| Revenue from Contracts with Customers | Revenue from Contracts with Customers The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by applying the following five step model: (1) Identify the contract with a customer A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer. NOTE 3 - Revenue from Contracts with Customers (Continued) (2) Identify the performance obligations in the contract At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract. In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry. Our contracts are often modified through change orders to account for changes in the scope and price of the goods or services we are providing. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of our change orders are for goods or services that are not distinct within the context of our original contract and, therefore, are not treated as separate performance obligations. (3) Determine the transaction price The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability-weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts. Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied. NOTE 3 - Revenue from Contracts with Customers (Continued) Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs. For some transactions, the receipt of consideration does not match the timing of the transfer of goods or services to the customer. For such contracts, the Company evaluates whether this timing difference represents a financing arrangement within the contract. Although rare, if a contract is determined to contain a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money when determining the transaction price of such contract. Although our customers may retain a portion of the contract price until completion of the project and final contract settlement, these retainage amounts are not considered a significant financing component as the intent of the withheld amounts is to provide the customer with assurance that we will complete our obligations under the contract rather than to provide financing to the customer. In addition, although we may be entitled to advanced payments from our customers on certain contracts, these advanced payments generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract. Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate. (4) Allocate the transaction price to the performance obligations in the contract For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation. (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. NOTE 3 - Revenue from Contracts with Customers (Continued) 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 number 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. Changes in Estimates Due to uncertainties inherent in the estimation process, as well as the significant judgment involved in determining variable consideration, it is possible that estimates of costs to complete a performance obligation, and/or our estimates of transaction prices, will be revised in the near term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, or changes in the estimate of transaction prices, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicates 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. Based on an evaluation of individual projects that were substantially complete in prior periods but had revisions to total estimated cost or anticipated contract value that resulted in an increase to profitability in excess of $1.0 million, we recognized revenue during the three and nine months ended September 30, 2024 and 2023, as summarized in the following table (in thousands): For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 United States electrical construction and facilities services $ 7,540 $ 4,223 $ 9,457 $ 4,287 United States mechanical construction and facilities services 5,672 5,814 9,351 18,353 Total impact $ 13,212 $ 10,037 $ 18,808 $ 22,640 NOTE 3 - Revenue from Contracts with Customers (Continued) Included in our results for the nine months ended September 30, 2024 was $12.3 million of gross profit, recognized in the second quarter of the year, on two contracts, which are currently in process, as a result of favorable developments on certain claims. Of this amount, $8.4 million was reported within our United States electrical construction and facilities services segment and $3.9 million was reported within our United States mechanical construction and facilities services segment. Based on an evaluation of individual projects that had revisions to total estimated costs or anticipated contract value that resulted in a reduction of profitability in excess of $1.0 million, our operating results were negatively impacted during the three and nine months ended September 30, 2024 and 2023, as summarized in the following table (in thousands): For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 United States electrical construction and facilities services $ — $ 2,635 $ 16,758 $ 12,219 United States mechanical construction and facilities services 10,066 7,933 23,863 13,416 United States building services — — — 2,977 Total impact $ 10,066 $ 10,568 $ 40,621 $ 28,612 Disaggregation of Revenues Our revenues are principally derived from contracts to provide construction services relating to electrical and mechanical systems, as well as to provide a number of building services and industrial services to our customers. Our contracts are with many different customers in numerous industries. The following tables provide further disaggregation of our revenues, by categories we use to evaluate our financial performance within each of our reportable segments, for the three and nine months ended September 30, 2024 and 2023 (in thousands, except for percentages). Refer to Note 14 - Segment Information of the notes to consolidated financial statements for additional information on how we disaggregate our revenues by reportable segment. For the three months ended September 30, 2024 % of 2023 % of United States electrical construction and facilities services: Network and communications market sector $ 367,555 43 % $ 236,454 34 % Commercial market sector 70,366 8 % 104,270 15 % Manufacturing and industrial market sector 109,528 13 % 97,788 14 % Healthcare market sector 62,102 7 % 62,126 9 % High-tech manufacturing market sector 48,960 6 % 33,482 5 % Institutional market sector 51,504 6 % 37,916 6 % Transportation market sector 47,720 6 % 43,287 6 % Water and wastewater market sector 8,038 1 % 6,327 1 % Hospitality and entertainment market sector 16,835 2 % 16,708 2 % Short-duration projects (1) 48,225 6 % 43,481 6 % Service work 15,231 2 % 15,927 2 % 846,064 697,766 Less intersegment revenues (1,034) (360) Total segment revenues $ 845,030 $ 697,406 ________ (1) Represents those projects which generally are completed within three months or less. NOTE 3 - Revenue from Contracts with Customers (Continued) For the three months ended September 30, 2024 % of 2023 % of United States mechanical construction and facilities services: Network and communications market sector $ 221,700 13 % $ 102,630 8 % Commercial market sector 243,629 15 % 283,659 21 % Manufacturing and industrial market sector 176,127 11 % 178,123 13 % Healthcare market sector 152,851 9 % 123,025 9 % High-tech manufacturing market sector 388,084 23 % 255,229 19 % Institutional market sector 136,218 8 % 89,215 7 % Transportation market sector 13,834 1 % 10,168 1 % Water and wastewater market sector 74,478 5 % 65,219 5 % Hospitality and entertainment market sector 20,272 1 % 14,716 1 % Short-duration projects (1) 71,085 4 % 81,851 6 % Service work 165,540 10 % 128,912 10 % 1,663,818 1,332,747 Less intersegment revenues (1,607) (3,147) Total segment revenues $ 1,662,211 $ 1,329,600 ________ (1) Represents those projects which generally are completed within three months or less. For the three months ended September 30, 2024 % of 2023 % of United States building services: Mechanical services $ 599,371 75 % $ 542,371 66 % Commercial site-based services 151,852 19 % 222,499 27 % Government site-based services 45,700 6 % 52,848 7 % Total segment revenues $ 796,923 $ 817,718 For the three months ended September 30, 2024 % of 2023 % of United States industrial services: Field services $ 251,552 88 % $ 214,341 85 % Shop services 34,858 12 % 37,807 15 % Total segment revenues $ 286,410 $ 252,148 Total United States operations $ 3,590,574 $ 3,096,872 For the three months ended September 30, 2024 % of 2023 % of United Kingdom building services: Service work $ 49,530 47 % $ 54,286 49 % Project work 56,820 53 % 56,440 51 % Total segment revenues $ 106,350 $ 110,726 Total operations $ 3,696,924 $ 3,207,598 NOTE 3 - Revenue from Contracts with Customers (Continued) For the nine months ended September 30, 2024 % of 2023 % of United States electrical construction and facilities services: Network and communications market sector $ 1,002,116 42 % $ 665,493 33 % Commercial market sector 233,365 10 % 295,188 15 % Manufacturing and industrial market sector 313,454 13 % 278,912 14 % Healthcare market sector 177,059 7 % 182,442 9 % High-tech manufacturing market sector 137,306 6 % 102,075 5 % Institutional market sector 128,075 5 % 112,577 5 % Transportation market sector 147,701 6 % 118,436 6 % Water and wastewater market sector 23,337 1 % 18,388 1 % Hospitality and entertainment market sector 55,143 2 % 56,510 3 % Short-duration projects (1) 150,508 6 % 141,901 7 % Service work 44,789 2 % 50,080 2 % 2,412,853 2,022,002 Less intersegment revenues (3,118) (1,683) Total segment revenues $ 2,409,735 $ 2,020,319 ________ (1) Represents those projects which generally are completed within three months or less. For the nine months ended September 30, 2024 % of 2023 % of United States mechanical construction and facilities services: Network and communications market sector $ 527,404 11 % $ 289,085 8 % Commercial market sector 775,767 16 % 828,809 23 % Manufacturing and industrial market sector 568,502 12 % 485,809 13 % Healthcare market sector 426,275 9 % 353,595 10 % High-tech manufacturing market sector 1,075,890 23 % 549,678 15 % Institutional market sector 360,602 8 % 224,889 6 % Transportation market sector 43,496 1 % 31,615 1 % Water and wastewater market sector 224,921 5 % 201,167 6 % Hospitality and entertainment market sector 49,902 1 % 38,324 1 % Short-duration projects (1) 253,916 5 % 237,246 7 % Service work 443,055 9 % 368,378 10 % 4,749,730 3,608,595 Less intersegment revenues (4,673) (6,324) Total segment revenues $ 4,745,057 $ 3,602,271 ________ (1) Represents those projects which generally are completed within three months or less. NOTE 3 - Revenue from Contracts with Customers (Continued) For the nine months ended September 30, 2024 % of 2023 % of United States building services: Mechanical services $ 1,695,254 72 % $ 1,519,410 65 % Commercial site-based services 522,353 22 % 639,193 28 % Government site-based services 141,584 6 % 159,502 7 % Total segment revenues $ 2,359,191 $ 2,318,105 For the nine months ended September 30, 2024 % of 2023 % of United States industrial services: Field services $ 837,224 87 % $ 751,062 86 % Shop services 127,286 13 % 124,252 14 % Total segment revenues $ 964,510 $ 875,314 Total United States operations $ 10,478,493 $ 8,816,009 For the nine months ended September 30, 2024 % of 2023 % of United Kingdom building services: Service work $ 150,534 47 % $ 157,631 48 % Project work 167,070 53 % 170,012 52 % Total segment revenues $ 317,604 $ 327,643 Total operations $ 10,796,097 $ 9,143,652 Accounts Receivable and Allowance for Credit Losses Accounts receivable are recognized in the period we deliver goods and services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. Judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition. At September 30, 2024 and December 31, 2023, our allowance for credit losses was $32.7 million and $22.5 million, respectively. The increase in our allowance for credit losses was primarily due to a reserve taken in the first quarter of 2024 for a specific customer bankruptcy within the commercial site-based services division of our United States building services segment. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received. Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our credit losses. NOTE 3 - Revenue from Contracts with Customers (Continued) The change in the allowance for credit losses for the nine months ended September 30, 2024 was as follows (in thousands): Balance at December 31, 2023 $ 22,502 Provision for credit losses 12,585 Amounts written off against the allowance, net of recoveries (2,385) Balance at September 30, 2024 $ 32,702 Contract Assets and Contract Liabilities The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts are not yet billable 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 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. Net contract liabilities in the accompanying Consolidated Balance Sheets consisted of the following amounts as of September 30, 2024 and December 31, 2023 (in thousands): September 30, December 31, 2023 Contract assets, current $ 296,523 $ 269,885 Contract assets, non-current — — Contract liabilities, current (1,881,444) (1,595,109) Contract liabilities, non-current (1,995) (1,812) Net contract liabilities $ (1,586,916) $ (1,327,036) Contract assets and contract liabilities increased by approximately $3.3 million and $29.5 million, respectively, as a result of acquisitions made by us in 2024. Excluding the impact of acquisitions, net contract liabilities increased by approximately $233.6 million during the nine months ended September 30, 2024, primarily due to an increase in net contract liabilities on our uncompleted construction projects, partially as a result of the timing of invoicing to our customers as we continue to effectively manage our working capital. There was no significant impairment of contract assets recognized during the periods presented. NOTE 3 - Revenue from Contracts with Customers (Continued) Transaction Price Allocated to 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 percentages of total remaining performance obligations as of September 30, 2024 (in thousands, except for percentages): September 30, % of Total Remaining performance obligations: United States electrical construction and facilities services $ 2,767,672 28 % United States mechanical construction and facilities services 5,362,689 55 % United States building services 1,334,163 14 % United States industrial services 110,583 1 % Total United States operations 9,575,107 98 % United Kingdom building services 214,345 2 % Total operations $ 9,789,452 100 % Our remaining performance obligations at September 30, 2024 were approximately $9.79 billion. 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 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 as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us. 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 |
