Primoris Services Corp: Form 10-Q for the period ended Sep 30, 2023

Forward Looking Statements

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 (“Third Quarter 2023 Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and usually can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.

Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially as a result of a number of factors, including, among other things, customer timing, project duration, weather, and general economic conditions; changes in our mix of customers, projects, contracts and business; regional or national and/or general economic conditions and demand for our services; price, volatility, and expectations of future prices of oil, natural gas, and natural gas liquids; variations and changes in the margins of projects performed during any particular quarter; increases in the costs to perform services caused by changing conditions; the termination, or expiration of existing agreements or contracts; the budgetary spending patterns of customers; inflation and other increases in construction costs that we may be unable to pass through to our customers; cost or schedule overruns on fixed-price contracts; availability of qualified labor for specific projects; changes in bonding requirements and bonding availability for existing and new agreements; the need and availability of letters of credit; increases in interest rates and slowing economic growth or recession; the instability in the banking system as a result of recent bank failures; costs we incur to support growth, whether organic or through acquisitions; the timing and volume of work under contract; losses experienced in our operations; the results of the review of prior period accounting on certain projects and the impact of adjustments to accounting estimates; developments in governmental investigations and/or inquiries; intense competition in the industries in which we operate; failure to obtain favorable results in existing or future litigation or regulatory proceedings, dispute resolution proceedings or claims, including claims for additional costs; failure of our partners, suppliers or subcontractors to perform their obligations; cyber-security breaches; failure to maintain safe worksites; risks or uncertainties associated with events outside of our control, including conflicts in the Gaza Strip and between Russia and Ukraine, severe weather conditions, public health crises and pandemics, political crises or other catastrophic events; client delays or defaults in making payments; the cost and availability of credit and restrictions imposed by credit facilities; failure to implement strategic and operational initiatives; risks or uncertainties associated with acquisitions, dispositions and investments; possible information technology interruptions or inability to protect intellectual property; the Company’s failure, or the failure of our agents or partners, to comply with laws; the Company's ability to secure appropriate insurance; new or changing legal requirements, including those relating to environmental, health and safety matters; the loss of one or a few clients that account for a significant portion of the Company's revenues; asset impairments; and risks arising from the inability to successfully integrate acquired businesses. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the Securities and Exchange Commission (“SEC”). You should read this Third Quarter 2023 Report, our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Third Quarter 2023 Report. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and the accompanying notes included in Part 1, Item 1 of this Third Quarter 2023 Report and our Annual Report on Form 10-K for the year ended December 31, 2022.

Introduction

We are one of the leading providers of specialty contracting services operating mainly in the United States and Canada. We provide a wide range of specialty construction services, maintenance, replacement, fabrication and engineering services to a diversified base of customers.

Through the end of 2022, we segregated our business into three reportable segments: the Utilities segment, the Energy/Renewables segment, and the Pipeline segment. In the first quarter of 2023, we changed our reportable segments in connection with the realignment of our internal organization and management structure. The segment changes reflect the focus of our Chief Operating Decision Maker (“CODM”) on the range of services we provide to our end user markets. Our CODM regularly reviews our operating and financial performance based on these new segments.

The current reportable segments include the Utilities segment and the Energy segment, which is made up of our former Energy/Renewables and Pipeline Services segments. The Utilities segment operates throughout the United States and specializes in a range of services, including the installation and maintenance of new and existing natural gas and electric utility distribution and transmission systems, and communication systems.

The Energy segment operates throughout the United States and in Canada and specializes in a range of services that include engineering, procurement, and construction, retrofits, highway and bridge construction, demolition, site work, soil stabilization, mass excavation, flood control, upgrades, repairs, outages, pipeline construction and maintenance, pipeline integrity services, and maintenance services for entities in the renewable energy and energy storage, renewable fuels, and petroleum and petrochemical industries, as well as state departments of transportation.

We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies in the United States, major electrical and gas projects for a number of large utility companies in the United States, significant renewable energy projects for energy companies, as well as projects for our engineering customers. We enter into a large number of contracts each year, and the projects can vary in length from daily work orders to as long as 36 months, and occasionally longer, for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers tend to constitute a substantial portion of our total revenue in any given year.

We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts, each of which has a different risk profile. A portion of our revenue is derived from contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value. For these contracts, revenue is recognized over time as work is completed because of the continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For certain contracts, where scope is not adequately defined and we can’t reasonably estimate total contract value, revenue is recognized either on an input basis, based on contract costs incurred as defined within the respective contracts, or an output basis based on units completed. Costs to obtain contracts are generally not significant and are expensed in the period incurred.

The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.

Acquisition of PLH

On August 1, 2022, we acquired PLH Group, Inc. (“PLH”) in an all-cash transaction valued at approximately $429.0 million, net of cash acquired. PLH is a utility-focused specialty construction company with concentration in key fast-growing regions of the United States. The transaction directly aligns with our strategic focus on higher-growth, higher margin markets and expands our capabilities in the utility markets including power delivery, communications, and gas utilities. The total purchase price was funded through a combination of borrowings under our Third Amended and Restated Credit Agreement, dated as of August 1, 2022, which increased our term loan to an aggregate principal amount of $945.0 million (the “Term Loan”) and borrowings under our revolving credit facility, in which the lenders agreed to make loans on a revolving basis from time to time and to issue letters of credit for up to $325.0 million (the “Revolving Credit Facility”). We incorporated the majority of the PLH operations into our Utilities segment with the remaining operations going to our Energy segment.

Acquisition of B Comm Holdco, LLC

On June 8, 2022, we acquired B Comm Holdco, LLC (“B Comm”) in an all-cash transaction of approximately $36.0 million, net of cash acquired. B Comm was incorporated into our Utilities segment and is a provider of maintenance, repair, upgrade and installation services to the communications markets. The transaction directly aligns with the strategy to grow our Master Services Agreement (“MSA”) revenue base and expand our communication services within the utility markets. The total purchase price was funded with borrowings under our Revolving Credit Facility.

Acquisition of Alberta Screw Piles, Ltd.

On March 1, 2022, we acquired Alberta Screw Piles, Ltd. (“ASP”) for a cash price of approximately $4.1 million. In addition, the sellers could receive a contingent earnout payment of up to $3.2 million based on achievement of certain operating targets over the one year periods ending March 1, 2023 and March 1, 2024, respectively. We incorporated the operations of ASP into our Energy segment.

Material trends and uncertainties

We generate our revenue from construction and engineering projects, as well as from providing a variety of specialty construction services. We depend in part on spending by companies in the communications, gas and electric utilities, energy, chemical, and oil and gas industries, as well as state departments of transportation and municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, more reliable gas and electric utility infrastructure, upgraded and expanded local highway and bridge needs, and from the activity level in the oil and gas industry. However, periodically, each of these industries and government agencies is adversely affected by macroeconomic conditions. Economic and other factors outside of our control may affect the amount and size of contracts we are awarded in any particular period.

We actively monitor the impact of the dynamic macroeconomic environment, including the impact of inflation and the instability in the banking sector, on all aspects of our business. We have experienced increased fuel and labor costs and anticipate that elevated levels of cost inflation could persist into 2024. In an effort to mitigate the impacts of inflation on our operations, we attempt to recover increases in the cost of labor, equipment, fuel and materials through price escalation provisions that allow us to adjust billing rates for certain major contracts annually; by considering the estimated effect of such increases when bidding or pricing new work; or by entering into back-to-back contracts with suppliers and subcontractors. However, the annual adjustment provided by certain contracts is typically subject to a cap and there can be an extended period of time between the impact of inflation on our costs and when billing rates are adjusted. In some cases, our actual cost increases have exceeded the contractual caps, and therefore negatively impacted our operations. We have been successful in renegotiating some of our major contracts to address the increased costs on future work and will continue to address this with our customers going forward.

Fluctuations in the market prices of oil, gas and other fuel sources have affected demand for our services. While we have seen a recovery in the price of oil and natural gas, the volatility in the prices of oil, gas, and liquid natural gas that has occurred in the past few years could create uncertainty with respect to demand for our oil and gas pipeline services, specifically in our pipeline services operations, both in the near term and for future projects. While the construction of gathering lines within the oil shale formations may remain at lower levels for an extended period, we believe that over time, the need for pipeline infrastructure for mid-stream and gas utility companies will result in a continuing need for our services.

The continuing changes in the regulatory environment have affected the demand for our services, either by increasing our work, delaying projects, or cancelling projects. For example, environmental laws and regulations have provided challenges to pipeline projects, resulting in delays or cancellations that impact the timing of revenue recognition. However, environmental laws and new pipeline regulations could increase the demand for our pipeline maintenance and integrity services. In addition, the regulatory environment in certain states has resulted in delays for the construction of gas-fired power plants. However, the increased demand for renewable resources is also creating demand for our construction and specialty services, such as the need for battery storage and the construction of utility scale and distributed generation solar facilities.

We are exposed to certain market risks related to changes in interest rates. To monitor and manage these market risks, we have established risk management policies and procedures. Our Revolving Credit Facility and Term Loan bear interest at a variable rate which exposes us to interest rate risk. From time to time, we may use certain derivative instruments to hedge our exposure to variable interest rates. As of September 30, 2023, $300.0 million of our variable rate debt outstanding was economically hedged. Based on our variable rate debt outstanding as of September 30, 2023, a 1.0% increase or decrease in interest rates would change annual interest expense by approximately $7.2 million.

Seasonality, cyclicality and variability

Our results of operations are subject to quarterly variations. Some of the variation is the result of weather, particularly rain, ice, snow, and named storms, which can impact our ability to perform construction and specialty services. These seasonal impacts can affect revenue and profitability in all of our businesses. Any quarter can be affected either negatively, or positively by atypical weather patterns in any part of the country. In addition, demand for new projects in our Utilities segment tends to be lower during the early part of the calendar year due to clients’ internal budget cycles. As a result, we usually experience higher revenue and earnings in the second, third and fourth quarters of the year as compared to the first quarter.

Our project values range in size from several hundred dollars to several hundred million dollars. The bulk of our work is comprised of project sizes that average less than $3.0 million. We also perform construction projects which tend not to be seasonal, but can fluctuate from year to year based on customer timing, project duration, weather, and general economic conditions. Our business may be affected by declines, or delays in new projects, or by client project schedules. Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and our financial condition and operating results may vary from quarter to quarter. Results from one quarter may not be indicative of our financial condition, or operating results for any other quarter, or for an entire year.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and that affect the amounts of revenue and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ significantly from our estimates, and our estimates could change if they were made under different assumptions or conditions. Our critical accounting policies and estimates are described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies and estimates since December 31, 2022.

Results of Operations

Consolidated Results

The following discussion compares the results of the three and nine months ended September 30, 2023, to the three and nine months ended September 30, 2022.

Revenue

Revenue was $1,529.5 million for the three months ended September 30, 2023, an increase of $245.4 million, or 19.1%, compared to the same period in 2022. The increase was primarily due to revenue growth in both our Energy and Utilities segments, and the acquisition of PLH in August 2022.

Revenue was $4,199.8 million for the nine months ended September 30, 2023, an increase of $1,108.3 million, or 35.9%, compared to the same period in 2022. The increase was primarily due to revenue growth in both segments, and the acquisitions of PLH and B Comm in August 2022 and June 2022, respectively.

Gross Profit

Gross profit was $173.9 million for the three months ended September 30, 2023, an increase of $19.0 million, or 12.3%, compared to the same period in 2022. The increase was primarily due to an increase in revenue and the acquisition of PLH. Gross profit as a percentage of revenue decreased to 11.4% for the three months ended September 30, 2023, compared to 12.1% for the same period in 2022 primarily driven by a decrease in margins in our Utilities segment, partially offset by an increase in margins in our Energy segment.

Gross profit was $430.9 million for the nine months ended September 30, 2023, an increase of $127.4 million, or 42.0%, compared to the same period in 2022. The increase was primarily due to an increase in revenue. Gross profit as a percentage of revenue increased to 10.3% for the nine months ended September 30, 2023, compared to 9.8% for the same period in 2022 driven by improved margins in our Energy segment.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $84.4 million during the three months ended September 30, 2023, an increase of $8.7 million, or 11.5% compared to 2022 primarily due to higher incentive compensation costs associated with improved operational performance and an increase in headcount. SG&A expenses as a percentage of revenue decreased to 5.5% compared to 5.9% for the corresponding period in 2022 due to increased revenue.

SG&A expenses were $248.0 million during the nine months ended September 30, 2023, an increase of $57.1 million, or 29.9% compared to 2022 primarily due to the acquisitions of PLH and B Comm. Also contributing to the increase was higher incentive compensation costs associated with improved operational performance and an increase in headcount. SG&A expenses as a percentage of revenue decreased to 5.9% compared to 6.2% for the corresponding period in 2022 primarily due to increased revenue.

Transaction and related costs

Transaction and related costs were $1.1 million and $12.7 million for the three months ended September 30, 2023, and 2022, respectively. The decrease was due to professional fees paid to advisors for the acquisition of PLH in 2022.

Transaction and related costs were $4.7 million and $18.2 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease was due to professional fees paid to advisors for the acquisitions of B Comm and PLH in 2022.

Gain on Sale and Leaseback Transaction

On June 22, 2022, we completed a sale and leaseback transaction of land and buildings located in Carson, California for an aggregate sales price, net of closing costs, of $49.9 million. Under the transaction, the land, buildings, and improvements were sold and leased back for an initial term of three years. The property qualified for sale and leaseback treatment and is classified as an operating lease. Therefore, we recorded a gain on the transaction of $40.1 million. The gain is included in “Gain on sale and leaseback transaction” on our Condensed Consolidated Statements of Income for the nine months ended September 30, 2022.

Other income and expense

Non-operating income and expense items for the three and nine months ended September 30, 2023, and 2022 were as follows (in thousands):

Interest expense, net for the three months ended September 30, 2023, increased $8.0 million compared to the same period in 2022 primarily due to higher average debt balances from the borrowings incurred related to the PLH acquisition and higher average interest rates.

Interest expense, net for the nine months ended September 30, 2023, increased $35.8 million compared to the same period in 2022 primarily due to higher average debt balances from the borrowings incurred related to the PLH acquisition and higher average interest rates.

Provision for income taxes

We are subject to tax liabilities imposed by multiple jurisdictions. We determine our best estimate of the annual effective tax rate at each interim period using expected annual pre-tax earnings, statutory tax rates and available tax planning opportunities. Certain significant or unusual items are separately recognized in the quarter in which they occur, which can cause variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as income tax expense.

The effective tax rate for the nine-month period ended September 30, 2023, of 29.0% differs from the U.S. federal statutory rate of 21.0% primarily due to the impact of state income taxes and nondeductible components of per diem expenses. For the first nine months of 2022, our effective tax rate of 19.6% differed from the U.S. federal statutory rate of 21.0% primarily due to state income taxes net of the effects of a release in valuation allowances during the second and third quarters of 2022.

We recorded income tax expense for the nine months ended September 30, 2023, of $36.1 million compared to income tax expense of $22.3 million for the nine months ended September 30, 2022. The $13.8 million increase in income tax expense is primarily driven by a higher effective tax rate in 2023 and by a $10.8 million increase in pretax income.

Segment results

Utilities Segment

Revenue and gross profit for the Utilities segment for the three and nine months ended September 30, 2023, and 2022 were as follows:

Revenue increased by $31.6 million, or 5.2%, for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to increased activity in power delivery and the acquisition of PLH in 2022.

Revenue increased by $365.9 million, or 25.3%, for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to the acquisitions of PLH and B Comm in 2022 and increased activity in our power delivery and communications markets.

Gross profit for the three months ended September 30, 2023, decreased by $13.4 million, or 17.2%, compared to the same period in 2022, primarily due to a decrease in margins, partially offset by growth in revenue. Gross profit as a percentage of revenue decreased to 10.0% during the three months ended September 30, 2023, compared to 12.7% in the same period in 2022, primarily due to productivity issues on some legacy PLH projects that are nearing completion and a shift in the revenue mix in 2023.

Gross profit for the nine months ended September 30, 2023, increased by $23.5 million, or 16.7%, compared to the same period in 2022, primarily due to revenue growth, partially offset by a decrease in margins. Gross profit as a percentage of revenue decreased to 9.1% during the nine months ended September 30, 2023, compared to 9.7% in the same period in 2022, primarily due to productivity issues on some legacy PLH projects that are nearing completion, higher costs associated with a communication project in 2023, and a shift in the revenue mix in 2023.

Energy Segment

Revenue and gross profit for the Energy segment for the three and nine months ended September 30, 2023, and 2022 were as follows:

Revenue increased by $213.7 million, or 31.8%, for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to increased renewable energy, industrial, and pipeline activity.

Revenue increased by $742.4 million, or 45.2%, for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to increased renewable energy, industrial, and pipeline activity and the PLH acquisition.

Gross profit for the three months ended September 30, 2023, increased by $32.4 million, or 42.1%, compared to the same period in 2022, primarily due to higher revenue and margins. Gross profit as a percentage of revenue increased to 12.3% during the three months ended September 30, 2023, compared to 11.5% in the same period in 2022, primarily due to growth in high margin renewable energy work, strong performance on a pipeline project in the mid-Atlantic in 2023, and higher relative carrying costs for equipment and personnel in 2022 caused by lower than anticipated pipeline volumes.

Gross profit for the nine months ended September 30, 2023, increased by $103.9 million, or 63.8%, compared to the same period in 2022, primarily due to higher revenue and margins. Gross profit as a percentage of revenue increased to 11.2% during the nine months ended September 30, 2023, compared to 9.9% in the same period in 2022, primarily due to strong performance on a pipeline project in the mid-Atlantic in 2023, and higher costs on a separate pipeline project in the mid-Atlantic from unfavorable weather conditions experienced in 2022 and higher relative carrying costs for equipment and personnel in 2022 caused by lower than anticipated pipeline volumes.

Geographic area financial information

The majority of our revenue is derived from customers in the United States with approximately 5.6% generated from sources outside of the United States during the nine months ended September 30, 2023, principally in Canada.

Backlog

For companies in the construction industry, backlog can be an indicator of future revenue streams. Different companies define and calculate backlog in different manners. We define backlog as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value (“Fixed Backlog”), and (2) the estimated revenue on MSA work for the next four quarters (“MSA Backlog”). We do not include certain contracts in the calculation of backlog where scope, and therefore contract value, is not adequately defined.

The two components of backlog, Fixed Backlog and MSA Backlog, are detailed below.

Fixed Backlog

Fixed Backlog by reportable segment as of December 31, 2022 and September 30, 2023 and the changes in Fixed Backlog for the nine months ended September 30, 2023 are as follows (in millions):

Revenue recognized from non-Fixed Backlog projects shown above is generated by MSA projects and projects completed under time and material and cost reimbursable plus fee contracts where scope, and therefore contract value, is not adequately defined, or are generated from the sale of construction materials, such as rock or asphalt to outside third parties.

At September 30, 2023, our total Fixed Backlog was $4.63 billion representing an increase of $1.05 billion, or 29.4% compared to $3.58 billion at December 31, 2022.

MSA Backlog

The following table outlines historical MSA revenue for the past seven quarters (in millions):

MSA Backlog includes anticipated MSA revenue for the next twelve months. We estimate MSA revenue based on historical trends, anticipated seasonal impacts, inflation adjustments, and estimates of customer demand based on information from our customers.

The following table shows our estimated MSA Backlog at September 30, 2023 by reportable segment (in millions):

Total Backlog

The following table shows total backlog (Fixed Backlog plus MSA Backlog), by reportable segment as of the quarter-end dates shown below (in millions):

We expect that during the next four quarters, we will recognize as revenue approximately 69% of the total backlog at September 30, 2023, composed of backlog of approximately: 100% of the Utilities segment and 56% of the Energy segment.

Backlog should not be considered a comprehensive indicator of future revenue, as a percentage of our revenue is derived from projects that are not part of a backlog calculation. The backlog estimates include amounts from estimated MSA contracts, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs. Any of our contracts may be terminated by our customers on relatively short notice. In the event of a project cancellation, we may be reimbursed for certain costs, but typically we have no contractual right to the total revenue reflected in backlog. Projects may remain in backlog for extended periods of time as a result of customer delays, regulatory requirements or project specific issues. Future revenue from certain projects completed under time and material and cost reimbursable plus fee contracts may not be included in our estimated backlog amount.

Liquidity and Capital Resources

Liquidity represents our ability to pay our liabilities when they become due, fund business operations, and meet our contractual obligations and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period and our cash flows from operating activities. If needed, we have availability under our lines of credit to augment liquidity needs. Our short-term and long-term cash requirements consist primarily of working capital, investments to support revenue growth and maintain our equipment and facilities, general corporate needs, and to service our debt obligations. At September 30, 2023, there was $120.0 million of outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $37.8 million, and available borrowing capacity was $167.2 million.

In June 2023, we entered into an Accounts Receivable Facility (the “Facility”) with PNC Bank, National Association ("PNC") to improve cash flows from trade accounts receivable. The Facility has a one-year term, and the maximum purchase commitment by PNC is $100.0 million, at any one time. Under the Facility, certain of our designated subsidiaries may sell their trade accounts receivable as they are originated to a wholly owned bankruptcy remote Special Purpose Entity created specifically for this purpose. The total outstanding balance of trade accounts receivable that have been sold and derecognized is $65.0 million as of September 30, 2023. As of September 30, 2023, we had $35.0 million in available capacity under the Facility.

In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis. We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing the borrowing capacity under our credit facilities as necessary to fund our operations or to fund the acquisition of new businesses.

Our cash and cash equivalents totaled $160.7 million at September 30, 2023, compared to $248.7 million at December 31, 2022. We anticipate that our cash and investments on hand, existing borrowing capacity under our credit facilities, and our future cash flows from operations will provide sufficient funds to enable us to meet our operating needs, our planned capital expenditures, and settle our commitments and contingencies for the next twelve months and the foreseeable future.

The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services. During the nine months ended September 30, 2023, we spent approximately $82.5 million for capital expenditures, which included $31.4 million for construction equipment. Capital expenditures for the remaining three months of 2023 are expected to total between $10 million and $20 million, which includes $5 million to $10 million for equipment.

Cash Flows

Cash flows during the nine months ended September 30, 2023 and 2022 are summarized as follows (in thousands):

Operating Activities

The cash flows used in operating activities for the nine months ended September 30, 2023 and 2022 were as follows (in thousands):

Net cash used by operating activities for the nine months ended September 30, 2023 was $7.1 million compared to $102.0 million used by operating activities for the nine months ended September 30, 2022. The change year-over-year was primarily due to improvement in the impact from the changes in assets and liabilities and an increase in net income (after adjusting for cash from gains reported in investing activities).

The significant components of the $155.0 million change in assets and liabilities for the nine months ended September 30, 2023 are summarized as follows:

• Accounts receivable increased by $185.8 million, primarily due to increased revenue and the timing of collecting from our customers;
• Contract assets increased by $128.4 million, primarily due to increased revenue;
• Contract liabilities increased $106.0 million, primarily due to higher deferred revenue;
• Other current assets decreased by $33.0 million due primarily to a $20.0 million income tax refund; and
• Accounts payable and accrued liabilities increased $16.3 million primarily due to revenue growth and the timing of our payments to vendors.

The significant components of the $206.8 million change in assets and liabilities for the nine months ended September 30, 2022, are summarized as follows:

• Contract assets increased by $148.0 million, primarily due to significant revenue growth in 2022;
• Accounts receivable increased by $122.9 million, primarily due to increased revenue;
• Other current assets increased by $98.5 million primarily due to a $82.1 million increase in prepaid material purchases related to our solar projects; and
• Accounts payable and accrued liabilities increased $173.7 million primarily due to revenue growth and the timing of payments to our vendors.

Investing activities

For the nine months ended September 30, 2023, we used $25.6 million in cash for investing activities compared to $485.0 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, we used $478.4 million for acquisitions.

During the nine months ended September 30, 2023, we purchased property and equipment for $82.5 million compared to $75.7 million during the same period in the prior year. We believe the ownership or long-term leasing of equipment is generally preferable to renting equipment on a project-by-project basis, as this strategy helps to ensure the equipment is available for our projects when needed. In addition, this approach has historically resulted in lower overall equipment costs.

We periodically sell assets, typically to update our fleet. We received proceeds from the sale of assets of $47.6 million during the nine months ended September 30, 2023, compared to $19.2 million during the same period in the prior year. Additionally, we received proceeds of $49.9 million, net from a sale and leaseback transaction of land and buildings during the nine months ended September 30, 2022.

Financing activities

Financing activities used cash of $60.0 million for the nine months ended September 30, 2023, which was primarily due to the following:

• Payments of long-term debt of $66.1 million;
• Dividend payments to our stockholders of $9.6 million; and
• Net borrowings on our credit facilities of $20.0 million.

Financing activities provided cash of $515.4 million for the nine months ended September 30, 2022, which was primarily due to the following:

• Proceeds from the entry into an amended and upsized term loan of $462.9 million, net of debt issuance costs paid;
• Net borrowings on our credit facilities of $150.1 million;
• Payment of long-term debt of $77.8 million; and
• Dividend payments to our stockholders of $9.6 million.

Credit Agreements

For a description of our credit agreements, see Note 8 — “Credit Arrangements” in Item 1, Financial Statements of this Third Quarter 2023 Report.

Common stock

For a discussion of items affecting our common stock, please see Note 12 — “Stockholders’ Equity” in Item 1, Financial Statements of this Third Quarter 2023 Report.

Off-balance sheet transactions

We enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheet. We have no off-balance sheet financing arrangement with VIEs. The following represents transactions, obligations or relationships that could be considered material off-balance sheet arrangements.

• At September 30, 2023, we had letters of credit outstanding of $38.2 million under the terms of our credit agreements. These letters of credit are used by our insurance carriers to ensure reimbursement for amounts that they are disbursing on our behalf, such as beneficiaries under our self-funded insurance program. In addition, from time to time, certain customers require us to post a letter of credit to ensure payments to our subcontractors or guarantee performance under our contracts. Letters of credit reduce our borrowing availability under our Amended Credit Agreement and our Canadian credit facilities. If these letters of credit were drawn on by the beneficiary, we would be required to reimburse the issuer of the letter of credit, and we may be required to record a charge to earnings for the reimbursement. As of the date of this Third Quarter 2023 Report, we do not believe that it is likely that any material claims will be made under a letter of credit;
• In the ordinary course of our business, we may be required by our customers to post surety bid or completion bonds in connection with services that we provide. At September 30, 2023, we had bid and completion bonds issued and outstanding totaling approximately $6.0 billion. The remaining performance obligation on those bonded projects totaled approximately $2.7 billion at September 30, 2023. As of the date of this Third Quarter 2023 Report, we do not anticipate that we would have to fund material claims under our surety arrangements;
• Certain of our subsidiaries are parties to collective bargaining agreements with unions. In most instances, these agreements require that we contribute to multi-employer pension and health and welfare plans. For many plans, the contributions are determined annually and required future contributions cannot be determined since contribution rates depend on the total number of union employees and actuarial calculations based on the demographics of all participants. The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multi-Employer Pension Amendments Act of 1980, subjects employers to potential liabilities in the event of an employer’s complete or partial withdrawal of an underfunded multi-employer pension plan. The Pension Protection Act of 2006 added new funding rules for multi-employer plans that are classified as “endangered”, “seriously endangered”, or “critical”. We do not currently anticipate withdrawal from any multi-employer pension plans. Withdrawal liabilities or requirements for increased future contributions could negatively impact our results of operations and liquidity;
• We enter into employment agreements with certain employees which provide for compensation and benefits under certain circumstances and which may contain a change of control clause. We may be obligated to make payments under the terms of these agreements; and
• From time to time, we make other guarantees, such as guaranteeing the obligations of our subsidiaries.

Effects of Inflation and Changing Prices

Our operations are affected by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, equipment, fuel and materials through price escalation provisions that allow us to adjust billing rates for certain major contracts annually; by considering the estimated effect of such increases when bidding or pricing new work; or by entering into back-to-back contracts with suppliers and subcontractors. However, the annual adjustment provided by certain contracts is typically subject to a cap and there can be an extended period of time between the impact of inflation on our costs and when billing rates are adjusted. In some cases, our actual cost increases have exceeded the contractual caps, and therefore negatively impacted our operations. We have been able to renegotiate some of our major contracts to address the increased costs on future work and will continue to address this with our customers going forward.

In the ordinary course of business, we are exposed to risks related to market conditions. These risks primarily include fluctuations in foreign currency exchange rates, interest rates and commodity prices. We may seek to manage these risks through the use of financial derivative instruments. These instruments may include foreign currency exchange contracts and interest rate swaps.

Interest rate risk. Our Revolving Credit Facility and Term Loan bear interest at a variable rate which exposes us to interest rate risk. From time to time, we may use certain derivative instruments to hedge our exposure to variable interest rates. As of September 30, 2023, $300.0 million of our variable rate debt outstanding was economically hedged. Based on our variable rate debt outstanding as of September 30, 2023, a 1.0% increase or decrease in interest rates would change annual interest expense by approximately $7.2 million.

We do not execute transactions or use financial derivative instruments for trading or speculative purposes. We generally enter into transactions with counterparties that are financial institutions as a means to limit significant exposure with any one party.

Disclosure Controls and Procedures

As of September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures”, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e).

Based on this evaluation, our CEO and CFO concluded that, at September 30, 2023, the disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting practices or processes that occurred during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.