaired. ASC 350 requires that
goodwill be allocated to its respective reporting unit and that identifiable
intangible assets with finite lives be amortized over their useful lives. 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 the ability to successfully integrate
acquired companies, as well as macroeconomic conditions.
We test for impairment of our goodwill at the reporting unit level. Our
reporting units are consistent with the reportable segments identified in Note
14, "Segment Information," of the notes to consolidated financial statements. 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 loss 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. The fair value of each of our
reporting units is generally determined using discounted estimated future cash
flows; however, in certain circumstances, consideration is given to a market
approach whereby fair value is measured based on a multiple of earnings.
As of the date of our latest impairment test (October 1, 2019), the carrying
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 were approximately $331.0 million, $369.5 million,
$546.8 million, and $705.2 million, respectively. 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 $1,321.8 million,
$2,011.5 million, $922.3 million, and $40.5 million, respectively. No impairment
of our goodwill was recognized during the three months ended March 31, 2020 and
2019.


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The weighted average cost of capital used in our annual testing for impairment
as of October 1, 2019 was 9.5%, 9.1%, and 10.5% for our domestic construction
segments, our United States building services segment and our United States
industrial services segment, respectively. The perpetual growth rate used for
our annual testing was 2.7% for all of our domestic segments. Unfavorable
changes in these key assumptions may affect future testing results. For example,
keeping all other assumptions constant, a 50 basis point increase in the
weighted average costs 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 $108.8 million, $156.7 million,
$98.0 million, and $40.3 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 $61.4 million, $90.5 million, $55.7 million, and $20.5 million,
respectively. Given the amounts by which the fair value exceeds the carrying
value for each of our reporting units other than our United States industrial
services segment, the decreases in estimated fair values described above would
not have significantly impacted our 2019 impairment test. In the case of our
United States industrial services segment, however, such decreases would cause
the estimated fair value to approach its carrying value.
We also test for the impairment of trade names that are not subject to
amortization by calculating the fair value using the "relief from royalty
payments" methodology. This approach involves two steps: (a) estimating
reasonable royalty rates for each trade name and (b) applying these royalty
rates to a net revenue stream and discounting the resulting cash flows to
determine fair value. This fair value is then compared with the carrying value
of each trade name. If the carrying amount of the trade name is greater than the
implied fair value of the trade name, an impairment in the amount of the excess
is recognized and charged to operations. No impairment of our indefinite-lived
trade names was recognized during the three months ended March 31, 2020 and
2019.
In addition, we review for the impairment of other identifiable intangible
assets that are being amortized whenever facts and circumstances indicate that
their carrying values may not be fully recoverable. This test compares their
carrying values to the undiscounted pre-tax cash flows expected to result from
the use of the assets. If the assets are impaired, the assets are written down
to their fair values, generally determined based on their discounted estimated
future cash flows. No impairment of our other identifiable intangible assets was
recognized during the three months ended March 31, 2020 and 2019.
We have certain businesses, particularly within our United States industrial
services segment, whose results are highly impacted by the demand for some of
our offerings within the industrial and oil and gas markets. Volatility in the
price of oil has historically caused some of our refinery customers to curtail
or delay maintenance or capital projects. Prolonged volatility in the price of
oil may adversely affect some of our refinery customers causing them to defer
maintenance and/or capital projects performed by our companies or delay
purchases or repairs of heat exchangers that are manufactured and repaired by
some of our companies. Future performance of this segment, along with a
continued evaluation of the conditions of its end user markets, will be
important to ongoing impairment assessments. Should this segment's actual
results suffer a decline or expected future results be revised downward, the
risk of goodwill impairment or impairment of other identifiable intangible
assets would increase.
Our development of the discounted future cash flow projections used in
impairment testing is based upon assumptions and estimates 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 the weighted average cost of capital for each reporting unit are
developed with the assistance of a third-party valuation specialist and certain
other factors used in assessing fair value, such as interest rates, are outside
the control of management. These assumptions and estimates can change in future
periods, especially in consideration of the uncertainty created by the COVID-19
pandemic and how it will impact the broader economy and our results of
operations. There can be no assurance that estimates and assumptions made for
purposes of our goodwill and identifiable intangible asset impairment testing
will prove to be accurate predictions of the future. If our assumptions
regarding future business performance including anticipated growth rates and
margins are not achieved, or there is a rise in interest rates, we may be
required to record goodwill and/or identifiable intangible asset impairment
charges in future periods.
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.

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