We are one of the largest electrical and mechanical construction and facilities services firms inthe 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 inthe United States and theUnited 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 endedMarch 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 endedMarch 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 endedMarch 31, 2019 to$2.30 billion for the three months endedMarch 31, 2020 . Such increase in revenues was attributable to revenue growth within all of our reportable segments, except for ourUnited States electrical construction and facilities services segment, which experienced a slight decrease in revenues period over period. 21
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Operating income for the three months endedMarch 31, 2020 of$106.0 million increased by$3.7 million compared to operating income of$102.3 million for the three months endedMarch 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 ourUnited 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 byEMCOR in the comparable prior reported period. InJanuary 2020 , we acquired a company for an immaterial amount. This company provides building automation and controls solutions within the Northeastern region ofthe United States , and its results of operations have been included within ourUnited States building services segment. During calendar year 2019, we completed the acquisition ofBatchelor & 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 ofthe United States , and the results of its operations have been included within ourUnited States mechanical construction and facilities services segment. In addition to BKI, during 2019, we acquired: (a) a company which provides electrical contracting services in centralIowa , the results of operations of which have been included within ourUnited States electrical construction and facilities services segment, (b) a company which provides mechanical contracting services in south-central and easternTexas , the results of operations of which have been included within ourUnited States mechanical construction and facilities services segment, and (c) four companies included within ourUnited States building services segment, consisting of: (i) a company which provides mobile mechanical services in the Southern region ofthe 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$4.1 million of amortization expense associated with identifiable intangible assets, for the three months endedMarch 31, 2020 . Results of Operations Revenues The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages): For the three months ended March 31, % of % of 2020 Total 2019 Total Revenues:United States electrical construction and facilities services$ 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 endedMarch 31, 2020 increased to$2.30 billion compared to$2.16 billion for the three months endedMarch 31, 2019 . The increase in revenues for the three months endedMarch 31, 2020 was attributable to increased revenues from all of our reportable segments, except for ourUnited States electrical construction and facilities services segment. Companies acquired in 2020 and 2019, which are reported in ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, and ourUnited States building services segment, generated incremental revenues of$82.5 million for the three months endedMarch 31, 2020 . 22
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Revenues of ourUnited States electrical construction and facilities services segment were$525.2 million for the three months endedMarch 31, 2020 compared to revenues of$528.1 million for the three months endedMarch 31, 2019 . The slight decrease in revenues for the three months endedMarch 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 ofthe 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 endedMarch 31, 2020 additionally included$25.4 million of incremental revenues generated by a company acquired in 2019. OurUnited States mechanical construction and facilities services segment revenues for the three months endedMarch 31, 2020 were$834.1 million , an$81.7 million increase compared to revenues of$752.4 million for the three months endedMarch 31, 2019 . Excluding the impact of acquisitions, the increase in revenues for the three months endedMarch 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 endedMarch 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 ourUnited 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 endedMarch 31, 2020 included$1.6 million of incremental revenues generated by a company acquired in 2020 within our mobile mechanical services operations. Revenues of ourUnited States industrial services segment for the three months endedMarch 31, 2020 were$310.0 million , a$51.4 million increase compared to revenues of$258.6 million for the three months endedMarch 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. OurUnited Kingdom building services segment revenues for the three months endedMarch 31, 2020 were$112.4 million compared to revenues for the three months endedMarch 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 versusthe United States dollar negatively impacted this segment's revenues for the quarter endedMarch 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 endedMarch 31, 2020 compared to the three months endedMarch 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 ourUnited States building services segment. The increase in gross profit margin was primarily attributable to improved operating performance within ourUnited States construction segments. 23
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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 endedMarch 31, 2020 2019 Selling, general and administrative expenses $
226,997
9.9 % 9.6 % Our selling, general and administrative expenses for the three months endedMarch 31, 2020 increased by$20.8 million to$227.0 million compared to$206.2 million for the three months endedMarch 31, 2019 . Selling, general and administrative expenses as a percentage of revenues were 9.9% and 9.6% for the three months endedMarch 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 endedMarch 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 ourUnited 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 endedMarch 31, 2019 . Restructuring expenses Restructuring expenses, relating to employee severance obligations, were$0.1 million and$0.3 million for the three months endedMarch 31, 2020 and 2019, respectively. As ofMarch 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 endedMarch 31, 2020 and 2019, respectively. The increase in operating income for the three months endedMarch 31, 2020 was the result of an increase in gross profit from all of our reportable segments, except for ourUnited 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 endedMarch 31, 2020 and 2019, respectively. 24
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Operating income of ourUnited States electrical construction and facilities services segment for the three months endedMarch 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 endedMarch 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 endedMarch 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. OurUnited States mechanical construction and facilities services segment operating income for the quarter endedMarch 31, 2020 was$45.2 million compared to operating income of$41.0 million for the quarter endedMarch 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 endedMarch 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 endedMarch 31, 2020 and 2019. Operating income of ourUnited States building services segment for the three months endedMarch 31, 2020 was$20.8 million , or 4.0% of revenues, compared to operating income for the three months endedMarch 31, 2019 of$27.5 million , or 5.4% of revenues. The decrease in operating income for the three months endedMarch 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 endedMarch 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. OurUnited States industrial services segment operating income for the three months endedMarch 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 endedMarch 31, 2019 . The increase in operating income for the quarter endedMarch 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 endedMarch 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 endedMarch 31, 2020 , operating income of ourUnited Kingdom building services segment was$5.8 million compared to operating income of$4.1 million for the quarter endedMarch 31, 2019 . Operating margins within this segment for the three months endedMarch 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 versusthe United States dollar. The increase in operating margin for the three months endedMarch 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 endedMarch 31, 2020 was$21.9 million compared to$22.6 million for the three months endedMarch 31, 2019 . The decrease in corporate administration expenses for the three months endedMarch 31, 2020 was primarily due to a decrease in employment costs, such as incentive compensation. Net interest expense for the three months endedMarch 31, 2020 and 2019 was$2.5 million and$2.8 million , respectively. The decrease in net interest expense for the quarter endedMarch 31, 2020 resulted from lower interest rates, partially offset by higher average outstanding borrowings. For the three months endedMarch 31, 2020 and 2019, our income tax provision was$28.6 million and$27.5 million , respectively, based on an effective income tax rate, before discrete items, of 27.6% and 28.0%, respectively. The actual income tax rate for the three months endedMarch 31, 2020 and 2019, inclusive of discrete items, was 27.4% and 27.5%, respectively. The actual income tax rates differed from the statutory tax rate due to state and local income taxes and other permanent book to tax differences. The increase in the 2020 income tax provision was primarily due to increased income before income taxes. 25
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Remaining Unsatisfied Performance Obligations The following table presents the transaction price allocated to remaining unsatisfied performance obligations ("remaining performance obligations") for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages):
March 31, 2020 % of Total 2019 % of Total March 31, 2019 % of Total Remaining performance obligations:United States electrical construction and facilities services$ 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 atMarch 31, 2020 were$4.42 billion compared to$4.04 billion atDecember 31, 2019 and$4.16 billion atMarch 31, 2019 . The increase in remaining performance obligations atMarch 31, 2020 compared toDecember 31, 2019 was attributable to an increase in remaining performance obligations within all of our reportable segments, except for ourUnited States electrical construction and facilities services segment, which experienced a slight decline in remaining performance obligations. Novel Coronavirus InDecember 2019 , a novel strain of coronavirus ("COVID-19") emerged and has spread around the world. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. OnMarch 13, 2020 ,U.S. President Trump announced a National Emergency relating to the pandemic. Government authorities in theU.S. andU.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 26
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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 OnFebruary 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 ourUnited 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 ourUnited 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. 27
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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
$ (4,678
)
Our consolidated cash balance, including cash equivalents and restricted cash, decreased by approximately$11.8 million from$359.9 million atDecember 31, 2019 to$348.1 million atMarch 31, 2020 . Net cash used in operating activities for the three months endedMarch 31, 2020 was$78.8 million compared to$57.4 million of cash used in operating activities for the three months endedMarch 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 endedMarch 31, 2020 decreased by approximately$29.6 million compared to the three months endedMarch 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 endedMarch 31, 2020 was$86.1 million compared to net cash used in financing activities for the three months endedMarch 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 UntilMarch 2, 2020 , we had a credit agreement dated as ofAugust 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"). OnMarch 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") expiringMarch 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 ofMarch 31, 2020 with respect to the 2020 Credit Agreement and, as ofDecember 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 ofMarch 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% atMarch 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% atMarch 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 atMarch 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 onDecember 31, 2020 and principal payments onDecember 31 of each subsequent year in the amount of$15.0 million . All unpaid principal and interest is due onMarch 2, 2025 . As ofMarch 31, 2020 andDecember 31, 2019 , the balance of the 2020 Term Loan and the 2016 Term Loan was$300.0 million and$254.4 million , respectively. As ofMarch 31, 2020 andDecember 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 ofMarch 31, 2020 , and there were$50.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as ofDecember 31, 2019 . 28
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Share Repurchase Program and Dividends InSeptember 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 throughMarch 31, 2020 , we have repurchased approximately 17.4 million shares of our common stock for approximately$890.5 million . As ofMarch 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 sinceOctober 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 ofMarch 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. 29
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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
$ 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
(the "2020 Revolving Credit Facility") and a
"2020 Term Loan") (collectively referred to as the "2020 Credit Agreement").
As of
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
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 ofMarch 31, 2020 andDecember 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. 30
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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 endedDecember 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 ourUnited 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. 31
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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 endedMarch 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 endedMarch 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 withinthe 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. AtMarch 31, 2020 andDecember 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 32
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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 atMarch 31, 2020 compared toDecember 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 endedMarch 31, 2020 . Income Taxes We had net deferred income tax liabilities atMarch 31, 2020 andDecember 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 ofMarch 31, 2020 andDecember 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 ofMarch 31, 2020 andDecember 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 ofMarch 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 ofDecember 31, 2019 , goodwill and net identifiable intangible assets were$1,063.9 million and$611.4 million , respectively. As ofMarch 31, 2020 , approximately 13.4% of our goodwill related to ourUnited States electrical construction and facilities services segment, approximately 28.1% related to ourUnited States mechanical construction and facilities services segment, approximately 27.2% related to ourUnited States building services segment, and approximately 31.3% related to ourUnited States industrial services segment. The change to goodwill sinceDecember 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 eachOctober 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 ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, ourUnited States building services segment and ourUnited States industrial services segment were approximately$331.0 million ,$369.5 million ,$546.8 million , and$705.2 million , respectively. The fair values of ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, ourUnited States building services segment and ourUnited 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 endedMarch 31, 2020 and 2019. 33
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The weighted average cost of capital used in our annual testing for impairment as ofOctober 1, 2019 was 9.5%, 9.1%, and 10.5% for our domestic construction segments, ourUnited States building services segment and ourUnited 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 ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, ourUnited States building services segment, and ourUnited 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 ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, ourUnited States building services segment, and ourUnited 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 ourUnited 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 ourUnited 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 endedMarch 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 endedMarch 31, 2020 and 2019. We have certain businesses, particularly within ourUnited 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. 34
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