Primoris Services Corp (PRIM) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included in Item 8 in this Annual Report on Form 10-K. This discussion includes forward-looking statements that are based on current expectations and are subject to uncertainties and unknown or changed circumstances. For a further discussion, please see “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those risks inherent with our business as discussed in “Item 1A Risk Factors”.

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The following discussion starts with an overview of our business and a discussion of trends, including seasonality, that affect our industry. That is followed by an overview of the critical accounting policies and estimates that we use to prepare our financial statements. Next we discuss our results of operations and liquidity and capital resources, including our off-balance sheet arrangements and contractual obligations. We conclude with a discussion of our outlook and backlog.

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Introduction

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

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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.

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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.

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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.

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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.

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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. For the years ended December 31, 2023, 2022, and 2021, $3.9 billion, $2.7 billion, and $2.1 billion, respectively 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

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contracts, or an output basis based on units completed. Costs to obtain contracts are generally not significant and are expensed in the period incurred.

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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.

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Acquisition of PLH

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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 infrastructure services company with concentrations 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 “ New 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.

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Acquisition of B Comm Holdco, LLC

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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.

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Acquisition of Alberta Screw Piles, Ltd.

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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.

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Acquisition of Future Infrastructure Holdings, LLC.

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On January 15, 2021, we acquired Future Infrastructure Holdings, LLC (“FIH”) for approximately $604.7 million, net of cash acquired. FIH was incorporated into our Utilities segment and is a provider of non-discretionary maintenance, repair, upgrade, and installation services to the communications, regulated gas utility, and infrastructure markets. FIH furthers our strategic plan to expand our service lines, enter new markets, and grow our MSA revenue base. The transaction directly aligns with our strategy to grow in large, higher growth, higher margin markets, and expands our utility services capabilities. The total purchase price was funded through a combination of existing cash balances, borrowings under our Term Loan facility, and borrowings under our Revolving Credit Facility.

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Business Environment

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We believe there are growth opportunities across the industries we serve and we continue to have a positive long-term outlook. Although not without risks and challenges, including those discussed below and in Forward-Looking Statements and included in Item 1A. Risk Factors, we believe, with our full-service operations, broad geographic reach, financial position and technical expertise, we are well positioned to capitalize on opportunities and trends in our industries.

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We have seen and continue to anticipate potential changes to the already stringent regulatory and environmental requirements for many of our clients’ infrastructure projects, which may improve the timing and certainty of the projects. While permitting and other regulatory challenges create uncertainty as to the timing of some of our opportunities, we continue to see bidding activity for numerous midstream pipeline projects. We believe that we have the financial and operational strength to meet the challenge of either short-term delays or the impact of significant increases in work. We continue to be optimistic about both short and longer-term opportunities. Our current view of the outlook for our major end markets is as follows:

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Material Trends and Uncertainties

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We generate our revenue from construction and engineering projects, as well as from providing a variety of infrastructure services. We depend in part on spending by companies in the communications, gas and electric utilities, energy, chemical, and pipeline industries, as well as state departments of transportation. 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 pipeline 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.

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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 in 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.

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Fluctuations in the market prices of oil, gas and other fuel sources have affected demand for our services. 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 pipeline services, 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

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time, the need for pipeline infrastructure for mid-stream and gas utility companies will result in a continuing need for our services.

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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 infrastructure services, such as the need for battery storage and the construction of utility scale solar facilities.

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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 New 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 December 31, 2023, $300.0 million of our variable rate debt outstanding was economically hedged. Based on our variable rate debt outstanding as of December 31, 2023, a 1.0% increase or decrease in interest rates would change annual interest expense by approximately $5.7 million.

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Seasonality, Cyclicality and Variability

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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 infrastructure 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.

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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.

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Critical Accounting Policies and Estimates

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General—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 also 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, estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used in our accounting for revenue recognized over time, the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities and deferred income taxes. Actual results could materially differ from those that result from using the estimates under different assumptions or conditions.

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An accounting policy is deemed to be critical if i) it requires an accounting estimate to be based on assumptions about matters that are highly uncertain at the time the estimate is made, ii) different estimates could have reasonably been used, or iii) changes in the accounting estimates that are reasonably likely to occur periodically could materially impact our consolidated financial statements.

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The following accounting policies require critical accounting estimates that are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period. We periodically review these accounting policies and critical accounting estimates with the Audit Committee of the Board of Directors.

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Revenue recognition — 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.

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We evaluate whether two or more contracts should be combined and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one performance obligation. ASC 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our evaluation requires significant judgment and the decision to combine a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally we have contracts with multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the observable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct performance obligation in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation.

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Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. Total estimated costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation, politics and any prevailing impacts from pandemics or epidemics may affect the progress of a project’s completion, and thus the timing of revenue recognition. To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

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The nature of our contracts gives rise to several types of variable consideration, including contract modifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent we believe we have an enforceable right, and it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at this time.

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Contract modifications result from changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for

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goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.

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As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an “accrued loss provision” which is included in “Contract liabilities” on the Consolidated Balance Sheets. For contract revenue recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.

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At December 31, 2023, we had approximately $203.5 million of unapproved contract modifications included in the aggregate transaction prices. These unapproved contract modifications were in the process of being negotiated in the normal course of business. Approximately $175.7 million of the unapproved contract modifications had been recognized as revenue on a cumulative catch-up basis through December 31, 2023.

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In all forms of contracts, we estimate the collectability of contract amounts at the same time that we estimate project costs. If we anticipate that there may be issues associated with the collectability of the full amount calculated as the transaction price, we may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection. For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount. Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work.

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The timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is a contract asset. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.

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The caption “Contract assets” in the Consolidated Balance Sheets represents the following:

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The caption “Contract liabilities” in the Consolidated Balance Sheets represents the following:

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Business combinations—We use the fair value of the consideration paid and the fair value of the assets acquired and liabilities assumed to account for the purchase price of businesses we acquire. The determination of fair value requires estimates and judgments of future cash flow expectations for the assignment of the fair values to the identifiable tangible and intangible assets.

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Identifiable Tangible Assets. Significant identifiable tangible assets acquired would include accounts receivable, contract assets, leases and fixed assets (generally consisting of facilities and construction equipment). We determine the fair value of these assets as of the acquisition date. For current assets and current liabilities of an acquisition, we will evaluate whether the book value is equivalent to fair value due to their short term nature. We estimate the fair value of fixed assets using a market approach, based on comparable market values for similar equipment of similar condition and age.

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Identifiable Intangible Assets. When necessary, we use the assistance of an independent third-party valuation specialist to determine the fair value of the intangible assets acquired. Third-party specialists are used to help us identify and separate intangible assets apart from goodwill such as customer relationships and tradenames. Fair value is determined by analyzing revenue trends, expected growth rates for existing customers, customer attrition rates, royalty rates, discount rates and intended use of future assets.

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A liability for contingent consideration based on future earnings is estimated at its fair value at the date of acquisition, with subsequent changes in fair value recorded in earnings as a gain or loss. Fair value is estimated as of the acquisition date based on management’s best estimate of estimated earnout payments.

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Accounting principles generally accepted in the United States provide a “measurement period” of up to one year in which to finalize all fair value estimates associated with the acquisition of a business. Most estimates are preliminary until the end of the measurement period. During the measurement period, adjustments to initial valuations and estimates that reflect newly discovered information that existed at the acquisition date are recorded. After the measurement date, any adjustments would be recorded as a current period gain or loss.

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Goodwill and Indefinite-Lived Intangible Assets—Goodwill and certain intangible assets acquired in a business combination and determined to have indefinite useful lives are not amortized but are assessed for impairment annually and more frequently if triggering events occur. In performing these assessments, management relies on various factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill for impairment. Since judgment is involved in performing fair value measurements used in goodwill impairment analyses, there is risk that the carrying values of our goodwill may not be properly stated.

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We account for goodwill, including evaluation of any goodwill impairment under ASC 350, “Intangibles — Goodwill and Other”, performed at the reporting unit level for those units with recorded goodwill as of October 1 of each year, unless there are indications requiring a more frequent impairment test.

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Under ASC 350, we can assess qualitative factors to determine if a quantitative impairment test of intangible assets is necessary. Our qualitative assessment is used to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying value, including goodwill. Factors used in our qualitative assessment include, but are not limited to, macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and Company and reporting unit specific events. If deemed necessary, we use the quantitative impairment test outlined in ASC 350, which compares the fair value of a reporting unit with its carrying amount. Fair value for the goodwill impairment test is determined utilizing a discounted cash flow analysis based on our financial plan discounted using our weighted average cost of capital and market indicators of terminal year cash flows. Other valuation methods may be used to corroborate the discounted cash flow method. If the carrying amount of a reporting unit is in excess of its fair value, goodwill is considered impaired and an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill of the reporting unit.

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There were no impairments of goodwill for the years ended December 31, 2023, 2022 and 2021.

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Income taxes—We account for income taxes under the asset and liability method as set forth in ASC 740, “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting bases and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The

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effect of changes in tax rates on net deferred tax assets or liabilities is recognized as an increase or decrease in net income in the period the tax change is enacted.

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Deferred tax assets may be reduced by a valuation allowance if, in the judgment of management, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including recent financial operations, projected future taxable income, scheduled reversals of deferred tax liabilities, tax planning strategies, and the length of tax asset carryforward periods. The realization of deferred tax assets is primarily dependent upon our ability to generate sufficient future taxable earnings in certain jurisdictions. If we subsequently determine that some or all deferred tax assets that were previously offset by a valuation allowance are realizable, the value of the deferred tax assets would be increased by reducing the valuation allowance, thereby increasing income in the period when that determination is made.

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A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained based on its technical merits in a tax examination, using the presumption that the tax authority has full knowledge of all relevant facts regarding the position. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on ultimate settlement with the tax authority. For tax positions not meeting the more likely than not test, no tax benefit is recorded. Based on our results for the year ended December 31, 2023, a one-percentage point increase in our effective tax rate would have resulted in an increase in our income tax expense of approximately $1.8 million.

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Litigation and contingencies—Litigation and contingencies are included in our consolidated financial statements based on our assessment of the expected outcome of litigation proceedings or the expected resolution of the contingency. We record costs related to contingencies when a loss from such claims is probable and the amount is reasonably estimable. In determining whether it is possible to provide an estimate of loss, or range of possible loss, we review and evaluate litigation and regulatory matters on a quarterly basis in light of potentially relevant factual and legal developments. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for a potential litigation loss. Management is unable to ascertain the ultimate outcome of other claims and legal proceedings; however, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles/self-insurance retention, management believes that it has meritorious defenses to the claims and believes that the reasonably possible outcome of such claims will not, individually or in the aggregate, have a material adverse effect on our consolidated results of operations, financial condition or cash flows. See Note 12 — “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

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Recently Issued Accounting Pronouncements

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See Note 2 — “Summary of Significant Accounting Policies – Recently Issued Accounting Pronouncements” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements.

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Results of Operations

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Consolidated Results

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Revenue

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2023 and 2022

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Revenue for the year ended December 31, 2023 increased by $1.3 billion, or 29.3%, compared to 2022. The increase was primarily due to growth in both our Energy and Utilities segments, and the acquisitions of PLH and B Comm in 2022.

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2022 and 2021

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Revenue for the year ended December 31, 2022 increased by $923.0 million, or 26.4%, compared to 2021. The increase was primarily due to growth in our Energy and Utilities segments, and the acquisitions of PLH and B Comm ($406.2 million combined) as described in the segment results below.

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Gross Profit

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2023 and 2022

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For the year ended December 31, 2023, gross profit increased by $130.6 million, or 28.6%, compared to 2022. The increase was primarily due to an increase in revenue. Gross profit as a percentage of revenue remained consistent at 10.3% compared to the same period in 2022.

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2022 and 2021

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For the year ended December 31, 2022, gross profit increased by $40.2 million, or 9.7%, compared to 2021. The increase was primarily due to an increase in revenue and the acquisitions of PLH and B Comm ($46.4 million combined), partially offset by a decrease in margins. Gross profit as a percentage of revenue decreased to 10.3% from 11.9% in the same period in 2021 primarily as a result of negative gross margins experienced on pipeline projects in 2022, increased labor and fuel costs in our Utilities segment, and the favorable impact from the closeout of multiple pipeline projects in 2021, as more fully described in the segment results below.

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In addition, we had a favorable impact from the change in useful lives of certain equipment, which reduced our depreciation expense for the year ended December 31, 2022 by $19.3 million compared to the same period in 2021. See Note 2 — “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Selling, general and administrative expenses

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Selling, general and administrative expenses (“SG&A”) consist primarily of compensation and benefits to executive, management level and administrative employees, marketing and communications, professional fees, rent for facilities and utilities.

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2023 and 2022

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SG&A expenses were $328.7 million for the year ended December 31, 2023, an increase of $47.2 million, or 16.7% compared to 2022, primarily due to higher incentive compensation costs associated with improved operational performance and increases in headcount from the acquisitions of PLH and B Comm. SG&A expense as a percentage of revenue for the year ended December 31, 2023 decreased to 5.8% compared to 6.4% for the year ended December 31, 2022, primarily due to increased revenue.

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2022 and 2021

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SG&A expenses were $281.6 million for the year ended December 31, 2022, an increase of $51.5 million, or 22.4% compared to 2021, primarily due to the increases in headcount from the acquisitions of PLH and B Comm ($28.3 million) and increased costs to support our strong organic growth. SG&A expense as a percentage of revenue for the year ended December 31, 2022 decreased to 6.4% compared to 6.6% for the year ended December 31, 2021, primarily due to increased revenue.

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Transaction and related costs

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2023 and 2022

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Transaction and related costs for the year ended December 31, 2023 were $5.7 million, a decrease of $14.4 million or 71.7% compared to 2022. The decrease was due to professional fees paid to advisors for the acquisitions of B Comm and PLH in 2022.

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2022 and 2021

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Transaction and related costs for the year ended December 31, 2022 were $20.1 million, an increase of $3.7 million or 22.3% compared to 2021, primarily due to an increase in professional fees paid to advisors for the acquisitions of PLH and B Comm.

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Gain on Sale and Leaseback Transaction

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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 Consolidated Statements of Income for the year ended December 31, 2022. There were no such comparable transactions for the years ended December 31, 2023 and 2021.

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Other income and expense

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Non-operating income and expense items for the years ended December 31, 2023, 2022 and 2021 were as follows (in millions):

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Interest expense, net for the year ended December 31, 2023 was $78.2 million compared to $39.2 million for the year ended December 31, 2022. The increase of $39.0 million was due primarily to higher average debt balances from the borrowings related to the PLH acquisition and higher average interest rates.

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Interest expense, net for the year ended December 31, 2022 was $39.2 million compared to $18.5 million for the year ended December 31, 2021. The increase of $20.7 million was due primarily to higher average debt balances from the borrowings related to the PLH acquisition and a higher average interest rate.

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The weighted average interest rate on total debt outstanding at December 31, 2023, 2022 and 2021 was 6.8%, 6.2% and 2.8%, respectively.

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Provision for income taxes

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Our provision for income taxes increased $25.3 million to $51.5 million for 2023 compared to 2022. The increase was primarily driven by the tax benefit recognized in 2022 for capital losses, the 2023 expiration of a temporary law which allowed full deductibility of per diem expenses in 2021 and 2022, and increased pre-tax profits subject to tax. The 2023 effective tax rate was 29%.

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Our provision for income taxes decreased $9.8 million to $26.3 million for 2022 compared to 2021. The decrease was primarily driven by the release of valuation allowances during the second and third quarters of 2022, partially offset by tax on increased pre-tax profits. Due to capital gains on the sale of California properties in 2022, we have released all of the valuation allowance previously placed on capital losses and recognized a 5.8% decrease in our 2022 annual effective tax rate. The 2022 effective tax rate was 16.5%.

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Segment Results

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Utilities Segment

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Revenue and gross profit for the Utilities segment for the years ended December 31, 2023, 2022 and 2021 were as follows:

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2023 and 2022

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Revenue increased by $355.9 million, or 17.6%, during 2023 compared to 2022. The increase is primarily due to the acquisitions of PLH and B Comm in 2022 and increased activity in our power delivery and communications markets.

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Gross profit decreased $3.7 million, or 1.8%, during 2023 compared to 2022. The decrease is primarily due to a decrease in margins, partially offset by growth in revenue. Gross profit as a percentage of revenue decreased to 8.7% in 2023 compared to 10.4% 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 revenue mix in 2023.

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2022 and 2021

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Revenue increased by $366.3 million, or 22.1%, during 2022 compared to 2021. The increase is primarily due to the acquisitions of PLH and B Comm ($260.7 million combined) in 2022 and increased activity across the power delivery and communications markets.

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Gross profit increased $24.4 million, or 13.1%, during 2022 compared to 2021. The increase is primarily attributable to the incremental impact of the PLH and B Comm acquisitions ($26.2 million), partially offset by lower margins. Gross profit as a percentage of revenue decreased to 10.4% in 2022 compared to 11.2% in 2021 primarily due to increased fuel and labor costs from the inflationary environment we experienced in 2022. A substantial majority of the work done in our Utilities segment is performed over longer term MSA contracts. These MSA contracts generally have escalation provisions that allow us to adjust billing rates annually, but typically the annual adjustment is 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. Due to the inflationary environment we experienced in 2022, our actual cost increases exceeded the contractual caps, and therefore negatively impacted gross margins. We were successful in renegotiating some of our major contracts to address the increased fuel and labor costs on future work and continue to address this with our utility customers.

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Energy Segment

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Revenue and gross profit for the Energy segment for the years ended December 31, 2023, 2022 and 2021 were as follows:

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2023 and 2022

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Revenue increased by $938.8 million, or 39.2%, during 2023 compared to 2022, primarily due to increased renewable energy, industrial, and pipeline activity and the PLH acquisition.

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Gross profit increased by $134.3 million, or 54.5% during 2023 compared to 2022, due to higher revenue and margins. Gross profit as a percentage of revenue increased to 11.4% in 2023 compared to 10.3% in 2022, primarily due to significant growth in higher margin renewable energy work, strong performance on a pipeline project in the mid-Atlantic in 2023, 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.

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2022 and 2021

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Revenue increased by $556.6 million, or 30.3%, during 2022 compared to 2021, due to increased renewable energy activity ($430.1 million), the PLH acquisition ($145.4 million), and increased activity on electric power plants and hydrogen plants, partially offset by the substantial completion of pipeline projects in 2021 and a decline in midstream pipeline market demand.

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Gross profit increased by $15.8 million, or 6.8%, during 2022 compared to 2021, primarily due to higher revenue. Gross profit as a percentage of revenue decreased to 10.3% in 2022 compared to 12.5% in 2021, primarily due to the favorable impact from the closeout of multiple pipeline projects in 2021, higher costs on a project in the Mid-Atlantic from unfavorable weather conditions experienced in 2022 and lower than anticipated volumes in 2022, which lead to higher relative carrying costs for equipment and personnel. The decrease was partially offset by increased revenue on higher margin renewable energy projects in 2022 and higher costs associated with an LNG plant project in the Northeast in 2021.

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Liquidity and Capital Resources

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Cash Needs

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Liquidity represents our ability to pay our liabilities when they become due, fund business operations, 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 December 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $51.6 million, and available borrowing capacity was $273.4 million.

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In June 2023, we entered into an Accounts Receivable Facility (the “Facility”) with PNC Bank, National Association (“PNC”) to reduce interest costs and 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 $75.0 million as of December 31, 2023. As of December 31, 2023, we had $25.0 million in available capacity under the Facility.

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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 our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.

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Our cash and cash equivalents totaled $217.8 million at December 31, 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.

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The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services. In 2023, we spent approximately $103.0 million for capital expenditures, which included $34.0 million for construction equipment. Capital expenditures are expected to total between $80.0 million and $100.0 million for 2024, which includes $20.0 million to $40.0 million for construction equipment.

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Cash Flows

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Cash flows during the years ended December 31, 2023, 2022 and 2021 are summarized as follows (in millions):

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Operating Activities

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The sources and uses of cash flow associated with operating activities for the years ended December 31, 2023, 2022 and 2021 were as follows (in millions):

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2023 and 2022

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Net cash provided by operating activities for 2023 was $198.6 million, an increase of $115.3 million compared to 2022. The change year-over-year was primarily due to improvement in the impact from the changes in assets and liabilities and the inclusion of $40.1 million of gain on a sale and leaseback transaction in 2022 net income.

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The significant components of the $0.1 million change in assets and liabilities for the year ended December 31, 2023 are summarized as follows:

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2022 and 2021

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Net cash provided by operating activities for 2022 was $83.3 million, an increase of $3.6 million compared to 2021. The change year-over-year was primarily due to improvement in the impact from the changes in assets and liabilities, partially offset by a decrease in net income (after adjusting for cash from gains reported in investing activities).

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The significant components of the $79.0 million change in assets and liabilities for the year ended December 31, 2022 are summarized as follows:

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Investing activities

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Net cash used in investing activities was $30.0 million, $481.9 million, and $691.3 million in the years ended December 31, 2023, 2022 and 2021, respectively.

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During 2023, we received $9.3 million from a net working capital true-up related to the PLH acquisition.

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During 2022, we used $478.4 million for acquisitions, primarily for the acquisitions of PLH and B Comm.

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During 2021, we used $607.0 million for the acquisition of FIH.

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We purchased property and equipment for $103.0 million, $94.7 million and $133.8 million in the years ended December 31, 2023, 2022 and 2021, respectively, principally for our construction activities and facilities investment. 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.

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We periodically sell assets, typically to update our fleet. We received proceeds from the sale of assets of $63.7 million, $41.3 million and $49.5 million for 2023, 2022 and 2021, respectively. Additionally, we received net proceeds of $49.9 million from a sale and leaseback transaction of land and buildings during the year ended December 31, 2022.

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Financing activities

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Financing activities used cash of $205.3 million in 2023, which was primarily due to the following:

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Financing activities provided cash of $452.0 million in 2022, which was primarily due to the following:

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Financing activities provided cash of $485.8 million in 2021, which was primarily due to the following:

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Debt Activities

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Credit Agreement

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On August 1, 2022, we entered into the Amended Credit Agreement with CIBC Bank USA, as administrative agent (the “Administrative Agent”) and co-lead arranger, and the financial parties thereto (collectively, the “Lenders”) that increased the Term Loan by $439.5 million to an aggregate principal amount of $945.0 million. The Amended Credit Agreement is scheduled to mature on August 1, 2027.

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In addition to the New Term Loan, the Amended Credit Agreement increased the existing $200.0 million Revolving Credit Facility, whereby the Lenders agreed to make loans on a revolving basis from time to time and to issue letters of credit, to $325.0 million. At December 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $51.6 million, and available borrowing capacity was $273.4 million.

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Under the Amended Credit Agreement, we must make quarterly principal payments on the New Term Loan in an amount equal to approximately $11.8 million, with the balance due on August 1, 2027. The proceeds from the New Term Loan and additional borrowings under the Revolving Credit Facility were used to finance the acquisition of PLH.

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We capitalized $6.5 million of debt issuance costs during the third quarter of 2022 associated with the Amended Credit Agreement that is being amortized as interest expense over the life of the Amended Credit Agreement. In addition, we recorded a loss on extinguishment of debt during the third quarter of 2022 of $0.8 million related to the Amended Credit Agreement.

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The principal amount of all loans under the Amended Credit Agreement will bear interest at either: (i) the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin as specified in the Amended Credit Agreement (based on our net senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio as defined in the Amended Credit Agreement), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.50% or (b) the prime rate as announced by the Administrative Agent) plus an applicable margin as specified in the Amended Credit Agreement. Quarterly non-use fees, letter of credit fees and administrative agent fees are payable at rates specified in the Amended Credit Agreement.

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The principal amount of any loan drawn under the Amended Credit Agreement may be prepaid in whole or in part at any time, with a minimum prepayment of $5.0 million.

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Loans made under the Amended Credit Agreement are secured by our assets, including, among others, our cash, inventory, equipment (excluding equipment subject to permitted liens), and accounts receivable. Certain subsidiaries have issued joint and several guaranties in favor of the Lenders for all amounts under the Amended Credit Agreement.

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The Amended Credit Agreement contains various restrictive and financial covenants including, among others, a net senior debt/EBITDA ratio and minimum EBITDA to cash interest ratio. In addition, the Amended Credit Agreement includes restrictions on investments, change of control provisions and provisions in the event we dispose of more than 20% of our total assets.

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We were in compliance with the covenants for the Amended Credit Agreement at December 31, 2023.

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On January 31, 2023, we entered into an interest rate swap agreement to manage our exposure to the fluctuations in variable interest rates. The swap effectively exchanged the interest rate on $300.0 million of the debt outstanding under our New Term Loan from variable to a fixed rate of 4.095% per annum, plus an applicable margin which was 2.25% at December 31, 2023. The interest rate swap matures on January 31, 2025.

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Canadian Credit Facilities

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We have credit facilities totaling $14.0 million in Canadian dollars for the purposes of issuing commercial letters of credit and providing funding for working capital. At December 31, 2023, commercial letters of credit outstanding were $0.9 million in Canadian dollars and there were no outstanding borrowings. Available capacity at December 31, 2023 was $13.1 million in Canadian dollars.

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Contractual Obligations

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As of December 31, 2023, we had $964.7 million of outstanding long-term debt, and there were no short-term borrowings.

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A summary of contractual obligations as of December 31, 2023 is as follows (in millions):

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The summary does not include potential obligations under multi-employer pension plans in which some of our employees participate. Our multi-employer pension plan contribution rates are generally specified in our collective bargaining agreements, and contributions are made to the plans based on employee payrolls. Our obligations for future periods cannot be determined because we cannot predict the number of employees that we will employ at any given time nor the plans in which they may participate.

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We may also be required to make additional contributions to multi-employer pension plans if they become underfunded, and these contributions will be determined based on our union payroll. The Pension Protection Act of 2006 added special funding and operational rules for multi-employer plans that are classified as “endangered,” “seriously endangered” or “critical” status. Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, which may require additional contributions from employers. The amounts of additional funds that we may be obligated to contribute cannot be reasonably estimated and is not included in the table above.

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Off Balance Sheet Arrangements

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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.

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Backlog

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For infrastructure services contractors, backlog can be an indicator of future revenue streams. Different companies define and calculate backlog in different manners. We define backlog as 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 the estimated revenue on MSA work (“MSA Backlog”). We present two measures of backlog; one that includes Fixed Backlog and MSA Backlog for the next twelve months, and total backlog that includes all Fixed Backlog and MSA Backlog to the end of the MSA agreement. We do not consider renewals when estimating MSA Backlog. We do not include certain contracts in the calculation of fixed backlog where scope, and therefore contract value, is not adequately defined. We estimate MSA Backlog based on historical trends, anticipated seasonal impacts and estimates of customer demand based on information from our customers.

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Fixed and MSA Backlog by reporting segment for the periods ending December 31, 2023 and 2022 were as follows (in millions):

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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 MSAs, 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 are typically reimbursed for all of our costs through a specific date, as well as all reasonable costs associated with demobilizing from the jobsite, 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 projects where scope, and therefore contract value, is not adequately defined may not be included in our estimated backlog amount.

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Effects of Inflation and Changing Prices

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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.

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