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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
FOR----------------
ANNUAL AND TRANSITION REPORTSREPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
| |2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-23151-8267
EMCOR GROUP, INC.
EXACT(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
301 MERRITT SEVEN CORPORATE PARK 06851-1060
Norwalk, Connecticut (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 849-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)12(G) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |X| No |_|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes |_|
No |X|
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | ||_|
Indicate by check mark if disclosure of delinquent filingsfilers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any as an amendment to this
Form 10-K. |X||_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2
of the Exchange Act Rule 12b-2)Act). Yes |X| No | ||_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the registrant's voting common equitystock held by non-affiliates of
the registrant on June 30, 2004,was approximately $1,293,000,000 as of the last business day of
the registrant's most recently completed second fiscal quarter, was approximately
$670,000,000 based upon the
closing sale price on that day's closing price.the New York Stock Exchange reported for such date. Shares
of common stock held by each officer and director and by each person who owns 5%
or more of the outstanding common stock (based solely on filings of such 5%
holders) have been excluded from such calculation as such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of the registrant's common stock outstanding as of the
close of business on March 4, 2005: 15,294,118February 16, 2007: 31,840,696 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 20052007 Annual
Meeting of Stockholders, which document will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates, are incorporated by
reference into Items 10 through 14 of Part III.III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business
General ......................................................................................................... 1
Operations ...................................................................................................... 2
Competition ..................................................................................................... 4
Employees ....................................................................................................... 4
Backlog ......................................................................................................... 4
Item 2. Properties ........................................................................................................ 5
Item 3. Legal Proceedings. ................................................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders ............................................................... 10
Executive Officers of the Registrant .............................................................................. 11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .. 12
Item 6. Selected Financial Data ........................................................................................... 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................ 25
Item 8. Financial Statements and Supplementary Data ....................................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 54
Item 9A. Controls and Procedures ........................................................................................... 54
Item 9B. Other Information ................................................................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................................ 55
Item 11. Executive Compensation ............................................................................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................... 55
Item 13. Certain Relationships and Related Transactions .................................................................... 55
Item 14. Principal Accounting Fees and Services ............................................................................ 55
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................ 56
PAGE
PART I
Item 1. Business
General ....................................................... 1
Operations .................................................... 2
Competition ................................................... 4
Employees ..................................................... 4
Backlog ....................................................... 4
Available Information ......................................... 4
Item 1A. Risk Factors .................................................... 5
Item 1B. Unresolved Staff Comments ....................................... 8
Item 2. Properties ...................................................... 9
Item 3. Legal Proceedings. .............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders ............. 13
Executive Officers of the Registrant ............................ 14
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ............... 15
Item 6. Selected Financial Data ......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 29
Item 8. Financial Statements and Supplementary Data ..................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................ 61
Item 9A. Controls and Procedures ......................................... 61
Item 9B. Other Information ............................................... 61
PART III
Item 10. Directors and Executive Officers and Corporate Governance of
the Registrant .................................................. 62
Item 11. Executive Compensation .......................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................. 62
Item 13. Certain Relationships and Related Transactions and Director
Independence .................................................... 62
Item 14. Principal Accounting Fees and Services .......................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................... 63
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FORWARD-LOOKING STATEMENTS
Certain information included in this report, or in other materials we have
filed or will file with the Securities and Exchange Commission (the "SEC") (as
well as information included in oral statements or other written statements made
or to be made by us) contains or may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995
Act"). Such statements are being made pursuant to the 1995 Act and with the
intention of obtaining the benefit of the "Safe Harbor" provisions of the 1995
Act. Forward-looking statements are based on information available to us and our
perception of such information as of the date of this report and our current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They contain words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "may," "can," "could," "might,"
variations of such wording and other words or phrases of similar meaning in
connection with a discussion of our future operating or financial performance,
and other aspects of our business, including market share growth, gross profit,
project mix, projects with varying profit margins, selling, general and
administrative expenses, and trends in our business and other characterizations
of future events or circumstances. From time to time, forward-looking statements
also are included in our other periodic reports on Forms 10-Q and 8-K, in press
releases, in our presentations, on our web site and in other material released
to the public. Any or all of the forward-looking statements included in this
report and in any other reports or public statements made by us are only
predictions and are subject to risks, uncertainties and assumptions, including
those identified below in the "Risk Factors" section, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section, and other sections of this report, and in our Forms 10-Q for the three
months ended March 31, 2006, June 30, 2006 and September 30, 2006 and in other
reports filed by us from time to time with the SEC as well as in press releases,
in our presentations, on our web site and in other material released to the
public. Such risks, uncertainties and assumptions are difficult to predict,
beyond our control and may turn out to be inaccurate causing actual results to
differ materially from those that might be anticipated from our forward-looking
statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in our subsequent
reports on Forms 10-K, 10-Q and 8-K should be consulted.
[This Page Intentionally Left Blank]
PART I
ITEM 1. BUSINESS
The Internet website addressReferences to the "Company," "EMCOR," "we," "us," "our" and words of
similar import refer to EMCOR Group, Inc. ("EMCOR" orand its consolidated subsidiaries
unless the "Company")
is http://www.emcorgroup.com. The Company's annual report on Form 10-K,
quarterly reports on Forms 10-Q and current reports on Forms 8-K (and any
amendments to those reports)context indicates otherwise.
GENERAL
We are available free of charge on or through its
Internet website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
GENERAL
EMCOR is one of the largest mechanicalelectrical and electricalmechanical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2004, EMCOR2006, we had revenues of approximately $4.75$5.0 billion. The
Company providesWe provide
services to a broad range of commercial, industrial, utility and institutional
customers through approximately 70 principal operating subsidiaries and joint
venture entities. EMCOR hasOur offices in 42 states and the
District of Columbia inare located throughout the United States, eight provinces in
Canada and 12
primary locations in the United Kingdom. In the United Arab Emirates, the
Company carrieswe carry on
business through two joint ventures. ItsOur executive offices are located at 301
Merritt Seven, Corporate Park, Norwalk, Connecticut 06851-1060, and itsour telephone number at
those offices is (203) 849-7800.
EMCOR specializesWe specialize in providing construction services relating to mechanicalelectrical
and electricalmechanical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services."
EMCOR designs, integrates, installs, starts up, operatesWe design, integrate, install, start-up, operate and maintainsmaintain various
mechanicalelectrical and electricalmechanical systems, including:
o Electric power transmission and distribution systems;
o Premises electrical and lighting systems;
o Low-voltage systems, such as fire alarm, security and process
control systems;
o Voice and data communications systems;
o Roadway and transit lighting and fiber optic lines;
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems;
o Fire protection systems;
o Plumbing, process and high-purity piping systems;
o Systems for generationWater and distribution of electrical power;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications and
process controlwastewater treatment systems; and
o VoiceCentral plant heating and data communicationscooling systems.
EMCOR'sOur facilities services businesses, which support the operation of a
customer's facilities, include:
o Site-based operations and maintenance;
o Mobile maintenance and services;
o Facilities management;
o Remote monitoring;
o Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development, management and managementmaintenance for energy systems.
These facilities services are provided to a wide range of commercial,
industrial, utility and institutional facilities, including those atto which EMCOR
providedwe
also provide construction services and others atto which construction services wereare
provided by others. EMCOR'sOur varied facilities services are frequently combined to
provide integrated service packages which include operations and maintenance,
mobile services and facility improvement programs.
EMCOR providesWe provide construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. ItWe also providesprovide these services indirectly by acting as
a subcontractor to general contractors, systems suppliers and other
subcontractors. Worldwide, EMCOR haswe have approximately 26,00027,000 employees.
EMCOR's1
Our revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of EMCOR's 2004our
2006 revenues, approximately 80%81% were generated in the United States and
approximately 20%19% were generated internationally. In 2004,2006, approximately 49%48% of
revenues were derived from new construction projects, 21%23% were derived from
renovation and retrofit of customer's existing facilities and 30%29% were derived
from facilities services operations.
1
The broad scope of EMCOR'sour operations areis more particularly described below.
For information regarding the revenues, operating income and total assets of
each of EMCOR'sour segments with respect to each of the last three fiscal years, and
EMCOR'sour revenues and assets attributable to the United States, Canada, the United
Kingdom and all other foreign countries, see Note M - Segment Information of the
notes to EMCOR'sconsolidated financial statements included herein.in this report.
OPERATIONS
The mechanicalelectrical and electricalmechanical construction services industry has a higherhigh
growth rate than the overall non-residential construction industry, due principally to the ever increasing content and complexity of
mechanicalelectrical and electricalmechanical systems in all types of projects. This increasing
content and complexity is, in part, a result of the expanded use of computers
and more technologically advanced voice and data communications, lighting and
environmental control systems in all types of facilities. For these reasons,
buildings of all types consume more electricity per square foot than in the past
and thus need more extensive electrical distribution systems. In addition, advanced
voice and data communication systems require more sophisticated power supplies
and extensive low voltagelow-voltage and fiber-optic communications cabling. Moreover, the
need for greatersubstantial environmental controls within a building, such asdue to the
heightened need for climate control to maintain extensive computer systems at
optimal temperatures, and the growing demand for environmental control in individual
spaces have created expanded opportunities for the mechanicalelectrical and electrical constructionmechanical
services and facilities services businesses.
MechanicalElectrical and electricalmechanical construction services primarily involve the
design, integration, installation and start-up of: (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b)
plumbing, process and high-purity piping systems; (c) systems for the generationelectric power
transmission and distribution of electrical power,systems, including power cables, conduits,
distribution panels, transformers, generators, uninterruptible power supply
systems and related switch gear and controls; (d)(b) premises electrical and
lighting systems, including fixtures and controls; (e)(c) low-voltage systems, includingsuch
as fire alarm, security and process control systems; and (f)(d) voice and data
communications systems, including fiber-optic and low-voltage copper cabling.
Mechanicalcabling;
(e) roadway and electricaltransit lighting and fiber-optic lines; (f) heating,
ventilation, air conditioning, refrigeration and clean-room process ventilation
systems; (g) fire protection systems; (h) plumbing, process and high-purity
piping systems; (i) water and wastewater treatment systems; and (j) central
plant heating and cooling systems.
Electrical and mechanical construction services generally fall into one of
two categories: (a) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (b) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR'sOur United States mechanicalelectrical and electricalmechanical construction services
operations accounted for about 60%57% of its 2004our 2006 revenues, of which revenues
approximately 72%65% were related to new construction and approximately 28%35% were
related to renovation and retrofit projects. EMCOR'sOur United Kingdom and Canada
mechanicalelectrical and electricalmechanical construction services operations accounted for
approximately 10%13% of its 2004our 2006 revenues, of which revenues approximately 56%74% were
related to new construction and approximately 44%26% were related to renovation and
retrofit projects. EMCOR providesWe provide electrical and mechanical and electrical construction services
for both large and small installation and renovation projects. ItsOur largest
projects include thosethose: (a) for institutional use (such as water and wastewater
treatment facilities, hospitals, correctional facilities schools and research
laboratories); (b) for industrial use (such as pharmaceutical plants, steel,
pulp and paper mills, chemical, automotive and semiconductor manufacturing
facilities and oil refineries); (c) for transportation projects (such as
highways, airports and transit systems); (d) for commercial use (such as office
buildings, data centers, hotels, casinos, convention centers, sports stadiums,
shopping malls and resorts); and (e) for power generation and energy management
projects. EMCOR'sOur largest projects, which typically range in size from $10.0 million
up to and occasionally exceeding $50.0 million and are usuallyfrequently multi-year
projects, represented about 33%28% of EMCOR'sour construction services revenues in 2004.
EMCOR's2006.
Our projects of less than $10.0 million accounted for approximately 67%72% of
2004our 2006 electrical and mechanical and electrical construction services revenues. These
projects are typically completed in less than one year. They usually involve
mechanicalelectrical and electricalmechanical construction services when an end-user or owner
undertakes construction or modification of a facility to accommodate a specific
use. These projects frequently require mechanicalelectrical and electricalmechanical systems to meet
special needs such as critical systems power supply, fire protection systems,
special environmental controls and high-purity air systems, sophisticated
mechanicalelectrical and electricalmechanical systems for data centers, including those associated with internet service providers and
electronic commerce, trading floors in financial
services businesses, new production lines in manufacturing plants and office
arrangements in existing office buildings. They are not usually dependent upon
the new construction market. Demand for these projects and types of services is
often prompted by the expiration of leases, changes in technology or changes in
the customer's plant or office layout in the normal course of a customer's
business.
EMCOR performs itsWe perform services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term complex projects that require
significant technical and management skills and the financial strength to obtain
bid and performance bonds, which are often a condition to bidding for and
winning these projects.
2
EMCORWe also installsinstall and maintainsmaintain lighting for streets, highways, bridges and
tunnels, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactureswe manufacture and installsinstall sheet metal air
handling systems for both itsour own mechanical construction operations and for
unrelated mechanical contractors. EMCORWe also maintainsmaintain welding and pipe fabrication
shops in support of some of its ownour mechanical operations.
FacilitiesOur United States facilities services are providedsegment, as well as our other
segments, provide facilities services to a wide range of commercial, industrial
and institutional facilities, including both those for which EMCORwe have provided
construction services and those for which construction services were provided by
others. Facilities services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by our employees based at
customer site-based EMCOR
employees.sites.
These facilities services, which generated approximately 30%29% of 2004our 2006
revenues, are provided to owners, operators, tenants and managers of all types
of facilities both on a contract basis for a specified period of time and on an
individual task-ordertask order basis.
In 1997, EMCORwe established a subsidiary to expand itsour facilities services
operations in North America.America (primarily in the United States). This division has
built on EMCOR'sour traditional mechanicalelectrical and electrical constructionmechanical services operations,
facilities services activities at itsour electrical and mechanical and electrical contracting
subsidiaries, and EMCOR'sour client relationships, as well as acquisitions, to expand
the scope of services currentlybeing offered and to develop packages of services for
customers on a regional, national and global basis.
As a consequence, EMCOR'sOur United States facilities services division now offers a broad range of
facilities services, including maintenance and service of mechanicalelectrical and
electricalmechanical systems, which EMCOR haswe have historically provided to customers following
completion of construction projects, and site-based operations and maintenance,
mobile maintenance and service,services, facilities management, remote monitoring, installation and support
for building systems, technical consulting and diagnostic services, small
modification and retrofit projects and program development, management and
management formaintenance of energy systems.
EMCOR hasWe have experienced an expansion in the demand for itsour facilities services
which it believeswe believe is driven by customers' decisions to focus on their own core
competencies, customers' programs to reduce costs, the increasing technical
complexity of their facilities and their mechanical, electrical, voice and data
and other systems, and the need for increased reliability, especially in
mechanicalelectrical and electricalmechanical systems. These trends have led to outsourcing and
privatization programs whereby customers in both the private and public sectors
seek to contract out those activities that support, but are not directly
associated with, the customer's core business. EMCOROur clients requiring facilities
services include the federal government, utilities and major corporations engaged in
information technology, telecommunications, pharmaceuticals, financial services,
publishing and manufacturing.
Illustrative of the outsourcing of companies' facilities services are
multi-year agreements with (a) Bank One under which EMCOR provides facilities
services for approximately 2,200 Bank One locations encompassing 32.0 million
square feet of space in 30 states; (b) LAM Research under which EMCOR provides
such services to approximately 1.0 million square feet of production and
research and development facilities and office space; (c) Fifth Third Bank under
which EMCOR provides facilities services to over 1,200 Fifth Third locations
with over 9.5 million square feet in seven states; (d) Exelon Corp. under which
EMCOR provides comprehensive facilities services to substations, power
generation facilities and offices encompassing over 5.7 million square feet of
space in four states; (e) Mattson Technology, Inc. under which EMCOR provides
integrated services to approximately 800,000 square feet of production and
research and development facilities and office space; (f) Fidelity Investments
under which EMCOR provides integrated services to approximately 2.5 million
square feet of office and data center space; and (g) Hewlett-Packard Company
under which EMCOR provides integrated services to approximately 20.0 million
square feet of production, distribution and office space in seven states.
Through a limited liability Company owned by EMCOR and CB Richard Ellis Inc., a
nationwide real estate management company, operations and maintenance services
are provided to over 3,000 commercial facilities comprising approximately 135.0
million square feet of space.
In December 2002, EMCOR acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business. In Washington D.C., CES iswe are the second largest facilities services provider
to the federal government behind the General Services Administration and
currently providesprovide services to such preeminent buildings as the Ronald Reagan
Building, the second largest federal government facility after the Pentagon.
ItThis division of our facilities services business pursuant to which we provide
facilities services to the federal government at military bases or government
buildings is subject to renegotiation of profit, termination by the government
prior to the expiration of the term and non-renewal by the U.S. government.
We currently provides itsprovide facilities services in 28 states throughout the Northeast, Midwest, Mid-Atlantic and Southeast. Asas part of itsour
operations CES isare responsible forfor: (a) the oversight of all or most of a business'
facilities operations, including operation and maintenance; (b) the oversight of
logistical processes; (c) tenant services and management; (d) servicing, upgrade
and retrofit of HVAC, electrical, plumbing and industrial piping and sheet metal
systems in existing facilities; and (e) diagnostic and solution engineering for
building systems and their components.
In November
2003, EMCOR acquired the Facility Management Services division of Siemens
Building Technologies, Inc., including contracts to provide facilities services
to several operating units of Siemens Corporation encompassing 5.0 million
square feet of corporate, manufacturing and research space.
EMCOR'sOur United Kingdom subsidiary also has a division dedicated tothat focuses on
facilities services. This division currently provides a full range of facilities
services to public and private sector customers under multi-year agreements, including
the maintenance of British Airways'agreements.
Our EMCOR Energy Services business designs, constructs and operates
energy-related projects and facilities at Heathrow and Gatwick Airports,
GlaxoSmithKline Research Laboratories, and the Tubelines, a maintenance
operating company of the London Underground. In the United Kingdom, EMCOR also
provides facilities services at several manufacturing facilities, including BAE
Systems manufacturing plants. In addition, the United Kingdom operations provide
on-call and mobile service support on a task-order or contract basis, small
renovationturn-key basis. Currently, we
operate 18 central heating and alteration project work,cooling plants/power and installationcogeneration facilities
and provide maintenance services for data communicationshigh-voltage and security systems.
3
EMCOR's Energy & Technologies business designsboiler systems under
multi-year contracts. In addition, we provide consulting and constructs customers'
energy-related projects and for certain of these projects also provides plant
staffing. Thisnational program
energy management services under multi-year agreements. Our energy services
business' recent projects include the designinclude: (a) engineering, procurement and construction
of a $15.6 million 14 megawatt control utility plant and a combined heat and power
facility to supply all HVAC and hot water and electrical requirements for the
Morongo Native American Hotel/Casino complex in Cabazon, California and the
design andtwo waste-to-energy projects; (b) construction of a $27.0 million1.5 megawatt cogeneration
facility for Johnson & Johnson; and chiller
plant to provide cooling, heat(c) provision of evaluation, engineering,
project development, and power atconstruction management services for the UniversitySan Francisco
Public Utilities Commission, Pacific Gas & Electric Company, Southern California
Edison, and Long Island Power Authority for self generation and alternative
generation projects and a wide range of New Hampshire main
campus in Durham, New Hampshire. EMCOR will also provide plant staffing to these
projects under long-term contracts.conservation and efficiency projects.
Over the past five years, EMCOR haswe have completed more than 8090 energy-related projects
ranging from basic life safety standby systems to complete utility grade peaking
power plants and cogeneration/central utility plants supplying thermal and power
requirements completely separated from utilities' electrical grids. This
business is reported within theour United States facilities services segment.
EMCOR believes3
We believe that our electrical and mechanical and electrical construction services,
facilities services and facilitiesenergy services activities are complementary, permitting
itus to offer customers a comprehensive package of services. The ability to offer
both construction andservices, facilities services and energy services enhances EMCOR'sour
competitive position with customers. Furthermore, EMCOR'sour facilities services
operations tend to be less cyclical than itsour construction operations because
facilities services are more responsive to the needs of an industry's
operational requirements rather than its construction requirements.
COMPETITION
EMCOR believesWe believe that the mechanicalelectrical and electricalmechanical construction services
business is highly fragmented and competitive consisting ofour competition includes thousands of small
companies across the United States and around the world. EMCOR competesWe compete with
national, regional and local companies, many of which are small, owner-operated
entities that operate in a limited geographic area. However, there are a few
public companies focused on providing mechanicalelectrical and electricalmechanical construction
services, such as Integrated Electrical Services, Inc. and Comfort Systems USA,
Inc. A majority of EMCOR'sour revenues are derived from projects requiring competitive
bids; however, an invitation to bid is often conditioned upon prior experience,
technical capability and financial strength. Because EMCOR haswe have total assets,
annual revenues, net worth, access to bank credit and surety bonding and
expertise significantly greater than most of itsour competitors, EMCOR believes
it haswe believe we have
a significant competitive advantage over its competitors.our competitors in providing electrical
and mechanical construction services. Competitive factors in the mechanicalelectrical and
electricalmechanical construction services business include: (a) the availability of
qualified and/or licensed personnel; (b) reputation for integrity and quality;
(c) safety record; (d) cost structure; (e) relationships with customers; (f)
geographic diversity; (g) the ability to control project costs; (h) experience
in specialized markets; (i) the ability to obtain surety bonding; (j) adequate
working capital; and (k) access to bank credit.
While the facilities services business is also highly fragmented with most
competitors operating in a specific geographic region, a number of large
corporations such as Johnson Controls, Inc., Fluor Corp., UniccoUNICCO Service
Company, Trammel Crow andWashington International, Inc., CB Richard Ellis Group, Inc., Jones
Lang LaSalle, ABM Facility Services and Linc Facility Services, LLC are engaged
in this field.field, as are large original equipment manufacturers such as Carrier
Corp. and Trane Air Conditioning. The key competitive factors in the facilities
services business include price, service, quality, technical expertise,
geographic scope and the availability of qualified personnel and managers. Due
to our size, both financial and geographic, and our technical capability and
management experience, we believe we are in a strong competitive position in the
facilities services business.
EMPLOYEES
EMCORWe presently employsemploy approximately 26,00027,000 people, approximately 71%69% of whom
are represented by various unions pursuant to more than 460400 collective
bargaining agreements between EMCOR'sour individual subsidiaries and local unions. EMCOR believesWe
believe that itsour employee relations are generally good. NoneOnly two of these
collective bargaining agreements are national or regional in scope.
BACKLOG
EMCORWe had contract backlog as of December 31, 20042006 of approximately $2.8$3.50 billion,
compared with backlog of approximately $3.0$2.76 billion as of December 31, 2003.2005.
Backlog is not a term recognized under accounting principlesUnited States generally accepted
in the United States;accounting principles; however, it is a common measurement used in EMCOR'sour industry.
Backlog includes unrecognized revenues to be realized from uncompleted
construction contracts plus unrecognized revenues expected to be realized over
the remaining term of the facilities services contracts, exceptcontracts. However, if the
remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues.
BacklogAVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. These filings are available to the public over the
internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room located at 100 F Street,
N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
Our Internet address is www.emcorgroup.com. We make available free of
charge on or through www.emcorgroup.com our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
Our Board of Directors has an audit committee, a compensation and
personnel committee and a nominating and corporate governance committee. Each of
these committees has a formal charter. We also have Corporate Governance
Guidelines, which includes guidelines regarding related party transactions, a
Code of Ethics for our Chief Executive Officer and Senior Financial Officers,
and a Code of Ethics and Business Conduct for Directors, Officers and Employees.
Copies of these charters, guidelines and codes, and any waivers or amendments to
such codes which are applicable to our executive officers, senior financial
officers or directors, can be obtained free of charge from our web site,
www.emcorgroup.com.
4
In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes and any waivers or amendments to such
codes which are applicable to our executive officers, senior financial officers
or directors, at no cost by writing to us at EMCOR Group, Inc., 301 Merritt
Seven, Norwalk, CT 06851-1060, Attention: Corporate Secretary, or by telephoning
us at (203) 849-7800.
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks, including the risks
described below as well as adverse business and market conditions and risks
associated with foreign operations. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties not known to
us or not described below which we have not determined to be material may also
impair our business operations. You should carefully consider the risks
described below, together with all other information in this report, including
information contained in the "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk" sections. If any of the following
risks actually occur, our business, financial condition and results of
operations could be adversely affected, and we may not be able to achieve our
goals. Such events may cause actual results to differ materially from expected
and historical results, and the trading price of our common stock could decline.
AN ECONOMIC DOWNTURN MAY LEAD TO LESS DEMAND FOR OUR SERVICES. If the
general level of economic activity slows, our ultimate customers may delay or
cancel new projects. For example, economic downturns in the past have led to
increased by $0.1 billion asbankruptcies and pricing pressures. These factors contribute to the
delay and cancellation of December 31, 2003 comparedprojects, especially with respect to December 31, 2002. For the year ended December 31,
2004, EMCOR had approximately $4.75 billion in revenues comparedmore profitable
private sector work, and impact our operations and ability to approximately $4.53 billion in revenuescontinue to grow
at historical levels. A number of other factors, including financing conditions
for the year ended December 31, 2003.
4industries we serve, could further adversely affect our ultimate
customers and their ability or willingness to fund capital expenditures in the
future or pay for past services. In addition, consolidation, competition or
capital constraints in the industries of our ultimate customers may result in
reduced spending by such customers. If economic conditions do not continue to
improve, or if there is another economic downturn, reducing in particular the
availability of more profitable private sector work, our results of operations
are likely to be adversely affected.
AN INCREASE IN THE PRICE OF CERTAIN MATERIALS USED IN OUR BUSINESSES COULD
ADVERSELY AFFECT OUR BUSINESSES. We are exposed to market risk of fluctuations
in certain commodity prices of materials such as copper and steel utilized in
both our construction and facilities services operations. We are also exposed to
increases in energy prices, particularly as they relate to gasoline prices for
our fleet of over 6,000 vehicles.
OUR INDUSTRY IS HIGHLY COMPETITIVE. Our industry is served by numerous
small, owner-operated private companies, a few public companies and several
large regional companies. In addition, relatively few barriers prevent entry
into some of our businesses. As a result, any organization that has adequate
financial resources and access to technical expertise may become one of our
competitors. Competition in our industry depends on numerous factors, including
price. Certain of our competitors have lower overhead cost structures and,
therefore, are able to provide their services at lower rates than we are
currently able to provide. In addition, some of our competitors have greater
resources than we do. We cannot be certain that our competitors will not develop
the expertise, experience and resources necessary to provide services that are
superior in both price and quality to our services. Similarly, we cannot be
certain that we will be able to maintain or enhance our competitive position
within the industry or maintain a customer base at current levels. We may also
face competition from the in-house service organizations of existing or
prospective customers, particularly with respect to facilities services. Many of
our customers employ personnel who perform some of the same types of services
that we do. We cannot be certain that our existing or prospective customers will
continue to outsource facilities services in the future.
OUR BUSINESS MAY ALSO BE AFFECTED BY ADVERSE WEATHER CONDITIONS. Adverse
weather conditions, particularly during the winter season, could affect our
ability to perform efficient work outdoors in certain regions of the United
States, the United Kingdom and Canada. As a result, we could experience reduced
revenue in the first and fourth quarters of each year. In addition, cooler than
normal temperatures during the summer months could reduce the need for our
services, and we may experience reduced revenues and profitability during the
period such weather conditions persist.
OUR BUSINESS MAY BE AFFECTED BY THE WORK ENVIRONMENT. We perform our work
under a variety of conditions, including but not limited to, difficult terrain,
difficult site conditions and busy urban centers where delivery of materials and
availability of labor may be impacted, clean-room environments where strict
procedures must be followed and sites which may have been exposed to
environmental hazards. Performing work under these conditions can negatively
affect efficiency and, therefore, our profitability.
OUR DEPENDENCE UPON FIXED PRICE CONTRACTS COULD ADVERSELY AFFECT OUR
BUSINESS. We currently generate, and expect to continue to generate, a
significant portion of our revenues under fixed price contracts. We must
estimate the costs of completing a particular project to bid for fixed price
contracts. The cost of labor and materials, however, may vary from the costs we
originally estimated. These variations, along with other risks, inherent in
performing fixed price contracts, may cause actual revenues and gross profits
from projects to differ from those we originally estimated and could result in
reduced profitability or losses on projects. Depending upon the size of a
particular project, variations from the estimated contract costs can have a
significant impact on our operating results for any fiscal quarter or year.
5
WE COULD INCUR ADDITIONAL COSTS TO COVER GUARANTEES. In some instances, we
guarantee completion of a project by a specific date, achievement of certain
performance standards or performance of our services at a certain standard of
quality. If we subsequently fail to meet such guarantees, we may be held
responsible for costs resulting from such failure. Such failure could result in
our payment in the form of contractually agreed upon liquidated or other
damages. To the extent that any of these events occur, the total costs of a
project could exceed the original estimated costs, and we would experience
reduced profits or, in some cases, a loss.
MANY OF OUR CONTRACTS, ESPECIALLY OUR FACILITIES SERVICES CONTRACTS, MAY
BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING SUCH
CONTRACTS IF THEY ARE CANCELED OR AS THEY ARE COMPLETED OR EXPIRE. We could
experience a decrease in revenue, net income and liquidity if any of the
following occur:
o customers cancel a significant number of contracts;
o we fail to win a significant number of our existing contracts upon
rebid;
o we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
o we fail to reduce operating and overhead expenses consistent with
any decrease in our revenue.
We may be unsuccessful at generating internal growth. Our ability to
generate internal growth will be affected by, among other factors, our ability
to:
o expand the range of services offered to customers to address their
evolving needs;
o attract new customers; and
o increase the number of projects performed for existing customers.
In addition, our customers may reduce the number or size of projects
available to us due to their inability to obtain capital or pay for services
provided. Many of the factors affecting our ability to generate internal growth
may be beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. If we are not successful, we may not
be able to achieve internal growth, expand operations or grow our business.
THE DEPARTURE OF KEY PERSONNEL COULD DISRUPT OUR BUSINESS. We depend on
the continued efforts of our senior management. The loss of key personnel, or
the inability to hire and retain qualified executives, could negatively impact
our ability to manage our business. However, we have executive development and
management succession plans in place in order to minimize any such negative
impact.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES. Our ability to
grow and maintain productivity and profitability will be limited by our ability
to employ, train and retain skilled personnel necessary to meet our
requirements. We cannot be certain that we will be able to maintain an adequate
skilled labor force necessary to operate efficiently and to support our growth
strategy or that labor expenses will not increase as a result of a shortage in
the supply of these skilled personnel. Labor shortages or increased labor costs
could impair our ability to maintain our business or grow our revenues.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS COULD RESULT IN SIGNIFICANT
LIABILITIES. Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and disposal of waste
products, PCBs and fuel storage. A violation of such laws and regulations may
expose us to liabilities, including remediation costs and fines. We own and
lease many facilities. Some of these facilities contain fuel storage tanks which
may be above or below ground. If these tanks were to leak, we could be
responsible for the cost of remediation as well as potential fines. As a part of
our business, we also install fuel storage tanks and are sometimes required to
deal with hazardous materials, all of which may expose us to environmental
liability.
In addition, new laws and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown contamination or
leaks, or the imposition of new clean-up requirements could require us to incur
significant costs or become the basis for new or increased liabilities that
could harm our financial condition and results of operations. In certain
instances, we have obtained indemnification or covenants from third parties
(including predecessors or lessors) for such clean-up and other obligations and
liabilities that we believe are adequate to cover such obligations and
liabilities. However, such third-party indemnities or covenants may not cover
all of such costs or third-party indemnitors may default on their obligations.
In addition, unanticipated obligations or liabilities, or future obligations and
liabilities, may have a material adverse effect on our business operations or
financial condition. Further, we cannot be certain that we will be able to
identify, or be indemnified for, all potential environmental liabilities
relating to any acquired business.
ADVERSE RESOLUTION OF LITIGATION MAY HARM OUR OPERATING RESULTS OR
FINANCIAL CONDITION. We are a party to lawsuits most of which are in the normal
course of our business. Litigation can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. An unfavorable resolution of a particular lawsuit
could have a material adverse affect on our business, operating results,
financial condition, and in some cases, on our reputation. See Item 3. Legal
Proceedings for more information regarding certain lawsuits in which we are
involved.
6
OPPORTUNITIES WITHIN THE GOVERNMENT SECTOR COULD LEAD TO INCREASED
GOVERNMENTAL REGULATION APPLICABLE TO US AND UNRECOVERABLE START-UP COSTS. Most
government contracts are awarded through a regulated competitive bidding
process. As we pursue increased opportunities in the government arena,
particularly in our facilities services segment, management's focus associated
with the start-up and bidding process may be diverted away from other
opportunities. If we are to be successful in being awarded additional government
contracts, a significant amount of costs could be required before any revenues
are realized from these contracts. In addition, as a government contractor we
are subject to a number of procurement rules and other regulations, any deemed
violation of which could lead to fines or penalties or a loss of business.
Government agencies routinely audit and investigate government contractors.
Government agencies may review a contractor's performance under its contracts,
cost structure and compliance with applicable laws, regulations and standards.
If government agencies determine through these audits or reviews that costs are
improperly allocated to specific contracts, they will not reimburse the
contractor for those costs or may require the contractor to refund previously
reimbursed costs. If government agencies determine that we are engaged in
improper activity, we may be subject to civil and criminal penalties. Government
contracts are also subject to renegotiation of profit, termination by the
government prior to the expiration of the term and non-renewal by the
government.
A SIGNIFICANT PORTION OF OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE
SURETY BONDS. WE MAY BE UNABLE TO COMPETE FOR OR WORK ON CERTAIN PROJECTS IF WE
ARE NOT ABLE TO OBTAIN THE NECESSARY SURETY BONDS. Our construction contracts
frequently require that we obtain from surety companies and provide to our
customers payment and performance bonds as a condition to the award of such
contracts. Such surety bonds secure our payment and performance obligations.
Surety market conditions have in the last few years become more difficult
as a result of significant losses incurred by many surety companies, both in the
construction industry as well as in certain large corporate bankruptcies.
Consequently, less overall bonding capacity is available in the market than in
the past, and surety bonds have become more expensive and restrictive. Further,
under standard terms in the surety market, surety companies issue bonds on a
project-by-project basis and can decline to issue bonds at any time or require
the posting of additional collateral as a condition to issuing any bonds.
Current or future market conditions, as well as changes in our sureties'
assessment of their operating and financial risk, could cause our surety
companies to decline to issue, or substantially reduce the amount of, bonds for
our work and could increase our bonding costs. These actions can be taken on
short notice. If our surety companies were to limit or eliminate our access to
bonding, our alternatives would include seeking bonding capacity from other
surety companies, increasing business with clients that do not require bonds and
posting other forms of collateral for project performance, such as letters of
credit, or cash. We may be unable to secure these alternatives in a timely
manner, on acceptable terms, or at all. Accordingly, if we were to experience an
interruption or reduction in the availability of bonding capacity, we may be
unable to compete for or work on certain projects.
WE ARE EFFECTIVELY SELF-INSURED AGAINST MANY POTENTIAL LIABILITIES.
Although we maintain insurance policies with respect to a broad range of risks,
including automobile liability, general liability, workers compensation and
employee group health, these policies do not cover all possible claims and
certain of the policies are subject to large deductibles. Accordingly, we are
effectively self-insured for a substantial number of actual and potential
claims. Our estimates for unpaid claims and expenses are based on known facts,
historical trends and industry averages utilizing the assistance of an actuary.
We reflect these liabilities in our balance sheet as "Other accrued expenses and
liabilities" and "Other long-term obligations." The determination of such
estimated liabilities and their appropriateness are reviewed and updated at
least quarterly. However, these liabilities are difficult to assess and estimate
due to many relevant factors, the effects of which are often unknown, including
the severity of an injury or damage, the determination of liability in
proportion to other parties, the timeliness of reported claims, the
effectiveness of our risk management and safety programs and the terms and
conditions of our insurance policies. Our accruals are based upon known facts,
historical trends and our reasonable estimate of future expenses, and we believe
such accruals are adequate. However, unknown or changing trends, risks or
circumstances, such as increases in claims, a weakening economy, increases in
medical costs, changes in case law or legislation or changes in the nature of
the work we perform, could render our current estimates and accruals inadequate.
In such case, adjustments to our balance sheet may be required and these
increased liabilities would be recorded in the period that the experience
becomes known. Insurance carriers may be unwilling, in the future, to provide
our current levels of coverage without a significant increase in insurance
premiums and/or collateral requirements to cover our deductible obligations.
Increased collateral requirements may be in the form of additional letters of
credit, and an increase in collateral requirements could significantly reduce
our liquidity. If insurance premiums increase, and/or if insurance claims are
higher than our estimates, our profitablilty could be adversely affected.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AS A RESULT OF
GOODWILL IMPAIRMENTS. When we acquire a business, we record an asset called
"goodwill" equal to the excess amount paid for the business, including
liabilities assumed, over the fair value of the tangible and intangible assets
of the business acquired. In 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 141, "Business Combinations" which requires that
all business combinations be accounted for using the purchase method of
accounting and that certain intangible assets acquired in a business combination
be recognized as assets apart from goodwill. FASB Statement No. 142, "Goodwill
and Other Intangible Assets" ("Statement 142") provides that goodwill and other
intangible assets that have indefinite useful lives not be amortized, but
instead must be tested at least annually for impairment, and intangible assets
that have finite useful lives should continue to be amortized over their useful
lives. Statement 142 also provides specific guidance for testing goodwill and
other non-amortized intangible assets for impairment. Statement 142 requires
management to make certain esti-
7
mates and assumptions to allocate goodwill to reporting units and to determine
the fair value of reporting unit net assets and liabilities, including, among
other things, an assessment of market conditions, projected cash flows,
investment rates, cost of capital and growth rates, which could significantly
impact the reported value of goodwill and other intangible assets. Fair value is
determined using discounted estimated future cash flow. Absent any impairment
indicators, we perform impairment tests annually each October 1. Impairments, if
any, would be recognized as operating expenses and would adversely affect
profitability.
AMOUNTS INCLUDED IN OUR BACKLOG MAY NOT RESULT IN ACTUAL REVENUE OR
TRANSLATE INTO PROFITS. Many of our contracts do not require purchase of a
minimum amount of services. In addition, many contracts are cancelable on short
notice. We have historically experienced variances in the components of backlog
related to project delays or cancellations resulting from weather conditions,
external market factors and economic factors beyond our control, and we may
experience such delays or cancellations in the future. If our backlog fails to
materialize, we could experience a reduction in revenue and a decline in
profitability which would result in a deterioration of our financial condition,
profitability and liquidity.
WE ACCOUNT FOR THE MAJORITY OF OUR CONSTRUCTION PROJECTS USING THE
PERCENTAGE-OF-COMPLETION ACCOUNTING METHOD; THEREFORE, VARIATIONS OF ACTUAL
RESULTS FROM OUR ASSUMPTIONS MAY REDUCE OUR PROFITABILITY. We recognize revenue
on construction contracts using the percentage-of-completion accounting method.
See Application of Critical Accounting Policies in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations. Under
the percentage-of-completion accounting method, we record revenue as work on the
contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that
incurred costs to date bear to total estimated costs. Accordingly, contract
revenue and total cost estimates are reviewed and revised monthly as the work
progresses. Adjustments are reflected in contract revenue in the period when
such estimates are revised. Estimates are based on management's reasonable
assumptions and experience, but are only estimates. Variation of actual results
from assumptions on an unusually large project or on a number of average size
projects could be material. We are also required to immediately recognize the
full amount of the estimated loss on a contract when estimates indicate such a
loss. Such adjustments and accrued losses could result in reduced profitability
which could negatively impact our cash flow from operations.
CERTAIN PROVISIONS OF OUR CORPORATE GOVERNANCE DOCUMENTS COULD MAKE AN
ACQUISITION OF US, OR A SUBSTANTIAL INTEREST IN US, MORE DIFFICULT. The
following provisions of our certificate of incorporation and bylaws, as
currently in effect, as well as our stockholder rights plan and Delaware law,
could discourage potential proposals to acquire us, delay or prevent a change in
control of us or limit the price that investors may be willing to pay in the
future for shares of our common stock:
o our certificate of incorporation permits our board of directors to
issue "blank check" preferred stock and to adopt amendments to our
bylaws;
o our bylaws contain restrictions regarding the right of our
stockholders to nominate directors and to submit proposals to be
considered at stockholder meetings;
o our certificate of incorporation and bylaws restrict the right of
our stockholders to call a special meeting of stockholders and to
act by written consent;
o we are subject to provisions of Delaware law which prohibit us from
engaging in any of a broad range of business transactions with an
"interested stockholder" for a period of three years following the
date such stockholder becomes classified as an interested
stockholder; and
o we adopted a stockholder rights plan that could cause substantial
dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors or permitted by our
stockholder rights plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
8
ITEM 2. PROPERTIES
TheOur operations of EMCOR are conducted primarily in leased properties. The following
table lists major facilities, both leased and owned, and identifies the business
segment that is the principal user of each such facility.
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven Corporate Park
Norwalk, Connecticut ............................................... 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona (a) ............................................... 30,603 3/31/08
1200 North Sickles Drive
Tempe, Arizona (b) ................................................. 29,000 Owned
1000 N. Kraemer Place
Anaheim, California (b) ............................................ 24,384 8/14/12
4540 Easton Drive
Bakersfield, California (c) ........................................ 11,368 3/31/09
3208 Landco Drive
Bakersfield, California (c) ........................................ 49,875 6/30/07
555 Anton Boulevard
Costa Mesa, California (a) ......................................... 17,058 5/31/08
1168 Fesler Street
El Cajun, California (b) ........................................... 48,360 8/31/10
24041 Amador Street
Hayward, California (b) ............................................ 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) ............................................ 34,800 6/30/14
5 Vanderbilt
Irvine, California (a) ............................................. 18,000 7/31/08
4462 Corporate Center Drive
Los Alamitos, California (c) ....................................... 57,863 7/31/06
825 Howe Road
Martinez, California (c) ........................................... 109,800 12/31/07
8670 Younger Creek Drive
Sacramento, California (a) ......................................... 54,135 1/13/12
9505 and 9525 Chesapeake Drive
San Diego, California (c) .......................................... 25,124 12/31/06
414 Brannan Street
San Francisco, California (c) ...................................... 18,964 3/31/05
4405 and 4420 Race Street
Denver, Colorado (b) ............................................... 17,704 9/30/11
345 Sheridan Boulevard
Lakewood, Colorado (c) ............................................. 63,000 Owned
367 and 377 Research Parkway
Meriden, Connecticut (b) ........................................... 23,500 7/31/11
1781 N.W. North River Drive
Miami, Florida (b) ................................................. 11,285 Owned
2501 S.W. 160th Street
Miramar, Florida (c) ............................................... 15,877 7/31/08
3145 Northwoods Parkway
Norcross, Georgia (c) .............................................. 25,808 1/31/06
5LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven
Norwalk, Connecticut ......................... 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona (a) ......................... 30,603 3/31/08
1200 North Sickles Drive
Tempe, Arizona (b) ........................... 29,000 Owned
601 S. Vincent Avenue
Azusa, California (c) ........................ 33,450 10/31/08
3208 Landco Drive
Bakersfield, California (c) .................. 49,875 6/30/07
1168 Felser Street
El Cajon, California (b) ..................... 48,360 8/31/10
24041 Amador Street
Hayward, California (b) ...................... 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) ...................... 34,800 6/30/14
4462 Corporate Center Drive
Los Alamitos, California (c) ................. 57,863 8/14/11
825 Howe Road
Martinez, California (c) ..................... 109,800 12/31/12
8670 Younger Creek Drive
Sacramento, California (a) ................... 54,135 1/13/12
9505 and 9525 Chesapeake Drive
San Diego, California (c) .................... 25,124 12/31/11
4405 and 4420 Race Street
Denver, Colorado (b) ......................... 31,340 9/30/16
345 Sheridan Boulevard
Lakewood, Colorado (c) ....................... 63,000 Owned
3145 Northwoods Parkway
Norcross, Georgia (c) ........................ 25,808 1/31/12
400 Lake Ridge Drive
Smyrna, Georgia (a) .......................... 30,000 3/30/12
3100 Woodcreek Drive
Downers Grove, Illinois (c) .................. 55,551 7/31/17
1406 Cardinal Court
Urbana, Illinois (b) ......................... 33,750 10/1/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ...................... 136,695 10/31/08
2655 Garfield Road
Highland, Indiana (c) ........................ 45,816 6/30/11
3100 Brinkerhoff Road
Kansas City, Kansas (b) ...................... 42,836 11/30/07
2118 W. Harry
Wichita, Kansas (b) .......................... 25,600 8/31/07
9
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
400 Lake Ridge Drive
Smyrna, Georgia (a) ................................................ 30,000 9/30/12
2160 North Asland Avenue
Chicago, Illinois (b) .............................................. 67,000 6/30/05
2100 South York Road
Oak Brook, Illinois (c) ............................................ 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) .......................................... 40,000 6/09/05
1406 Cardinal Court
Urbana, Illinois (b) ............................................... 33,750 10/01/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ............................................ 136,695 10/31/08
2655 Garfield Road
Highland, Indiana (c) .............................................. 45,816 6/30/06
5124-5128 W. 79th Street
Indianapolis, Indiana (b) .......................................... 12,600 9/30/06
2600 N. Ninth Street Road
Lafayette, Indiana (b) ............................................. 13,798 10/31/08
3100 Brinkerhoff Road
Kansas City, Kansas (b) ............................................ 42,836 11/30/05
3125 Brinkerhoff Road
Kansas City, Kansas (b) ............................................ 22,676 Owned
631 Pecan Circle
Manhattan, Kansas (b) .............................................. 22,750 8/31/08
2118 W. Harry
Wichita, Kansas (b) ................................................ 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky (c) ............................................ 20,600 1/07/09
4530 Hollins Ferry Road
Baltimore, Maryland (b) ............................................ 26,792 Owned
643 Lofstrand Lane
Rockville, Maryland (a) ............................................ 15,000 2/28/10
306 Northern Avenue
Boston, Massachusetts (a) .......................................... 15,275 6/30/05
200 Old Colony Way
Boston, Massachusetts (b) .......................................... 11,500 3/31/08
70-70D Hawes Way
Stoughton, Massachusetts (b) ....................................... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts (a) (b) ................................... 36,000 6/10/13
1743 Maplelawn
Troy, Michigan (c) ................................................. 22,000 4/30/06
6060 Hix Road
Westland, Michigan (b) ............................................. 23,000 Month to Month
6325 South Valley Boulevard
Las Vegas, Nevada (b) .............................................. 23,190 12/31/08
3555 W. Oquendo Road
Las Vegas, Nevada (c) ..............................................LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
4530 Hollins Ferry Road
Baltimore, Maryland (b) ...................... 26,792 Owned
80 Hawes Way
Stoughton, Massachusetts (a) (b) ............. 36,000 6/10/13
3555 W. Oquendo Road
Las Vegas, Nevada (c) ........................ 90,000 11/30/08
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ...................................... 25,000 1/14/06
348 New Country Road
Secaucus, New Jersey (b) ........................................... 37,905 12/31/07
26 West Street
Brooklyn, New York (b) ............................................. 15,000 Owned
301 and 305 Suburban Avenue
Deer Park, New York (b) ............................................ 33,535 3/31/05
24-37 46th Street
Long Island City, New York (a) ..................................... 10,000 1/31/07
111-01 and 109-15 14th Avenue
College Point, New York (c) ........................................ 82,000 2/28/11
516 West 34th Street
New York, New York (c) ............................................. 25,000 6/30/12
253 West 35th Street
New York, New York (c) ............................................. 7,000 8/31/09
Two Penn Plaza
New York, New York (c) ............................................. 55,891 1/31/16
704 Clinton Avenue South
Rochester, New York (a) ............................................ 25,000 7/31/06
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio (a) ............................................... 25,600 9/27/06
3976 Southern Avenue
Cincinnati, Ohio (a) ............................................... 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) ................................................. 25,500 10/31/07
2904 S.W. 1st Avenue
Portland, Oregon (c) ............................................... 12,500 3/31/05
700 Gracern Road
Columbia, South Carolina (a) ....................................... 11,850 2/28/07
7520 Bartlett Corp. Avenue, East
Bartlett, Tennessee (c) ............................................ 9,000 12/31/05
4067 New Getwell Road
Memphis, Tennessee (b) ............................................. 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas (c) ................................................. 18,028 1/31/07
5550 Airline Drive
Houston, Texas (b) ................................................. 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) ................................................. 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ........................................... 120,904 12/31/06
320 23rd Street
Arlington, Virginia (a) ............................................ 43,028 3/05/10
109-D Executive Drive
Dulles, Virginia (c) ............................................... 19,000 8/31/09
22930 Shaw Road
Dulles, Virginia (c) ...............................................348 New Country Road
Secaucus, New Jersey (b) ..................... 37,905 12/31/07
301 and 305 Suburban Avenue
Deer Park, New York (b) ...................... 33,535 3/31/10
111-01 and 109-15 14th Avenue
College Point, New York (c) .................. 82,000 2/28/11
516 West 34th Street
New York, New York (c) ....................... 25,000 6/30/12
Two Penn Plaza
New York, New York (a) (c) ................... 55,891 1/31/16
704 Clinton Avenue South
Rochester, New York (a) ...................... 30,000 7/31/11
2900 Newpark Drive
Barberton, Ohio (b) .......................... 88,131 9/30/13
10,14,15,17 and 21 West Voorhees Street
Cincinnati, Ohio (a) ......................... 34,189 9/30/11
3976 Southern Avenue
Cincinnati, Ohio (a) ......................... 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) ........................... 25,500 10/31/07
9815 Roosevelt Boulevard
Philadelphia, Pennsylvania (a) ............... 33,405 11/30/11
4067 New Getwell Road
Memphis, Tennessee (a) ....................... 36,000 8/28/07
5550 Airline Drive
Houston, Texas (b) ........................... 78,483 12/31/09
512 Norwood Drive
Houston, Texas (b) ........................... 28,000 12/31/09
515 Norwood Drive
Houston, Texas (b) ........................... 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ..................... 120,904 12/31/07
320 23rd Street
Arlington, Virginia (a) ...................... 43,028 3/5/10
22930 Shaw Road
Dulles, Virginia (c) ......................... 32,616 2/28/15
73280 Formex Road
Richmond, Virginia (a) ....................... 30,640 7/31/08
8657 South 190th Street
Kent, Washington (b) ......................... 46,125 6/30/08
6950 Gisholt Drive
Madison, Wisconsin (b) ....................... 32,000 5/30/09
400 Parkdale Avenue N
Hamilton, Ontario, Canada (d) ................ 48,826 5/24/11
10
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
3280 Formex Road
Richmond, Virginia (b) ............................................. 30,640 7/31/08
8657 South 190th Street
Kent, Washington (b) ............................................... 46,125 6/30/08
6950 Gisholt Drive
Madison, Wisconsin (b) ............................................. 32,000 5/30/09
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom (d) .......................... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom (d) ....................... 24,300 12/24/06
2116 Logan Avenue
Winnipeg, Manitoba, Canada (e) ..................................... 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada (e) .................................... 16,100 Owned
EMCOR believesWe believe that all of itsour property, plant and equipment are well maintained, in
good operating condition and suitable for the purposes for which they are used.
See Note K --- Commitments and Contingencies of the notes to consolidated
financial statements for additional information regarding lease costs. EMCOR
utilizesWe
utilize substantially all of itsour leased or owned facilities and believesbelieve there
will be no difficulty either in negotiating the renewal of itsour real property
leases as they expire or in finding alternative space, if necessary.
- ----------------------------
(a) Principally used by a company engaged in the "United States facilities
services" segment.
(b) Principally used by a company engaged in the "United States mechanical
construction and facilities services" segment.
(c) Principally used by a company engaged in the "United States electrical
construction and facilities services" segment.
(d) Principally used by a company engaged in the "United Kingdom construction
and facilities services" segment.
(e) Principally used by a company engaged in the "Canada construction and
facilities services" segment.
811
ITEM 3. LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
EMCOR and three of its officers (Chairman of the Board and Chief Executive
Officer Frank T. MacInnis, Executive Vice President and Chief Financial Officer
Leicle E. Chesser, and Senior Vice President-Chief Accounting Officer and
Treasurer Mark A. Pompa) have been named as defendants in a purported
consolidated class action filed in the United States District Court of
Connecticut entitled IN RE EMCOR GROUP, INC SECURITIES LITIGATION. Plaintiff
purports to represent a class composed of all persons who purchased or otherwise
acquired EMCOR common stock and/or other securities between April 9, 2003 and
October 2, 2003, inclusive. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder and of Section 20(A) of
the Securities Exchange Act, relating to alleged misstatements and omissions in
certain of the Company's filings with the Securities and Exchange Commission,
press releases and other public statements between April 9 and October 2, 2003,
and seeks damages on behalf of the purported class in unspecified amounts. A
motion to dismiss the Complaint filed by EMCOR and the individual defendants is
currently under submission. As set forth in the motion, EMCOR and the individual
defendants believe that the plaintiff's allegations are without merit and are
vigorously defending against them.
In July 2003, EMCOR'sour subsidiary, Poole &and Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecumsubpoena duces tecum by a grand jury empaneledempanelled by the United
States District Court for the District of Maryland which is investigating, among other
things, Poole & Kent'spublic corruption and fraud in the use of minority and woman-owned
business enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On April 26, 2004, Poole & Kent was advised that it isidentified as a target
of that investigation. Poole & Kent has cooperated with investigators from the
time it first learned of the investigation, has responded to various subpoenas
and requests for documents and other information, and, in the course of its
cooperation with investigators, has waived its attorney client privilege and
other client/lawyer confidentiality protections. In connection with such
investigation, on September 6, 2005, a former employee of Poole & Kent and his
wife pled guilty to federal mail fraud charges that they used a fraudulent
woman's owned business enterprise ("WBE") in order to enrich themselves, to help
Poole & Kent qualify for certain public construction projects and to corrupt a
former Maryland state senator. The former employee also pled guilty to filing a
false federal personal income tax return as a result of his failure to report on
his federal income tax return the value of free work that was done at his home
by Poole & Kent. On October 17, 2005, the grand jury returned an indictment
charging W. David Stoffregen ("Stoffregen"), the former President and Chief
Executive Officer of Poole & Kent, and a former Maryland state senator and his
wife with racketeering, mail fraud and related offenses, related to the
fraudulent WBE and corruption schemes. On October 26, 2005, a former Poole &
Kent project manager pled guilty to making false statements to federal
investigators during the grand jury investigation. More recently, on October 20,
2006, Stoffregen's former administrative assistant pled guilty to a charge of
misprision of a felony for deliberately withholding from investigators and the
grand jury a scheme by Stoffregen to defraud Poole & Kent. On December 4, 2006,
Stoffregen entered a plea of guilty to racketeering conspiracy, mail fraud and
tax charges, related to the fraudulent WBE scheme, his efforts to corrupt the
Maryland state senator and his defrauding of Poole & Kent. Poole & Kent is cooperatinghad
terminated Stoffregen prior to his indictment in October 2005 because of his
refusal to cooperate with the investigation.federal investigators.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against EMCOR'sour United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named EMCOR Drake & Scull Group plcplc) ("D&S"), in connection with a
subcontract D&S entered into with Mowlem with respect to a project for the
United Kingdom Ministry of Defence at Abbey Wood in Bristol, U.K. Mowlem seeks
damages arising out of alleged defects in the D&S design and construction of the
mechanicalelectrical and electricalmechanical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $75.8$77.3 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $22.3$22.7 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCOR or its
subsidiaries are involved range from a few thousand dollars to over $75.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR's financial position and/or results of
operations. These proceedings include the following: (a) aA civil action brought(the "First Anti-Trust Action") is pending against EMCOR'sour
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW from at least 1996 through 2002, conspired
to prevent competition and to monopolize the market for communicationstelecommunications
wiring services in the New York City area thereby excluding plaintiffs from
wiring jobs in that market. Plaintiffs allege they have lost profits as a result
of this concerted activity and seek damages in the amount of $50$50.0 million after
trebling plus attorney's fees.fees and unspecified compensatory and punitive damages
on their common law claims. However, plaintiffs' damages expert has stated in
his pre-trial deposition that he estimates plaintiffs' total damages atof $8.7
million before trebling. Forest has denied the allegations of wrongdoing set
forth in the complaint, and pre-trailpre-trial discovery has been completed. No trial
date has been set by the Court. Forest
believesDefendants are scheduled to move for summary
judgment dismissing all claims in February 2007. The parties do not know when
the motion will be decided, and there is no assurance that the suit is without merit. (b) Amotion will be
granted in the action.
Another civil action brought(the "Second Anti-Trust Action") is pending against
Forest and seven other defendants in the United States District Court for the
Southern District of New York under the Sherman Act and New York common law by a
joint
venture (the "JV") between EMCOR's subsidiary Poole & Kent Corporation ("Poole &
Kent") and an unrelated companycompetitor, who is one of the plaintiffs in the Fairfax, Virginia Circuit CourtFirst Anti-Trust Action
described above, and whose employees are not members of the IBEW. The Second
Anti-Trust Action alleges, among other things, that Forest, six other electrical
contractors (four of whom were named as defendants in the First Anti-Trust
Action) and the IBEW conspired from at least January 2003 to prevent competition
in the market for telecommunications wiring services in the New York City area
thereby excluding plaintiffs from wiring jobs in that market. Plaintiff alleges
that it lost profits as a result of the concerted activity and seeks an
undetermined amount of damages for its anti-trust claims, which it seeks to have
trebled, plus attorneys' fees and alleges $30.0 million in compensatory damages
and unspecified punitive damages for its common law claims. Forest has not yet
answered the complaint.
We are involved in other proceedings in which the JV seeks damages from the Upper Occoquan Sewage Authority ("UOSA") resulting
from material breachesand claims have been
asserted against us. We believe that we have a number of a construction contract (the "Contract") entered into
between the JVvalid defenses to such
proceedings and UOSA for construction of a wastewater treatment facility.
Poole & Kent incurred unrecovered costs in completing this project, which are
included in the balance sheet account "costsclaims and estimated earnings in excess of
billings on uncompleted contracts" in EMCOR's consolidated balance sheets as of
December 31, 2004intend to vigorously defend ourselves and 2003. A jury has returned a verdict findingdo not
believe that UOSA
committed material
9any significant liabilities will result.
12
breaches of the Contract and a jury trial to establish the JV's damages is
currently in process. The JV claims total damages, based upon alternative
measures of damages, in excess of $75.0 million (exclusive of interest), and in
a jury trial to be subsequently held the JV intends to claim damages in excess
of $18.0 million (exclusive of interest). In accordance with the joint venture
agreement establishing the JV, Poole & Kent would be entitled to approximately
one-half of any damage award received by the JV.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10No matters were submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2006.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 58;60; Chairman of the Board and Chief Executive
Officer of the Company since April 1994. Mr. MacInnis was elected to the
additional position of President on February 26, 2004 and served as such until
October 25, 2004. He also served as President of the Company from April 1994 to
April 1997. From April 1990 to April 1994, Mr. MacInnis served as President and
Chief Executive Officer, and from August 1990 to April 1994 as Chairman of the
Board, of Comstock Group, Inc., a nationwide electrical contracting company.
From 1986 to April 1990, Mr. MacInnis was Senior Vice President and Chief
Financial Officer of Comstock Group, Inc. In addition, from 1986 to April 1994,
Mr. MacInnis was also President of Spie Group Inc., which had interests in
Comstock Group, Inc., Spie Construction Inc., a Canadian pipeline construction
company, and Spie Horizontal Drilling Inc., a U.S. company, engaged in
underground drilling for the installation of pipelines and communications cable.
ANTHONY J. GUZZI, Age 40;42; President and Chief Operating Officer since
October 25, 2004. From August 2001, until he joined the Company, Mr. Guzzi
served as President of the North American Distribution and Aftermarket Division
of Carrier Corporation ("Carrier"). Carrier is a manufacturer and distributor of
commercial and residential HVAC and refrigeration systems and equipment and a
provider of aftermarket services and components of its own products and those of
other manufacturers in both the HVAC and refrigeration industries. From January
2001 to August 2001, Mr. Guzzi was President of Carrier's Commercial Systems and
Services Division and from June 1998 to December 2000, he was Vice President and
General Manager of Carrier's Commercial Sales and Services Division.
SHELDON I. CAMMAKER, Age 65;67 ; Executive Vice President and General Counsel
of the Company since September 1987 and Secretary of the Company since May 1997.
Prior to September 1987, Mr. Cammaker was a senior partner of the New York City
law firm of Botein, Hays & Sklar.
LEICLE E. CHESSER,MARK A. POMPA, Age 58;42; Executive Vice President and Chief Financial
Officer of the Company since May 1994.April 3, 2006. From June 2003 to April 19902, 2006, Mr.
Pompa was Senior Vice President - Chief Accounting Officer of the Company, and
from June 2003 to MayJanuary 2007, Mr. Pompa was also Treasurer of the Company.
From September 1994 to June 2003, Mr. Chesser
served as ExecutivePompa was Vice President and Chief Financial OfficerController of
Comstock
Group, Inc., and from 1986 to May 1994, Mr. Chesser was also Executive Vice
President and Chief Financial Officer of Spie Group, Inc.the Company.
R. KEVIN MATZ, Age 46;48; Senior Vice President - Shared Services of the
Company since June 2003. From April 1996 to June 2003, Mr. Matz served as Vice
President and Treasurer of the Company and Staff Vice President - Financial
Services of the Company from March 1993 to April 1996. From March 1991 to March
1993, Mr. Matz was Treasurer of Sprague Technologies Inc., a manufacturer of
electronic components.
MARK A. POMPA, Age 40; Senior Vice President - Chief Accounting Officer and
Treasurer of the Company since June 2003. From September 1994 to June 2003, Mr.
Pompa was Vice President and Controller of the Company.
1114
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION. EMCOR'sOur common stock trades on the New York Stock Exchange
under the symbol "EME".
The following table sets forth high and low sales prices for theour common
stock for the periods indicated as reported by the New York Stock Exchange:
2004Exchange,
adjusted for a 2-for-1 stock split effected in the form of a 100% stock
distribution made on February 10, 2006:
2006 HIGH LOW
---- ---- ---
First Quarter .......................... $45.12 $34.06................................ $49.96 $33.75
Second Quarter ......................... $46.01 $35.80............................... $52.65 $42.22
Third Quarter .......................... $44.00 $37.52................................ $57.70 $42.66
Fourth Quarter ......................... $47.38 $37.41
2003............................... $63.89 $53.26
2005 HIGH LOW
---- ---- ---
First Quarter .......................... $55.20 $43.40................................ $24.95 $20.90
Second Quarter ......................... $54.30 $45.61............................... $25.50 $21.76
Third Quarter .......................... $50.40 $39.79................................ $29.76 $24.15
Fourth Quarter ......................... $45.14 $33.00............................... $36.14 $27.98
HOLDERS. As of March 4, 2005,February 16, 2007, there were 127106 stockholders of record
and, as of that date, EMCOR estimateswe estimate there were approximately 7,60010,900 beneficial
owners holding our common stock in nominee or "street" name.
DIVIDENDS. EMCORWe did not pay dividends on itsour common stock during 20042006 or
2003,2005, and it doeswe do not anticipate that itwe will pay dividends on itsour common stock in
the foreseeable future. EMCOR'sOur working capital credit facility limits the payment
of dividends on itsour common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes, as of December 31, 2006, equity compensation plans
that were approved by stockholders and equity compensation plans that were not
approved by stockholders as of December 31, 2004:stockholders. The information in the table and in the Notes thereto
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
Equity Compensation Plan Information
A B C
-------------------------- -------------------------- ---------------------------------------------- -----------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE FUTURE ISSUANCE UNDEREQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN A)
- --------------------- -------------------------- -------------------------- -------------------------- ---------------------------------------------- -----------------------
Equity Compensation
Plans Approved
by Stockholders 624,288 $16.85 469,214(2)Security Holders 1,355,189 $23.77 916,560(2)
Equity Compensation
Plans Not Approved
by Security Holders 1,440,403(1) $34.43 103,463(3)
--------- -------1,911,084(1) $18.94 51,058(3)
---------- ----------
Total 2,064,691 $32.56 572,677
========= =======3,266,273 $20.94 967,618
========== ==========
- ------------------------
(1) 50,46834,666 shares relate to outstanding options to purchase shares of Companyour
common stock which are held bywere granted to our employees (other than executive
officers) of the Company
(the "Employee Options"), 1,259,3981,785,866 shares relate to outstanding
options to purchase shares of Companyour common stock which are held bywere granted to our
executive officers of the
Company (the "Executive Options"), 14,00024,000 shares relate to
outstanding options to purchase shares of Companyour common stock which are held bywere
granted to our Directors of the
Company (the "Director Options"), and 116,53766,552 shares
relate to restricted common stock units ("RSUs") described below under
"Restricted Share Units."
(2) Includes 89,21495,862 shares of Companyour common stock reservedavailable for future issuance
under theour 1997 Non-Employee Directors' Non-Qualified Stock Option Plan
60,000(the "1997 Directors' Plan"), 600 shares of Companyour common stock reservedavailable for
future issuance under the 2003
Non-Employee Directors' Stock Option Plan, and 320,000 shares of Company
common stock reserved for issuance under theour 2003 Management Stock Incentive Plan. Subsequent to December 31, 2004, options to purchase
290,200Plan, 772,238
shares of Companyour common stock wereavailable for future issuance under our 2005
Management Stock Incentive Plan and 47,860 shares of our common stock
available for future issuance under our 2005 Stock Plan for Directors. The
shares available for future issuance under our 2003 and 2005 Management
Stock Incentive Plans may be issuable in respect of options and/or stock
appreciation rights granted under the 2003
ManagementPlan and/or may also be issued
pursuant to the award of restricted stock, unrestricted stock and/or
awards that are valued in whole or in part by reference to, or are
otherwise based on the fair market value of, our common stock. Our shares
of common stock that remain available for issuance under our 2005 Stock
Incentive Plan.Plan for Directors are issuable to each non-employee director who elects
to receive $40,000 of his non-cash annual retainer in shares of our common
stock. The number of shares issuable to each such director is determined
by dividing $40,000 by the fair market value of a share of our common
stock as of the first business day of each calendar year and increasing
such resulting number by 20%. One-half of such shares are to be delivered
to the director promptly after the first business day of the calendar
year, and the other half are held by us for one year after which they are
to be delivered to the director.
(3) Represents shares relating to the grant of RSU's.
12RSUs.
15
EMPLOYEE OPTIONS
The Employee Options referred to in note (1) to the immediately preceding
table under Equity Compensation Plan Information (the "Table") vest over three
years in equal annual installments, commencing with the first anniversary of the
date of grant of the Employee Options. TheOur Board of Directors granted such
Employee Options to certain of our key employees of the Company based upon the
performance of such employees. Suchtheir performance.
Those Employee Options have an exercise price per share equal to the fair market
value of a share of Companyour common stock on their respective grant dates and have a
term of ten years from the grant date.
EXECUTIVE OPTIONS
140,000The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
180,000 of the Executive Options referred to in note (1) to the Table were
granted to six of our executive officers in connection with their employment
agreements with the Companyus, which employment agreements were made as of January 1, 1998,
as amended (the "1998 Employment Agreements"). and have since expired. Pursuant
to the terms of the 1998 Employment Agreements, each such executive officer
received a fixed number of Executive Options on the first business day of 2000
and 2001 with respective exercise prices of $17.56$8.78 and $25.44$12.72 per share; in
addition, Mr. MacInnis, our Chairman of the Board and Chief Executive Officer, of the Company,
received an additional grant under his 1998 Employment Agreement of an option to
purchase 200,000400,000 shares with an exercise price of $19.75$9.88 per share. Such
Executive Options vested on the first anniversary of the grant date, other than
the option granted to Mr. MacInnis for 200,000400,000 shares which vested in four equal
installments based upon the Company'sour common stock reaching target stock prices of $25, $30, $35$12.50,
$15.00, $17.50 and $40.
488,135$20.00.
1,205,866 of the Executive Options referred to in note (1) to the Table
were granted to six executive officers in connection with employment agreements
with the Companyus, which employment agreements were dated January 1, 2002 (the "2002
Employment Agreements") and 30,000have since expired, and 60,000 of the Executive
Options were granted to Mr. Anthony Guzzi, our President and Chief Operating
Officer, of the Company when he joined the Companyus in October 2004. Of these Executive Options, (a)(i) an
aggregate amount of 171,100275,800 of such Executive Options were granted on December
14, 2001 (exercisable in full upon grant) with an exercise price of $41.70$20.85 per
share, (b)(ii) an aggregate amount of 145,700231,400 of such Executive Options were
granted on January 2, 2002 with an exercise price of $46.35$23.18 per share, (c)(iii) an
aggregate amount of 141,335253,870 of such Executive Options were granted on January 2,
2003 with an exercise price of $54.73$27.37 and (d) 30,000(iv) an aggregate amount of 384,796 of
such Executive Options were granted on October 25,January 2, 2004 with an exercise price of
$38.68.$21.92. The Executive Options referred to above in clause (a)(i) were exercisable
in full on the grant date. Thedate; the Executive Options referred to above in clauses
(b)(ii), (iii) and (c)(iv) provided that they were
originally exercisable as follows;follows: one-fourth
on the grant date, one-fourth on the first anniversary of the grant date,
one-fourth on the second anniversary of the grant date and one-fourth on the
last business day of the calendar year immediately preceding the third
anniversary of the grant date. However, on June
10,During 2004, the out-of-the-money Executive
Options referred to in classes (b)clauses (iii) and (c)(iv) were amended
so that they became exercisablevested in full on that date in
anticipation of a change in accounting rules requiring the expensing of stock
options beginning in July
2005.January 2006. The options granted to Mr. Guzzi vestare
exercisable in three equal annual installments, commencing with the first
anniversary of the date of grant.
On the first business day of 2005, the Company's executive officers were
granted options under the Company's stockholder-approved 2003 Management Stock
Incentive Plan to purchase an aggregate of 262,500 shares of Company common
stock with an exercise price of $45.08 per share. These options are not included
in the Table.
Each of the Executive Options granted have a term of ten years from their
respective grant dates and an exercise price per share equal to the fair market
value of a share of common stock on their respective grant dates.
DIRECTOR OPTIONS
The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
During 2002, each of our non-employee director of the Companydirectors received 2,000
Director Options and in 2003 Mr. Larry J. Bump, upon his election to the Board,
received 2,0004,000 Director
Options. These options were in addition to the 3,0006,000 options to purchase our
common stock that were granted to each non-employee director under the
Company'sour 1995
Non-Employee Directors' Non-Qualified Stock Option Plan, which plan has been
approved by the Company'sour stockholders. The price at which such Director Options are
exercisable is equal to the fair market value per share of common stock on the
grant date. The exercise price per share of the Director Options is $55.49$27.75 per
share, except those granted to Mr. Michael T. Yonker, upon his election to the
Board on October 25, 2002, which have an exercise price of $51.75 per share, and those granted to Mr. Bump, upon his election to the Board
on February 27, 2003, which have an exercise price of $48.15$25.88 per share. All
of these options vested in full onbecame exercisable commencing with the grant date and have a
term of ten years from the grant date.
RESTRICTED SHARE UNITS
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by theour
Board of Directors in October 2000 and amended on December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of unitsRestricted
Stock Units ("RSUs") that will subsequently be converted into shares of our
common stock at a 15% discount from the fair market value of common stock as of
the date the annual bonus is determined. The units are to be converted into
shares of common stock and delivered to the executive officer on the earliest
of (a)of: (i) the first business day following the day upon which the Company releaseswe release to the
public generally itsour results in respect of the fourth quarter of the third
calendar year following the year in respect of which the RSUs were granted
("Release Date"), (b); (ii) the executive officer's termination of employment for any
reasonreason;
16
or (c)(iii) immediately prior to a "change of control" (as defined in the Stock
Bonus Plan). In addition, pursuant to the Stock Bonus Plan, each executive
officer iswas permitted at his election to cause all or part of his annual bonus
not automatically credited to him in the form of RSUs under the Stock Bonus Plan
to be
13
credited to him in the form of units ("Voluntary Units") that will
subsequently be converted into common stock at a 15% discount from the fair
market value of common stock as of the date the annual bonus is determined. An
election to accept Voluntary Units under the Stock Bonus Plan musthad to be made at
least six months prior to the end of calendar year in respect of which the bonus
will be payable. These Voluntary Units are to be converted into shares of common
stock and delivered to the executive officer on the earliest of (a)(i) the date
elected by the executive officer, but in no event earlier than the Release Date,
(b)(ii) the executive officer's termination of employment or (c)(iii) immediately
prior to a "change of control." In addition, on October 25, 2004, when he joined the
Company, Mr. Guzzi was granted 25,000 restricted stock units, and 12,500 of
these units will be converted into an equal number of shares of the Company's
common stock on the first business day immediately following the day upon which
the Company releases to the public its results for the fourth quarter of each of
2004 and 2005, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
financial statements and should be read in conjunction with the consolidated
financial statements, the related notes thereto and the Reportreport of Independent Registered
Public Accounting Firmour
independent registered public accounting firm thereon included elsewhere in this
and in previously filed annual reports on Form 10-K of EMCOR.
As required, the results of operations for all years presented have been
adjusted to reflect a 2-for-1 stock split effected in the form of a 100% stock
distribution made February 10, 2006. See Note H - Common Stock of the notes to
consolidated financial statements for additional information. The results of
operations for all years presented reflect discontinued operations accounting
due to the sale of a subsidiary in 2006 and in 2005.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues ................................. $4,747,880 $4,534,646 $3,968,051 $3,419,854 $3,460,204........................................... $5,021,036 $4,696,603 $4,698,126 $4,477,046 $3,943,504
Gross profit ............................. 446,902 482,454 482,634 391,823 357,817....................................... 567,677 498,415 443,059 476,311 479,140
Operating income ......................... 42,129 47,057 115,539 88,682 78,925................................... 118,044 80,895 42,222 47,926 115,974
Net income ........................................................................ $ 86,634 $ 60,042 $ 33,207 $ 20,621 $ 62,902 $ 50,012 $ 40,089
========== ========== ========== ========== ==========
Basic earnings per share .................- continuing operations ... $ 2.182.76 $ 1.381.96 $ 4.231.09 $ 3.860.70 $ 3.842.13
Basic earnings per share - discontinued operations . (0.02) (0.03) (0.00) (0.01) (0.01)
---------- ---------- ---------- ---------- ----------
$ 2.74 $ 1.93 $ 1.09 $ 0.69 $ 2.12
========== ========== ========== ========== ==========
Diluted earnings per share ...............- continuing operations . $ 2.132.67 $ 1.331.92 $ 4.071.07 $ 3.400.68 $ 2.952.05
Diluted earnings per share - discontinued operations (0.02) (0.03) (0.00) (0.01) (0.01)
---------- ---------- ---------- ---------- ----------
$ 2.65 $ 1.89 $ 1.07 $ 0.67 $ 2.04
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) .....................................(1) ........................... $ 710,309 $ 615,436 $ 562,361 $ 521,356 $ 489,870
$ 421,933 $ 233,503
Total assets ........................................................................................ $2,089,023 $1,778,941 $1,817,969 $1,795,247 $1,758,491
$1,349,664 $1,261,864
Goodwill ................................................................................................ $ 288,165 $ 283,412 $ 279,432 $ 277,994 $ 290,412
$ 56,011 $ 67,625
Notes payable ...................................................................................... $ -- $ -- $ -- $ -- $ 21,815
$ 573 $ --
Borrowings under working capital credit lines ...................... $ -- $ -- $ 80,000 $ 139,400 $ 112,000
$ -- $ --
Other long-term debt, including current maturities ............ $ 332 $ 387 $ 476 $ 589 $ 1,015
$ 973 $ 116,056
Capital lease obligations .............................................................. $ 1,566 $ 1,570 $ 1,662 $ 339 $ 351 $ 249 $ 573
- ---------------
(a)----------
(1) No cash dividends on EMCOR'sthe Company's common stock have been paid during the
past five years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AND
FINANCIAL CONDITIONWe are one of the largest electrical and mechanical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. We provide services to a broad range of commercial, industrial,
utility and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. Our offices are located throughout the
United States, in Canada and in the United Kingdom. In the United Arab Emirates,
we carry on business through two joint ventures.
17
OVERVIEW
RevenuesThe following table presents selected financial data for the year ended December 31, 2004 were $4.75 billion compared to
$4.53 billion and $3.97 billion for thefiscal years
ended December 31, 20032006, 2005 and 2002,
respectively. Net income was $33.2 million for 2004 compared to $20.6 million
for 2003(in millions, except percentages and $62.9 million for 2002. Diluted
earnings per share on net income
were $2.13share):
2006 2005 2004
--------- --------- ---------
Revenues ................................................... $ 5,021.0 $ 4,696.6 $ 4,698.1
Revenues increase from prior year .......................... 6.9% -- 4.9%
Operating income ........................................... $ 118.0 $ 80.9 $ 42.2
Operating income as a percentage of revenues ............... 2.4% 1.7% 0.9%
Net income ................................................. $ 86.6 $ 60.0 $ 33.2
Diluted earnings per share ................................. $ 2.65 $ 1.89 $ 1.07
Cash flows provided by operating activities ................ $ 209.3 $ 145.7 $ 43.6
Our results of operations for 2004 compared to $1.33 per share for 20032006 benefited from a strong commercial
construction business cycle and $4.07 per
share for 2002.
Positively impacting 2004 net income and diluted earnings per share were
increaseda greater availability of generally higher gross
margin work in the United States than was the case in 2005. All of our operating
segments reported positive operating income fromfor 2006 for the United Kingdomfirst time since
2002, exclusive of our Other international construction and facilities services
segment which reported breakeventhat consisted of two small joint ventures in the Middle East during
this time period. In particular, the commercial, hospitality, high-tech, food
and pharmaceutical sectors contributed to the general improvement in our United
States construction profits. Our United States facilities services segment
benefited from the addition of new site-based facilities services contracts and
strong demand for mobile services. Our United States mechanical construction and
facilities services segment also benefited from the absence of an $11.7 million
non-cash expense recorded in 2005 with respect to a civil action. Included in
net income from continuing operations were favorable income tax adjustments of
$16.1 million and $17.5 million for 2006 and 2005, respectively. The general
market improvements in results for 2004 compared to an operating loss
of $22.4 million for 2003, increased gross profits from2006 were partially offset by fewer
transportation infrastructure and financial services healthcareprojects, which had
produced higher operating margins in 2005 than in 2006 and hospitality workhad increased the
reported operating income as a percentage of revenues for 2005, and by larger
than usual losses on certain contracts particularly within the United States
electrical construction and facilities services segmentsegment. Additionally, our 2006
results, when compared to 2005, were negatively impacted by the absence of a
$5.6 million favorable insurance settlement, which primarily affected the United
States electrical construction and facilities services segment. 2006 results
also were negatively impacted by a $4.0 million expense, or $0.07 per basic and
diluted share after income tax, relating to the effect of the adoption of
Statement No. 123(R) "Share-Based Payment" ("Statement 123(R)") issued by the
Financial Accounting Standards Board ("FASB").
Cash flows provided by operating activities were $209.3 million for 2006,
compared to $145.7 million for 2005. Our 2006 year ending cash and cash
equivalents balance was $273.7 million compared to $103.8 million at the end of
2005. This improvement was primarily attributable to improved billing and
collection practices and settlement of certain large contract claims and
disputes. We continued to restructure parts of our business during 2006
resulting in $1.6 million of restructuring expense, which was primarily related
to the reduction of personnel and leased facilities in the provisionour United States
facilities services segment.
Our net income and diluted earnings per share for income taxes of approximately $16.3 million in2005 compared to 2004
and 2003. This was offset by decreased gross profits due to:were positively impacted by: (a) poor
contractgenerally improved performance on certainUnited States
and United Kingdom construction contracts; (b) greater availability of generally
higher margin discretionary project work in the United States mechanical and United
Kingdom; (c) favorable income tax adjustments of $17.5 million; (d) the
settlement of an insurance coverage related dispute which contributed
approximately $5.6 million to operating income; (e) a generally improved
economic environment, particularly for the United States and United Kingdom
commercial construction industry; and (f) reduced losses in our Canada
construction and facilities services segments; (b) continued decreased
availabilitysegment. The favorable income tax
adjustments of higher margin discretionary small project spending$17.5 million were comprised of a reversal of $22.7 million in
income tax reserves that were no longer required, partially offset by a $5.2
million income tax provision related to a valuation allowance recorded to reduce
deferred tax assets related to net operating losses and repairother temporary
differences of our Canada construction and maintenance work in certain geographical marketsfacilities services segment. The
valuation allowance was required because of uncertainty at the time if the
segment would have sufficient taxable income in the United States; (c)
continued heightened price competition for commercial, industrial and public
sector work infuture to realize the United States; and (d) increased prices for certain fixed
price construction project materials, particularly in Canada.
14
income
tax benefit of such deferred tax assets. The 2004 results also included
favorable income tax adjustments of $13.9 million (see discussion below).
Results for 2005 were also positively affectednegatively impacted by a non-cash expense of $11.7 million
as a result of the implementationUOSA Action.
We have share-based compensation plans and programs. With the adoption of
significant strategic decisionsStatement 123(R) on January 1, 2006, all share-based payments to our employees
and management changes initiated by EMCOR Group,
Inc. senior managementnon-employee directors, including grants of stock options, have been
recognized in late 2003 and during 2004. These actions included a
curtailmentthe income statement based on their fair values utilizing the
modified prospective method of accounting. The impact of the adoption of
Statement 123(R) resulted in bidding for public sector work, replacementthe recognition of senior management
at certain business units and reductions in selling, general and administrative
expenses in all segments. Related to these actions were $8.3$4.0 million of restructuring expensescompensation
expense in 2006. As a result, on an after income tax basis, net income was
adversely impacted by $2.4 million, and basic and diluted earnings per share was
adversely impacted by $0.07. Approximately $1.2 million of compensation expense,
net of income taxes, will be recognized over the approximate 15 month remaining
vesting period for stock options outstanding at December 31, 2006. Prior to
January 1, 2006, we applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25") and related
interpretations in accounting for stock options. Accordingly,
18
no compensation expense had been recognized in the accompanying Consolidated
Statements of Operations for 2005 and 2004 principally employee severance obligations.
EMCOR will continueas permitted by Opinion 25 in respect
of stock options vesting during those periods inasmuch as we granted stock
options at fair market value. Compensation awards for which the liabilities
fluctuate with changes in the market price of our common stock increased
incentive-based compensation expense by $2.8 million for 2006 compared to focus during2005.
A civil action ("the UOSA Action") was brought by a joint venture ("the
JV") between our subsidiary Poole and Kent Corporation ("Poole & Kent") and an
unrelated company against the Upper Occoquan Sewage Authority ("UOSA"), based on
a material breach by UOSA of a construction contract. As a result of a jury
decision on March 11, 2005 on controlling selling, general and administrative expenses, increasing revenues from multi-year facilities services
contracts and selective estimating and biddingsubsequent rulings of work. At the same time, a
continued gradual improvementtrial judge in commercial constructionthe
action, it was determined that the JV is anticipated.
Management believesentitled to be paid approximately $18.0
million in connection with the UOSA project in addition to the amounts it has
positioned EMCORalready received from UOSA. UOSA has paid approximately $16.6 million of the
$18.0 million, but is seeking to benefit fromhave a determination of the strategic
decisions and management changes initiated in late 2003 and during 2004;
however, theretrial court
reversed on appeal to the Virginia Supreme Court regarding its obligation to pay
the balance. There is no assurance that therethe Virginia Supreme Court will hear the
appeal or, if the appeal is heard, that it will be significantly improved future
results if economic conditions, with respectresolved in favor of the JV.
Inasmuch as the jury decision and the trial judge's subsequent ruling did not
reflect the amount sought by the JV following the trial we recorded a non-cash
expense of approximately $8.7 million during the first quarter of 2005 following
the jury decision on March 11, 2005 and an additional non-cash expense of
approximately $3.0 million during the second quarter of 2005 following a ruling
by the trial judge on June 27, 2005. These non-cash expenses reflected a
write-off of unrecovered costs of Poole & Kent in completing certain work
related to this project based on what we believe is probable of recovery by the
JV based on current facts. (The unrecoverable costs were included in the balance
sheet account "costs and estimated earnings in excess of billings on uncompleted
contracts" in our consolidated balance sheet as of December 31, 2004.) The JV
has asserted additional claims against UOSA relating to the availabilitysame project which
are also pending in the Fairfax, Virginia Circuit Court and another trial
between the JV and UOSA is scheduled to commence in September 2007 in which the
JV seeks damages in excess of more
profitable private sector work affecting EMCOR and$22.0 million. Upon the construction industry
generally, do not continue to improve and competitive pressures do not ease.
Results of operations for 2003 compared to 2002 were positively impacted by
the acquisitionresolution of the
capital stock of Consolidated Engineering Services, Inc.
("CES") in December 2002 and an increase in revenues and income generated by
United States facilities services operations and United States transportation
infrastructure work. However, the 2003 results comparedadditional claims referred to 2002 were negatively
impacted by: (a) poor performance in the United Kingdom construction operations;
(b) increased competition for,immediately preceding sentence, we may
record income or additional non-cash expense. In accordance with the agreement
establishing the JV, Poole & Kent is entitled to approximately one-half of the
aggregate amounts paid and a related decrease in gross profit margin on,
commercial and industrial work in the United States due to a continuing decline
in commercial and industrial work in the United States resulting from the
economic recession; (c) reduced private sector spending on small and
discretionary projects and repairs and maintenance work resulting from the
economic recession; (d) an increase in the percentage of work relating to public
sector construction that typically has lower gross profit margins than private
sector work; (e) lower than historical gross profit margins on several United
States projects as a result of poor contract performance; and (f) reduced labor
productivity duebe paid by UOSA to the uncertain job market. (The foregoing factors affecting
the United States subsidiaries are hereafter referred to collectively as the
"2003 Unfavorable United States Market Conditions").
The consolidated results of operations for EMCOR for the year ended December
31, 2002 include the results of operations of (a) a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc. and (b)
CES from their respective dates of acquisition in 2002. EMCOR acquired one
additional company during each of 2003 and 2002, and their results of operations
are also included from their respective dates of acquisition. See Note C -
Acquisitions of Businesses and Disposition of Assets of the notes to
consolidated financial statements for additional discussion of these
transactions.JV.
OPERATING SEGMENTS
EMCOR hasWe have the following reportable segments which provide services
associated with the design, integration, installation, startup,start-up, operation and
maintenance of various systems: (a) United States electrical construction and
facilities services (involving systems for generation and distribution of electrical power transmission and
distribution; central plant heating and cooling; premises electrical and
lighting systems,systems; low-voltage systems, such as fire alarm, security communications and process
control systems andcontrol; voice and data systems)communication; and roadway and transit lighting and
fiber optic lines); (b) United States mechanical construction and facilities
services (involving systems for heating, ventilation, air conditioning,
refrigeration and clean-room ventilation systems, andprocess ventilation; fire protection; plumbing,
process and high-purity piping systems)piping; water and wastewater treatment); (c) United
States facilities services; (d) Canada construction and facilities services; (e)
United Kingdom construction and facilities services; and (f) Other international
construction and facilities services. The segment "United States facilities
services" principally consists of those operations which provide a portfolio of
services needed to support the operation and maintenance of customers'
facilities (mobile operationmaintenance and services; site-based operations and
maintenance services, site-based
operationservices; facilities management; installation and support for
building systems; technical consulting and diagnostic services; small
modification and retrofit projects; and program development, management and
maintenance services, facility planning and consulting services,for energy management programs and the design and construction of energy-related
projects)systems, which services are not related to customers'
construction programs. The Canada, United Kingdom and Other international
segments perform electrical construction, mechanical construction and facilities
services. The "Other international construction and facilities services" segment represents
EMCOR'sour operations outside of the United States, Canada and the United Kingdom
(primarily(currently in the Middle East). In August of 2004, we sold our interest in a
South African joint venture.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Our reportable segments reflect, for all years presented, discontinued
operations accounting due to the sale of one subsidiary in 2006 and one in 2005
and certain reclassifications of prior years amounts among the segments due to
changes in our internal reporting structure.
REVENUES
As described in more detail below, revenues for 2006 were $5.0 billion
compared to $4.7 billion for 2005 and 2004. The increased revenue for 2006
compared to 2005 was primarily attributable to a strong commercial construction
business cycle and to increased work for the hospitality, high-tech, food and
pharmaceutical sectors. Although our total revenues in 2005 and 2004 were
approximately the same, 2005 revenues when compared to 2004 were positively
impacted by increased private sector commercial construction and discretionary
project work, offset by planned curtailment of work on certain types of public
sector and certain other longer-term projects by certain of our subsidiaries.
As of December 31, 2006, our backlog was $3.50 billion, an all-time high,
and as of December 31, 2005, backlog was $2.76 billion. This increase was
primarily attributable to the strong United States commercial and hospitality
construction market and continued sales efforts that have resulted in additional
site-based service contracts for our United States facilities services segment.
Backlog is not a term recognized under United States generally accepted
accounting principles; however, it is a common measurement used in our industry.
19
Backlog includes unrecognized revenues to be realized from uncompleted
construction contracts plus unrecognized revenues expected to be realized over
the remaining term of facilities services contracts. However, if the remaining
term of a facilities services contract exceeds 12 months, the unrecognized
revenues attributable to such contract included in backlog are limited to only
12 months of revenues.
The following table presents our revenues by each of our operating
segments and the approximate percentages that each segment's revenues were of
total revenues for the years ended December 31, 2006, 2005 and 2004 (in
millions, except for percentages):
% OF % OF % OF
2006 TOTAL 2005 TOTAL 2004 TOTAL
-------- ----- -------- ----- -------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services $1,280.2 25% $1,224.6 26% $1,235.3 26%
United States mechanical construction and facilities services 1,820.9 36% 1,671.6 36% 1,778.3 38%
United States facilities services ........................... 960.7 19% 785.2 17% 725.2 15%
-------- -------- --------
Total United States operations .............................. 4,061.8 81% 3,681.4 78% 3,738.8 80%
Canada construction and facilities services ................. 287.8 6% 342.1 7% 280.8 6%
United Kingdom construction and facilities services ......... 671.4 13% 673.1 14% 678.5 14%
Other international construction and facilities services .... -- -- -- -- -- --
-------- -------- --------
Total worldwide operations .................................. $5,021.0 100% $4,696.6 100% $4,698.1 100%
======== ======== ========
Revenues of our United States electrical construction and facilities
services segment for 2006 increased $55.6 million compared to 2005. The increase
in revenues was primarily attributable to increased commercial work as a result
of a stronger commercial construction market and greater availability of
government project work. Revenues for 2005 decreased $10.7 million compared to
2004. This decrease in revenues was primarily attributable to reduced
transportation infrastructure construction work and construction work for
financial services firms, partially offset by increased commercial construction
and discretionary project work generally due to the greater availability of such
work.
Revenues of our United States mechanical construction and facilities
services segment for 2006 increased $149.3 million compared to 2005. The
increase in revenues was primarily attributable to increased commercial work as
a result of an overall stronger commercial construction market, including
greater availability of work in the hospitality, high-tech, food and
pharmaceutical sectors. Revenues for 2005 decreased $106.7 million compared to
2004. The revenues decrease was primarily attributable to a planned decrease in
activities of certain subsidiaries related to the reduction in bidding for
certain types of public sector projects and certain other long-term projects,
partially offset by increased water and wastewater treatment and hospitality
projects undertaken by certain of our subsidiaries and increased discretionary
project work. The increase in discretionary project work was partially
attributable to seasonably warm weather conditions in 2005 compared to
unseasonably cool weather conditions in 2004.
United States facilities services revenues, which include those operations
that principally provide maintenance and consulting services, increased $175.5
million in 2006 compared to 2005. This increase was primarily related to an
increased number of site-based services contracts, the addition of a mobile
services company acquired in November 2005, that accounted for $64.3 million of
this increase in revenues in 2006, and greater demand in 2006 for mobile
services work. The site-based revenues increase was related to an increase in
the outsourcing of facilities services work, augmented by our own efforts to
pursue opportunities in the government and commercial sectors. The increase in
demand for mobile services was primarily due to the strong commercial
construction business cycle which resulted in an increase in our small project
work, and increased demand for maintenance caused by energy cost awareness.
Revenues in this segment increased by $60.0 million in 2005 compared to 2004.
This 2005 increase was primarily attributable to an increase in the availability
of discretionary project work due to improved economic conditions, an increase
in mobile services revenues which was partially attributable to seasonably warm
weather conditions compared to unseasonably cool weather conditions in the
summer of 2004 and increases in the number of site-based operations contracts as
a result of increased sales efforts.
Revenues of the Canada construction and facilities services segment
decreased $54.3 million in 2006 compared to 2005. The decrease in revenues
primarily reflected a reduction in awards to us of oil and gas industry work and
a more selective bidding process on our part, offset by $18.2 million of
additional revenues related to changes in the rate of exchange of Canadian
dollars for United States dollars due to strengthening of the Canadian dollar.
Revenues increased by $61.3 million for 2005 compared to 2004. This increase in
revenues was due to increased discretionary project work at manufacturing
facilities, construction work at oil and gas extraction facilities, construction
work at hospitals, and power transmission line work generally due to the greater
availability of such work. The revenues increase also reflected an increase of
$22.9 million related to the change in the rate of exchange of Canadian dollars
for United States dollars due to the strengthening of the Canadian dollar.
United Kingdom construction and facilities services revenues decreased
$1.7 million in 2006 compared to 2005, principally due to a refocus of our
facilities services strategy. However, revenues from our commercial and
transportation infrastructure construction businesses increased due to an
improvement in the commercial construction market and significant transportation
projects awarded to us. The decrease in revenues would have been greater except
for $9.5 million of additional revenues related to the strengthening of
20
the British pound as compared to the United States dollar. Revenues decreased
$5.4 million for 2005 compared to 2004, principally due to a $7.3 million
decrease related to the weakening of the British pound as compared to the United
States dollar, partially offset by increased small discretionary project work.
Other international construction and facilities services activities
consist of operations primarily in the Middle East. Until August 2004, when it
was sold, we also had an interest in a joint venture in South AfricaAfrica. During
each of 2006, 2005 and 2004, all of the projects in these markets were performed
by joint ventures that were accounted for under the equity method of accounting.
COST OF SALES AND GROSS PROFIT
The following table presents cost of sales, gross profit, and gross profit
as a percentage of revenues for the years ended December 31, 2006, 2005 and 2004
(in millions, except for percentages):
2006 2005 2004
-------- -------- --------
Cost of sales .................. $4,453.4 $4,198.2 $4,255.1
Gross profit ................... $ 567.7 $ 498.4 $ 443.1
Gross profit margin ............ 11.3% 10.6% 9.4%
Our gross profit (revenues less cost of sales) increased by $69.3 million
for 2006 compared to 2005. Gross profit margin (gross profit as a percentage of
revenues) was 11.3% for 2006 compared to 10.6% for 2005. The increase in gross
profit margin was primarily due to: (a) generally improved performance on United
States mechanical construction and facilities services contracts for commercial,
hospitality, high-tech, food and pharmaceutical sector work; (b) the increased
availability of generally higher margin work in the United States; (c) increases
in the number of site-based contracts in the United States facilities services
segment; (d) increased demand for mobile services in the United States; (e) the
addition of a mobile services company acquired in November 2005; (f)
improvements in Canada construction and facilities services profitability; and
(g) the absence of an $11.7 million non-cash expense recorded in 2005 in
connection with the UOSA Action. These improvements were partially offset by the
following items in the United States electrical construction and facilities
services segment: (a) unusually large losses on certain 2006 contracts, (b)
reduced profits from transportation infrastructure and financial services
projects compared to 2005; and (c) the absence of $4.5 million from a favorable
insurance settlement recorded in 2005.
Gross profit increased $55.4 million for 2005 compared to 2004. Gross
profit margin (gross profit as a percentage of revenues) was 10.6% in 2005
compared to 9.4% in 2004. This increase in gross profit was primarily
attributable to: (a) improvements in United States and United Kingdom
construction contract performance compared to the prior year primarily relating
to an increase in generally more profitable commercial construction work; (b)
the greater availability of generally higher margin small discretionary project
work (including mobile services work); (c) a reduction in contracts taken for
certain types of public sector work, which is generally less profitable; (d) an
improvement in gross profit in the Canada construction and facilities services
segment; and (e) a favorable settlement of an insurance coverage related dispute
of approximately $5.6 million. The resulting improvement in gross profit was
partially offset by the results of the UOSA Action which gave rise to an $11.7
million non-cash expense during 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents selling, general and administrative expenses,
and selling, general and administrative expenses as a percentage of revenues,
for the years ended December 31, 2006, 2005 and 2004 (in millions, except for
percentages):
2006 2005 2004
------- ------- -------
Selling, general and administrative expenses ........................... $ 448.0 $ 415.8 $ 395.4
Selling, general and administrative expenses as a percentage of revenues 8.9% 8.9% 8.4%
Our selling, general and administrative expenses for 2006 increased $32.2
million to $448.0 million compared to $415.8 million for 2005. Selling, general
and administrative expenses as a percentage of revenues were 8.9% for 2006 and
2005. The increase in expenses for 2006 compared to 2005 was primarily related
to: (a) increased administration and sales expenses required to support
increased revenues; (b) increased compensation expense attributable to improved
operating performance; (c) $4.0 million of compensation expense resulting from
the adoption of Statement 123(R) on January 1, 2006; and (d) compensation awards
for which the liabilities fluctuate with changes in the market price of our
common stock, which increased compensation expense by $2.8 million for 2006
compared to 2005.
Our selling, general and administrative expenses for 2005 increased $20.4
million to $415.8 million compared to $395.4 million for 2004. Selling, general
and administrative expenses as a percentage of revenues were 8.9% for 2005
compared to 8.4% for 2004. Selling, general and administrative expenses were
impacted in 2005 by increased incentive compensation expense due to our improved
profitability.
21
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance
obligations and reduction of leased facilities, were $1.6 million, $1.8 million
and $8.3 million for 2006, 2005 and 2004, respectively. As of December 31, 2006
and 2005, the balance of these obligations was $0.2 million at each date,
respectively. The December 31, 2005 obligation was paid during 2006.
GAIN ON SALE OF ASSETS
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 2004 sale of assets of our United Kingdom
Delcommerce equipment rental services division. Concurrently with the sale, we
entered into a long-term agreement to utilize the equipment rental services of
the purchaser. There were no other sales of assets in 2006, 2005 or 2004 other
than the disposal of property, plant and equipment in the normal course of
business.
OPERATING INCOME
The following table presents our operating income (gross profit less
selling, general and administrative expenses and restructuring expenses plus
gain on sale of assets) by segment, and each segment's operating income as a
percentage of such segment's revenues, for the years ended December 31, 2006,
2005 and 2004 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2006 REVENUES 2005 REVENUES 2004 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services $ 46.7 3.6% $ 79.8 6.5% $ 81.2 6.6%
United States mechanical construction and facilities services 82.1 4.5% 20.2 1.2% (1.5) --
United States facilities services ........................... 39.0 4.1% 26.3 3.3% 14.4 2.0%
------ ------ ------
Total United States operations .............................. 167.8 4.1% 126.3 3.4% 94.1 2.5%
Canada construction and facilities services ................. 1.0 0.4% (7.9) -- (11.9) --
United Kingdom construction and facilities services ......... 6.8 1.0% 7.5 1.1% 0.0 --
Other international construction and facilities services .... (0.1) -- 0.0 -- 0.5 --
Corporate administration .................................... (55.9) -- (43.2) -- (35.0) --
Restructuring expense ....................................... (1.6) -- (1.8) -- (8.3) --
Gain on sale of assets ...................................... -- -- -- -- 2.8 --
------ ------ ------
Total worldwide operations .................................. 118.0 2.4% 80.9 1.7% 42.2 0.9%
Other corporate items:
Interest expense ............................................ (2.3) (8.3) (8.9)
Interest income ............................................. 6.2 2.7 1.9
Gain on sale of equity investment ........................... -- -- 1.8
Minority interest ........................................... (4.2) (4.5) (3.8)
Income from continuing operations before income taxes ....... $117.7 $ 70.8 $ 33.3
As described in more detail below, our operating income was $118.0 million
for 2006, $80.9 million for 2005, and $42.2 million for 2004. The $37.1 million
increase in 2006 operating income compared to 2005 was primarily due to: (a)
generally improved performance on United States mechanical construction and
facilities services contracts for commercial, hospitality, high-tech, food and
pharmaceutical sector work; (b) the increased availability of generally higher
margin work in the United States; (c) the absence of an $11.7 million non-cash
expense recorded in 2005 relating to the UOSA Action; (d) an increase in the
number of site-based contracts in the United States facilities services segment;
(e) the addition of a mobile services company acquired in November 2005; (f)
increased demand for mobile services in the United States; and (g) improvements
in Canada construction and facilities services profitability. These improvements
were partially offset by the following items in the United States electrical
construction and facilities services segment: (a) unusually large losses on
certain 2006 contracts; (b) reduced profits from transportation infrastructure
and financial services projects compared to 2005; and (c) the absence of a $4.5
million favorable insurance settlement recorded in 2005. Additionally, selling,
general and administrative expenses increased for 2006 compared to 2005
primarily due to: (a) increased administration and sales expense required to
support increased revenues; (b) increased compensation expense related to
improved operating performance; and (c) $4.0 million of compensation expense
resulting from the adoption of Statement 123(R) on January 1, 2006.
2005 operating income increased $38.7 million compared to 2004 primarily
due to: (a) generally improved performance on United States and United Kingdom
construction contracts; (b) greater availability of generally higher margin
discretionary project work in the United States and United Kingdom; (c) the
settlement of an insurance coverage related dispute which contributed
approximately $5.6 million; (d) generally improved economic conditions,
particularly for the United States and United Kingdom commercial construction
22
industries; and (e) reduced losses in the Canada construction and facilities
services segment. In addition, as a consequence of effective risk management and
safety programs, operating income was favorably impacted by reductions of $3.6
million and $9.8 million in 2005 and 2004, respectively, of insurance
liabilities previously established for insurance exposures.
Our United States electrical construction and facilities services
operating income decreased by $33.1 million in 2006 compared to 2005. The
decrease was primarily due to: (a) unusually large losses on certain contracts;
(b) reduced profits due to a further decrease in generally more profitable work
related to transportation infrastructure and financial services projects; and
(c) the absence of $4.5 million from a favorable insurance settlement recorded
in 2005. This reduction in operating income was partially offset by profits
earned on commercial, high-tech and hospitality projects. Operating income was
$79.8 million for 2005, a $1.4 million decrease compared to operating income of
$81.2 million for 2004. This decrease in operating income was primarily the
result of reduced transportation infrastructure and financial services projects,
mostly offset by increased commercial construction and discretionary project
work, and approximately $4.5 million of income resulting from the settlement of
the insurance coverage-related dispute referred to earlier. Our 2005 selling,
general and administrative expenses decreased compared to the prior year
primarily due to a reduction in personnel and a reduction in incentive
compensation expense as a result of reduced profitability.
Our United States mechanical construction and facilities services
operating income for 2006 was $82.1 million, a $61.9 million improvement
compared to operating income of $20.2 million for 2005. This improvement was
primarily attributable to generally improved performance and an increase in the
number of contracts for commercial, hospitality, high-tech, food and
pharmaceutical sector work, the increased availability of generally higher
margin work in the United States, and the Middle Eastabsence of an $11.7 million non-cash
expense recorded in 2005 related to the UOSA Action. The improvement was
partially offset by the absence of a $1.1 million favorable insurance settlement
recorded in 2005. Operating income for 2005 was $20.2 million, a $21.7 million
improvement, when compared to an operating loss of $1.5 million in 2004. The
2005 operating income figure reflected an approximately $11.7 million reduction
in gross profit as a result of the write-off of unrecovered costs related to the
UOSA Action when compared to 2004. Notwithstanding the impact of the UOSA
Action, this segment had generally improved results for 2005 as a consequence of
(a) improved construction contract performance partially due to the greater
availability of generally more profitable private sector commercial construction
work as a result of improved economic conditions and (b) increased discretionary
project work which was partially attributable to seasonably warm weather
conditions compared to unseasonably cool weather conditions in the summer of
2004. In addition, operating income in this segment for 2005 included
approximately $1.1 million of income resulting from the settlement of the
insurance coverage related dispute referred to earlier. The 2005 improvement in
performance was partially attributable to a planned curtailment of certain
public sector work and certain other longer-term contracts of certain of our
subsidiaries, which work has generally been less profitable than private sector
work. Increased selling, general and administrative expenses related to
increased incentive compensation expense due to this segment's improved
profitability was partially offset by personnel reductions during 2005, which
reductions also contributed to the periods presented).
EMCOR'simprovement in operating income.
Our United States facilities services segment operating income increased
by $12.7 million for 2006 compared to 2005. The increase was primarily due to
the increase in the number of site-based contracts, improved contract
performance under existing contracts, increased demand for mobile services, the
addition of a mobile services company purchased in November 2005 and the
increased availability of generally higher margin work. Operating income for
2005 increased by $11.9 million compared to 2004. During 2005, operating income
compared to 2004 improved primarily due to improved gross margins on increased
revenues, which for the mobile services business was partially related to
seasonably warm weather conditions in 2005 compared to unseasonably cool weather
conditions in the summer of 2004. This increase in 2005 operating income was
partially offset by increased selling, general and administrative expenses for
2005 related to increased incentive compensation as a result of improved
financial performance. In addition, during 2004 this segment also incurred
approximately $2.3 million of losses on certain construction projects, outside
of the normal facilities services operations of this segment, that were
contracted for by a subsidiary in this segment prior to our acquisition of the
subsidiary.
Operating income for our Canada construction and facilities services
segment for 2006 was $1.0 million, an $8.9 million improvement compared to an
operating loss of $7.9 million for 2005. This improvement was attributable to
our improved performance on hospital, mining and auto manufacturing construction
contracts and the absence of a loss recorded in 2005 associated with a large
power transmission project, partially offset by costs associated with
investments in certain facilities and staff to support future business. The
impact of the rate of exchange from Canadian dollars to United States dollars
was not material to operating income reported for 2006 compared to 2005. The
operating loss was $7.9 million for 2005 compared to an operating loss of $11.9
million for 2004. The 2005 loss was primarily associated with a large power
transmission project, severance expenses not associated with restructuring
activities and legal expenses. The impact of exchange rate movements increased
operating losses by $0.7 million for 2005 compared to 2004.
Our United Kingdom construction and facilities services segment operating
income for 2006 was $6.8 million compared to $7.5 million for 2005. The decrease
in operating income was primarily due to reduced income from rail projects as a
result of lower gross profit than for 2005, partially offset by improvement in
profits from facilities services and commercial construction work and $0.6
million of additional operating income related to the rate of exchange of
British pounds for United States dollars, due to strengthening of the British
pound as compared to the United States dollar. Operating income for 2005 was
$7.5 million compared to breakeven in 2004. This improve-
23
ment in 2005 operating income over 2004 results was primarily attributable to
improved performance on construction projects and to a reduction in selling,
general and administrative expenses related to a reorganization of the United
Kingdom operations, partially offset by increased incentive compensation due to
improved financial performance.
Other international construction and facilities services operating income
was approximately breakeven for 2006 and 2005 compared to operating income of
$0.5 million for 2004.
Our corporate administration expenses for 2006 were $55.9 million, a $12.7
million increase compared to 2005. The increase in expense was primarily due to
$4.0 million of compensation expense as a result of the adoption of Statement
123(R) on January 1, 2006, $3.5 million of compensation expense related to
increased compensation awards based on achievement of earnings, $1.5 million of
expense related to share-based compensation awards and increases in
incentive-based compensation expense of $0.6 million due to deferred
compensation awards for which the liabilities fluctuate with changes in the
market price of our common stock. Corporate administration expense for 2005 was
$43.2 million compared to $35.0 million for 2004. This increase in expense was
primarily due to increased incentive compensation awards, and to a lesser
extent, increased professional fees and the absence of a non-recurring benefit
attributable to expense reimbursement that occurred in 2004.
NON-OPERATING ITEMS
Interest expense was $2.3 million for 2006 compared to $8.3 million for
2005 due to a reduction in borrowing levels. Interest expense was $8.9 million
for 2004. Reduced borrowings under the revolving credit facility for 2005,
compared to 2004, was partially offset by the impact of increases in interest
rates during 2005 and 2004.
Interest income for 2006 increased $3.5 million compared to 2005 primarily
due to increased cash available for investment and higher rates of return on
investments. Interest income increased by $0.8 million for 2005 compared to 2004
due primarily to interest earned on cash provided by the United Kingdom
construction and facilities services segment, as such cash was invested in the
United Kingdom at interest rates generally greater than the net cost of
borrowing under our revolving credit facility.
The $1.8 million gain on sale of an equity investment of 2004 was
attributable to the August 2004 sale of our interest in itsa South African joint
venture, the operating results of which had been reported previously in the
Other international construction and facilities services segment.
Minority interest represents the allocation of earnings to our joint
venture partners who either have a minority-ownership interest in joint ventures
or are not at risk for the majority of losses of the joint venture, which joint
ventures have been accounted for by us using the consolidation method of
accounting.
The 2006 income tax provision was comprised of: (a) $46.6 million of
income tax provision in respect of pre-tax earnings of $117.7 million; (b) $8.4
million of income tax benefit related to the reversal of a valuation allowance
based on the determination that sufficient taxable income existed in the past
and will continue in the future to realize the related United Kingdom tax
assets; (c) a $3.9 million income tax benefit related to the realization of net
operating losses for which valuation allowances had previously been recorded in
Canada; (d) an income tax benefit of $1.9 million for income tax reserves no
longer required based on a current analysis of probable exposures; and (e)
income tax benefits related to items aggregating approximately $1.9 million
principally due to the deductibility of certain compensation arrangements for
income tax purposes. For 2005, the income tax provision was $9.6 million
compared to an income tax provision of less than $0.01 million for 2004. Our
income tax provision for 2005 was comprised of: (a) $27.1 million of income tax
provision in respect of pre-tax earnings of $70.8 million; (b) $5.2 million of
income tax provision related to a valuation allowance recorded to reduce
deferred tax assets related to net operating losses and other temporary
differences with respect to our Canadian construction and facilities services
segment, since there was uncertainty as to whether the segment would have
sufficient taxable income in the future to realize the benefit of such deferred
tax assets; and (c) the offset of such income tax provisions by a $22.7 million
income tax benefit for income tax reserves no longer required based on a current
analysis of probable exposures. The income tax benefit of approximately $0.01
million for 2004 was comprised of: (a) $13.9 million of income tax provision on
pre-tax earnings of $33.3 million; (b) $8.2 million of income tax provision
related to a valuation allowance recorded to reduce net deferred tax assets
related to net operating losses and other temporary differences of the United
Kingdom construction and facilities services segment inasmuch as there was
uncertainty of sufficient future income to realize the benefit of such deferred
tax assets; and (c) the partial offset of such income tax provisions by $22.1
million of income tax benefits for income tax reserves no longer required based
on current analysis of probable exposures. The provision on income before income
taxes for each of 2006, 2005 and 2004 was recorded at an effective income tax
rate of approximately 40%, 38% and 42%, respectively, excluding the items
discussed above.
On January 31, 2006, we sold a subsidiary that had been part of our United
States mechanical construction and facilities services segment. On September 30,
2005, we sold a subsidiary that had been part of our United States facilities
services segment. Results of these operations for all periods presented in Julyour
consolidated financial statements reflect discontinued operations accounting.
Included in the results of discontinued operations for the year ended December
31, 2006 was a loss of $0.6 million (net of income taxes) which relates to the
January 2006 sale of the subsidiary that had been part of our United States
mechanical construction and facilities services segment. Included in the $1.1
million loss (net of income taxes) from discontinued operations for the year
ended December 31, 2005 is a loss of $1.0 million (net of
24
income taxes) which relates to the September 2005 sale of a subsidiary that had
been part of our United States facilities services segment. An aggregate of $1.7
million and $4.4 million in cash and notes was received as consideration for
both of these sales in 2006 and 2005, respectively. As of December 31, 2006 and
2005, the notes in respect of each year had been paid in full. We will not have
any future involvement with these subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2006 and 2005 (in millions):
2006 2005
------- -------
Net cash provided by operating activities .................. $ 209.3 $ 145.7
Net cash used in investing activities ...................... $ (64.4) $ (18.5)
Net cash provided by (used in) financing activities ........ $ 16.5 $ (78.5)
Effect of exchange rate changes on cash and cash equivalents $ 8.5 $ (4.0)
Our consolidated cash and cash equivalents balance increased by
approximately $170.0 million to $273.7 million at December 31, 2006 from $103.8
million at December 31, 2005. The increase in net cash provided by operating
activities for 2006 compared to 2005 was primarily due to an increase in working
capital as a result of an increase in net over-billings related to improved
billing and collection practices and settlement of certain large contract claims
and disputes. Net cash used in investing activities of $64.4 million for 2006
increased $45.9 million compared to $18.5 million for 2005 primarily due to an
increase in the purchase of property, plant and equipment of $7.3 million, of
which $3.9 million in purchases of equipment related to the start-up of certain
site-based contracts in our United States facilities services segment, a $30.0
million increase in payments for acquisitions of businesses and earn-out
agreements and an increase in net disbursements from other investing activities,
partially offset by $1.7 million of proceeds from the sale of discontinued
operations and sale of assets. Net cash provided by financing activities of
$16.5 million for 2006 increased $95.0 million compared to net cash used in
financing activities of $78.5 million for 2005. This increase was primarily
attributable to the absence of net borrowings under the working capital credit
line for 2006 compared to borrowings needed in 2005, to an increase in the
proceeds from the exercise of stock options of $8.7 million and to the excess
tax benefit from share-based compensation of $6.8 million for 2006.
The following is a summary of material contractual obligations and other
commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- -------- -------- -------- -------- --------
Other long-term debt ......................... $ 0.3 $ 0.1 $ 0.1 $ 0.1 $ --
Capital lease obligations .................... 1.6 0.7 0.8 0.1 --
Operating leases ............................. 175.2 43.7 65.6 36.9 29.0
Open purchase obligations (1) ................ 774.1 665.6 103.3 5.2 --
Other long-term obligations, including current
portion (2) ................................ 171.8 23.5 116.8 14.0 17.5
-------- -------- -------- -------- --------
Total Contractual Obligations ................ $1,123.0 $ 733.6 $ 286.6 $ 56.3 $ 46.5
======== ======== ======== ======== ========
AMOUNT OF COMMITMENT EXPIRATIONS BY PERIOD
--------------------------------------------------------------------
TOTAL LESS
OTHER COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
---------------- --------- -------- -------- -------- --------
Revolving Credit Facility (3) ................ $ -- $ -- $ -- $ -- $ --
Letters of credit ............................ 55.6 -- 55.6 -- --
Guarantees ................................... 25.0 -- -- -- 25.0
-------- -------- -------- -------- --------
Total Commercial Commitments ................. $ 80.6 $ -- $ 55.6 $ -- $ 25.0
======== ======== ======== ======== ========
- ----------
(1) Represents open purchase orders for material and subcontracting costs
related to construction and service contracts. These purchase orders are
not reflected in EMCOR's consolidated balance sheet and should not impact
future cash flows as amounts will be recovered through customer billings.
(2) Represents primarily insurance related liabilities and a pension plan
liability, classified as other long-term liabilities in the consolidated
balance sheets. Cash payments for insurance related liabilities may be
payable beyond three years, but it is not practical to estimate.
(3) We classify these borrowings as short-term on our consolidated balance
sheet because of our intent and ability to repay the amounts on a
short-term basis. As of December 31, 2006, there were no borrowings
outstanding.
25
Our previous revolving credit agreement (the "Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility with an amended and restated $350.0 million revolving
credit facility (the "2005 Revolving Credit Facility"). The 2005 Revolving
Credit Facility expires on October 17, 2010. It permits us to increase our
borrowing to $500.0 million if additional lenders are identified and/or existing
lenders are willing to increase their current commitments. We utilized this
feature to increase the line of credit under the 2005 Revolving Credit Facility
from $350.0 million to $375.0 million on November 29, 2005. We may allocate up
to $125.0 million of the borrowing capacity under the 2005 Revolving Credit
Facility to letters of credit. The 2005 Revolving Credit Facility is guaranteed
by certain of our direct and indirect subsidiaries, is secured by substantially
all of our assets and most of the assets of our subsidiaries, and provides for
borrowings in the form of revolving loans and letters of credit. The 2005
Revolving Credit Facility contains various covenants requiring, among other
things, maintenance of certain financial ratios and certain restrictions with
respect to payment of dividends, common stock repurchases, investments,
acquisitions, indebtedness and capital expenditures. A commitment fee is payable
on the average daily unused amount of the 2005 Revolving Credit Facility. The
fee ranges from 0.25% to 0.5% of the unused amount, based on certain financial
tests. Borrowings under the 2005 Revolving Credit Facility bear interest at (1)
a rate which is the prime commercial lending rate announced by Harris Nesbitt
from time to time (8.25% at December 31, 2006) plus 0.0% to 0.5%, based on
certain financial tests or (2) United States dollar LIBOR (5.35% at December 31,
2006) plus 1.0% to 2.25%, based on certain financial tests. The interest rates
in effect at December 31, 2006 were 8.25% and 6.35% for the prime commercial
lending rate and the United States dollar LIBOR, respectively. Letter of credit
fees issued under this facility range from 1.0% to 2.25% of the respective face
amounts of the letters of credit issued and are charged based on the type of
letter of credit issued and certain financial tests. In connection with the
replacement of the Old Revolving Credit Facility, $0.4 million of prepaid
commitment fees were recorded as interest expense for 2005. As of December 31,
2006 and 2005, we had approximately $55.6 million and $53.3 million of letters
of credit outstanding, respectively. There were no borrowings under the 2005
Revolving Credit Facility as of December 31, 2006 and 2005.
Our Canadian subsidiary, Comstock Canada Ltd., has a credit agreement with
a bank providing for an overdraft facility of up to Cdn. $0.5 million. The
facility is secured by a standby letter of credit and provides for interest at
the bank's prime rate, which was 6.0% at December 31, 2006. There were no
borrowings outstanding under this credit agreement at December 31, 2006 or 2005.
One of our subsidiaries has guaranteed $25.0 million of borrowings of a
venture in which we have a 40% interest; the other venture partner, Baltimore
Gas and Electric (a subsidiary of Constellation Energy), has a 60% interest. The
venture designs, constructs, owns, operates, leases and maintains facilities to
produce chilled water for sale to customers for use in air conditioning
commercial properties. These guarantees are not expected to have a material
effect on our financial position or results of operations. We and Baltimore Gas
and Electric are jointly and severally liable, in the event of default, for the
venture's $25.0 million in borrowings.
The terms of our construction contracts frequently require that we obtain
from surety companies ("Surety Companies") and provide to our customers payment
and performance bonds ("Surety Bonds") as a condition to the award of such
contracts. The Surety Bonds secure our payment and performance obligations under
such contracts, and we have agreed to indemnify the Surety Companies for
amounts, if any, paid by them in respect of Surety Bonds issued on our behalf.
In addition, at the request of labor unions representing certain of our
employees, Surety Bonds are sometimes provided to secure obligations for wages
and benefits payable to or for such employees. Public sector contracts require
Surety Bonds more frequently than private sector contracts, and accordingly, our
bonding requirements typically increase as the amount of public sector work
increases. As of December 31, 2006, based on our percentage-of-completion of our
projects covered by Surety Bonds, our aggregate estimated exposure, had there
been defaults on all our existing contractual obligations, would have been
approximately $1.0 billion. The Surety Bonds are issued by Surety Companies in
return for premiums, which vary depending on the size and type of bond.
In recent years there has been a reduction in the aggregate surety bond
issuance capacity of Surety Companies due to industry consolidations and
significant losses of Surety Companies as a result of providing Surety Bonds to
construction companies as well as companies in other industries. Consequently,
the availability of Surety Bonds has become more limited and the terms upon
which Surety Bonds are available have become more restrictive. If we experience
changes in our bonding relationships or if there are further changes in the
surety industry, we may seek to satisfy certain customer requests for Surety
Bonds by posting other forms of collateral in lieu of Surety Bonds such as
letters of credit or guarantees by EMCOR Group, Inc., by seeking to convince
customers to forego the requirement of a Surety Bond, by increasing our
activities in business segments that rarely require Surety Bonds such as the
facilities services segment and/or by refraining from bidding for certain
projects that require Surety Bonds. There can be no assurance that we will be
able to effectuate alternatives to providing Surety Bonds to our customers or to
obtain, on favorable terms, sufficient additional work that does not require
Surety Bonds to replace projects requiring Surety Bonds that we may decline to
pursue. Accordingly, if we were to experience a reduction in the availability of
Surety Bonds, we could experience a material adverse effect on our financial
position, results of operations and/or cash flow.
We do not have any other material financial guarantees or off-balance
sheet arrangements other than those disclosed herein.
26
Our primary source of liquidity has been, and is expected to continue to
be, cash generated by operating activities. We also maintain the 2005 Revolving
Credit Facility that may be utilized, among other things, to meet short-term
liquidity needs in the event cash generated by operating activities is
insufficient or to enable us to seize opportunities to participate in joint
ventures or to make acquisitions that may require access to cash on short notice
or for any other reason. We may also increase liquidity through an equity
offering or issuance of other debt instruments. Short-term changes in
macroeconomic trends may have an affect, positively or negatively, on liquidity.
In addition to managing borrowings, our focus on the facilities services market
is intended to provide an additional buffer against economic downturns inasmuch
as the facilities services business is characterized by annual and multi-year
contracts that provide a more predictable stream of cash flow than the
construction business. Short-term liquidity is also impacted by the type and
length of construction contracts in place. During economic downturns, such as
the downturn that we experienced from 2001 through 2004 in the commercial
construction industry, there were typically fewer small discretionary projects
from the private sector, and companies like us aggressively bid more large
long-term infrastructure and public sector contracts. Performance of long
duration contracts typically requires working capital until initial billing
milestones are achieved. While we strive to maintain a net over-billed position
with our customers, there can be no assurance that a net over-billed position
can be maintained. Our net over-billings, defined as the balance sheet accounts
"billings in excess of costs and estimated earnings on uncompleted contracts"
less "cost and estimated earnings in excess of billings on uncompleted
contracts", was $264.2 million and $144.6 million as of December 31, 2006 and
2005, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the 2005 Revolving Credit Facility and the
sale of various secured or unsecured debt and/or equity interests in the public
and private markets. Based upon our current credit ratings and financial
position, we can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, our primary revenue risk factor
continues to be the level of demand for non-residential construction services,
which is in turn influenced by macroeconomic trends including interest rates and
governmental economic policy. In addition to the primary revenue risk factor,
our ability to perform work at profitable levels is critical to meeting
long-term liquidity requirements.
We believe that current cash balances and borrowing capacity available
under the 2005 Revolving Credit Facility or other forms of financing available
through debt or equity offerings, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements. However,
we are a party to lawsuits and other proceedings in which other parties seek to
recover from us amounts ranging from a few thousand dollars to over $77.0
million. If we were required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on our financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2006, we utilized approximately $51.6 million of
letters of credit issued pursuant to our 2005 Revolving Credit Facility as
collateral for insurance obligations.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2006, we adopted FASB Statement No. 123(R), "Share-Based
Payment" ("Statement 123(R)"). Statement 123(R) is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25")
and amends FASB Statement No. 95, "Statement of Cash Flows". With the adoption
of Statement 123(R), all share-based payments to our employees and non-employee
directors, including grants of stock options, have been recognized in the income
statement based on their fair values, utilizing the modified prospective method
of accounting.
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Post Retirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158").
Statement 158 requires that a company recognize the overfunded or underfunded
status of its defined benefit post retirement plans (other than multi-employer
plans) as an asset or liability in its statement of financial position and that
it recognize changes in the funded status in the year in which the changes occur
through other comprehensive income. Statement 158 also requires the measurement
of the fair value of plan assets and benefit obligations as of the date of the
fiscal year-end statement of financial position and to provide additional
disclosures. On December 31, 2006, we adopted the recognition and disclosure
provisions of Statement 158. The effect of adopting Statement 158 on our
financial position at December 31, 2006 has been included in the accompanying
consolidated financial statements and increased Accumulated other comprehensive
loss by $31.0 million, net of a deferred tax benefit. Statement 158 did not have
an effect on our financial position as of December 31, 2005 or 2004. We measure
the fair value of plan assets and benefit obligations on December 31 of each
year. See Note J - Retirement Plans of the notes to consolidated financial
statements for more information on the impact of adoption and the related
disclosures.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("FIN 48"), to create a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for
income taxes, by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and
27
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We will adopt FIN
48 as of January 1, 2007, as required. The impact upon adoption is expected to
result in an immaterial reduction of retained earnings and an increase in the
accrual for income taxes. We will disclose the cumulative effect of the change
in retained earnings in the consolidated financial statements in the first
quarter of 2007.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("Statement 157"). Statement 157 provides guidance for using fair
value to measure assets and liabilities. The statement applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The statement does not expand the use of fair value in any new
circumstances. Statement 157 is effective for our financial statements beginning
with the first quarter of 2008. Early adoption is permitted. We have not
determined the effect, if any, the adoption of Statement 157 will have on our
financial position and results of operations.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Statement 159 is effective for our financial statements beginning with
the first quarter of 2008. We have not determined the effect, if any, the
adoption of Statement 159 will have on our financial position and results of
operations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
TheOur consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. EMCOR'sOur significant accounting policies are described in
Note B - Summary of Significant Accounting Policies of the notes to consolidated
financial statements included in Item 88. Financial Statements and Supplementary
Data of this Form 10-K. There
was no initial adoption of any accounting policies during 2004. EMCOR believesWe believe that some of the more critical judgment areas
in the application of accounting policies that affect theour financial condition
and results of operations are the impact of changes in the estimates and
judgments pertaining to: (a) revenue recognition from (i) long-term construction
contracts for which the percentage
of completionpercentage-of-completion method of accounting is used
and (ii) services contracts; (b) collectibility or valuation of accounts
receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and
intangible assets.
15
REVENUE RECOGNITION FROM LONG-TERM CONSTRUCTION CONTRACTS AND SERVICES CONTRACTS
EMCOR believes itsWe believe our most critical accounting policy is revenue recognition from
long-term construction contracts for which EMCOR useswe use the percentage-of-completion
method of accounting. Percentage-of-completion accounting is the prescribed
method of accounting for long-term contracts in accordance with accounting
principles generally accepted in the United States, Statement of Position No.
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts,"Contracts", and, accordingly, is the method used for revenue
recognition within EMCOR'sour industry. Percentage-of-completion for each contract is
measured principally by the ratio of costs incurred to date to perform each
contract to the estimated total costs to perform such contract at completion.
Certain of EMCOR'sour electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to perform such
contract at completion. Provisions for the entirety of estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Application of percentage-of-completion accounting results in the
recognition of costs and estimated earnings in excess of billings on uncompleted
contracts in EMCOR'sour consolidated balance sheets. Costs and estimated earnings in
excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers based upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion of a contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also
include amounts EMCOR seekswe seek or will seek to collect from customers or others for
errors or changes in contract specifications or design, contract change orders
in dispute or unapproved as to both scope and price or other customer-related
causes of unanticipated additional contract costs (unapproved(claims and unapproved change
orders and
claims)orders). Such amounts are recorded at estimated net realizable value and take
into account factors that may affect theour ability to bill unbilled revenues and
collect amounts after billing. No profit is recognized on the construction costs
incurred in connection with claim
amounts. As of December 31, 20042006 and 2003,2005, costs and estimated earnings in
excess of billings on uncompleted contracts included unbilled revenues for
unapproved change orders of approximately $65.4$48.2 million and $43.0$56.3 million,
respectively, and claims of approximately $53.5$22.4 million and $51.4$36.6 million,
respectively. In addition, accounts receivable as of December 31, 20042006 and 20032005
include claims of approximately $5.4$6.7 million and $9.4$4.7 million, respectively,
plus unapproved change orders and contractually billed amounts related to such
contracts of approximately $75.5$76.9 million and $53.1$76.2 million, respectively.
Generally, contractually billed amounts will not be paid by the customer to EMCORus
until final resolution of related claims. Due to uncertainties inherent in
estimates employed in applying percentage-of-completion accounting, estimates
may be revised as project work progresses. Application of
percentage-of-completion accounting requires that the impact of revised
estimates be reported prospectively in the consolidated financial statements. In
addition to revenue recognition for long-term construction contracts, EMCOR
recognizeswe
recognize revenues from services contracts as such contracts are performed in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition, revised
and updated" ("SAB 104"). There are two basic types of services contracts: (a)
fixed price facilities services contracts which are signed in advance for
maintenance, repair and retrofit work over periods typically ranging from one to
three years (pursuant to which thereour employees may be EMCOR employees onat a customer's site full
time) and (b) services contracts which may or may not be signed in advance for
similar maintenance, repair and retrofit work on an as needed basis (frequently
referred to as time and material work). Fixed price facilities
28
services contracts are generally performed over the contract period, and
accordingly, revenue is recognized on a pro-rata basis over the life of the
contract. Revenues derived from other services contracts are recognized when the
services are performed in accordance with SAB 104. Expenses related to all
services contracts are recognized as incurred.
ACCOUNTS RECEIVABLE
EMCOR isWe are required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the likelihood of
realization of receivables. Relevant assessment factors include the
creditworthiness of the customer, EMCOR'sour prior collection history with the customer
and related aging of past due balances. The provisions for bad debts during
2004, 2003,2006, 2005 and 20022004 amounted to approximately $1.1 million, $8.5 million and
$7.0 million, $11.2 million and $3.4 million,
respectively. The increase of $7.9 million in this provision for 2003 compared
to 2002 primarily related to the potential non-payment of an account receivable
of approximately $5.8 million due to the publicly reported financial
difficulties of the customer which owed that amount. This receivable was
written-off against the allowance for doubtful accounts in 2004. At December 31, 20042006 and 2003,2005, our accounts
receivable of $1,073.5$1,184.4 million and $1,009.2$1,046.4 million, respectively, included
allowances for doubtful accounts of $36.2$25.0 million and $43.7$30.0 million,
respectively. Specific accounts receivable are evaluated when EMCOR believeswe believe a
customer may not be able to meet its financial obligations due to a
deterioration of its financial condition or its credit ratings. The allowance
requirements are based on the best facts available and are re-evaluated and
adjusted on a regular basis and as additional information is received.
INSURANCE LIABILITIES
EMCOR hasWe have loss payment deductibles for certain workers' compensation, auto
liability, general liability and property claims, hashave self-insured retentions
for certain other casualty claims, and isare self-insured for employee-related
health care claims. Losses are recorded based upon estimates of theour liability
for claims incurred and an estimate offor claims incurred but not reported. The liabilities
are derived from known facts, historical trends and industry averages utilizing
the assistance of an actuary to determine the best estimate of these
obligations. EMCOR believes itsWe believe the liabilities recognized on our balance sheets for
these obligations are adequate. However, such obligations are difficult to
assess and estimate due to numerous
16
factors, including severity of injury,
determination of liability in proportion to other parties, timely reporting of
occurrences and effectiveness of safety and risk management programs. Therefore,
if our actual experience differs from the assumptions and estimates used for
recording the liabilities, adjustments may be required and wouldwill be recorded in
the period that the experience becomes known.
INCOME TAXES
EMCOR hadWe have net deferred tax assets primarily resulting from deductible
temporary differences of $2.5$28.2 million and $18.8$12.3 million at December 31, 20042006
and 2003,2005, respectively, which will reduce taxable income in future periods. A
valuation allowance is required when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. As of December 31, 20042006
and 2003,2005, the total valuation allowance on net deferred tax assets was
approximately $10.9$12.9 million and $2.0$18.7 million, respectively. The increaseprimary reason
for the decrease in the valuation allowance for 2006 was recorded to reduce net deferred tax assets related to net operating losses and other temporary differencesan $8.4
million reversal of thea United Kingdom constructionvaluation allowance based on the
determination that sufficient taxable income existed in the past and facilities services segment inasmuch as there is uncertainty of
sufficientwill
continue in the future income to realize the benefit of such deferredrelated United Kingdom tax assets.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
As of December 31, 2004, EMCOR2006, we had goodwill and net identifiable intangible
assets (primarily the market value of itsour backlog, customer relationships,
non-competition agreements and trademarks and tradenames)trade names) of $279.4$288.2 million and
$18.8$38.3 million, respectively, arising out of the acquisition of companies. The
determination of related estimated useful lives for identifiable intangible
assets and whether those assets are impaired involves significant judgments
based upon short and long-term projections of future performance. These
forecasts reflect assumptions regarding the ability to successfully integrate
acquired companies. FASB Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFASStatement 142") requires goodwill toand other intangible assets that
have indefinite useful lives not be amortized, but instead must be tested at
least annually for impairment on at least an
annual basis,(which we test each October 1), and be written
down when impaired, rather than amortized as previous standards required.
Furthermore, SFASStatement 142 requires that identifiable intangible assets other than goodwillwith
finite lives be amortized over their useful lives
unless these lives are determined to be indefinite.lives. Changes in strategy and/or
market conditions may result in adjustments to recorded intangible asset
balances. As of December 31, 2004,2006, no indicators of impairment of itsour goodwill
or identifiableindefinite lived intangible assets resulted from EMCOR'sour annual impairment
review, which was performed in accordance with the provisions of SFASStatement 142
and FASB Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFASStatement 144"). The review under SFAS
144 also included long-term assets related to the United Kingdom that were
determined not to be impaired. See Note B - Summary of Significant
Accounting Policies of the notes to consolidated financial statements for
additional discussion of the provisions of SFASStatement 142 and SFASStatement 144.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The reportable segments reflect, in all years presented, reclassifications of
certain expenses within the income statement for the prior years and
reclassifications of certain business units among the segments due to changes in
EMCOR's internal reporting structure.
REVENUES
As described below in more detail, revenues for 2004 increased 4.7% to $4.75
billion compared to $4.53 billion for 2003. This revenue growth was principally
due to: (a) increased work on United States transportation infrastructure,
financial services, healthcare, and hospitality construction projects; (b) the
impact of favorable foreign exchange rate changes on revenues amounting to $19.7
million in the Canada construction and facilities services segment (despite
reduced revenues as a consequence of certain power generation and healthcare
projects having been completed in 2003) and amounting to $72.6 million in the
United Kingdom construction and facilities services segment; and (c) an increase
in the number of United States site-based facilities services contracts. This
growth in revenues was partially offset by reduced revenues from power
generation projects, office and manufacturing construction projects, and repair
and maintenance work in the United States.
Contract backlog as of December 31, 2004 was approximately $2.8 billion, a
$0.2 billion decrease compared with backlog of approximately $3.0 billion as of
December 31, 2003. Backlog is not a term recognized under accounting principles
generally accepted in the United States; however, it is a common measurement
used in EMCOR's industry. Backlog includes unrecognized revenues to be realized
from uncompleted construction contracts plus unrecognized revenues expected to
be realized over the remaining term of the facilities services contracts, except
if the remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues. The decrease was primarily related to
completion of the prior year's backlog, combined with the curtailment in bidding
for public sector and other long-term contracts. The 2004 decrease in backlog
can be expected to result in lower revenues in 2005 than in 2004. Factors such
as availability of additional work and the timing thereof, in 2005, may also
impact total 2005 revenues. The impact of these factors, however, is not
possible to predict with certainty.
17
The $566.6 million increase in revenues for 2003 when compared to 2002 was
primarily due to revenues of $508.4 million from companies acquired in 2003 and
2002 and to increased revenues in the United States electrical construction and
facilities services and United States facilities services segments (excluding
companies acquired in 2003 and 2002) of $85.1 million and $19.7 million,
respectively. Excluding companies acquired in 2003 and 2002, revenues for the
United States mechanical construction and facilities services segment were lower
for 2003 than for 2002.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages that each segment's revenues was of total revenues for
the years ended December 31, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
2004 TOTAL 2003 TOTAL 2002 TOTAL
---------- ----- ---------- ----- ---------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3 26% $ 1,239.5 27% $ 1,152.4 29%
United States mechanical construction and facilities services ........ 1,825.7 38% 1,715.8 38% 1,715.4 43%
United States facilities services .................................... 727.6 15% 661.2 15% 250.0 6%
---------- ---------- ----------
Total United States operations ....................................... 3,788.6 80% 3,616.5 80% 3,117.8 79%
Canada construction and facilities services .......................... 280.8 6% 346.8 8% 316.3 8%
United Kingdom construction and facilities services .................. 678.5 14% 571.3 13% 533.9 13%
Other international construction and facilities services ............. -- -- -- -- -- --
---------- ---------- ----------
Total worldwide operations ............................................. $ 4,747.9 100% $ 4,534.6 100% $ 3,968.0 100%
========== ========== ==========
Revenues of the United States electrical construction and facilities services
segment for 2004 decreased $4.2 million compared to 2003. The decrease in
revenues was primarily due to fewer power generation and manufacturing
construction projects available, partially offset by an increase in the
availability of transportation infrastructure, financial services and
hospitality work. Revenues for 2003 increased by $87.1 million compared to 2002.
This increase in revenues was primarily due to an increase in transportation
infrastructure and power generation work, partially offset by a significant
decline in private sector commercial work, which includes offices, manufacturing
facilities and hotels. Of all of the major urban centers served by EMCOR, the
New York City area market in 2003 experienced the largest reduction in revenues
from private sector commercial work compared to 2002. This 2003 decline in
revenues from private sector commercial work (when compared to 2002) was offset
by increased public sector work in the Washington D.C. area market, increased
transportation infrastructure work in the Denver area and increased power
generation and transportation infrastructure work in California.
Revenues of the United States mechanical construction and facilities services
segment for 2004 increased $109.9 million compared to 2003. The increase in
revenues was primarily attributable to increased work on healthcare, hospitality
and financial services construction projects, partially offset by decreased
power generation work and commercial work, including discretionary small
projects and repair and maintenance work. Revenues for 2003 increased $0.4
million compared to 2002 principally due to increases in the education and
institutional sectors related to increased public sector spending, partially
offset by significantly decreased commercial office, manufacturing and power
generation work due to a fall off in availability of such work. In 2003, EMCOR's
mid-western markets were particularly negatively impacted by a fall off in
available outage upgrade and replacement work at manufacturing facilities. In
addition, revenues in 2003 were negatively impacted by declines in small and
discretionary projects and repairs and maintenance work caused largely by the
cooler than normal summer weather conditions in parts of the United States.
United States facilities services segment revenues increased $66.4 million
for 2004 compared to 2003. The increase in revenues was primarily attributable
to increased site-based facilities services contracts as a result of increased
sales efforts. Revenues increased by $411.2 million for 2003 compared to 2002.
The increase in revenues for 2003 was primarily due to revenues of $387.5
million attributable to the CES acquisition and increased site-based facilities
services contracts, partially offset by a decline in certain small and
discretionary projects due to increased competition resulting in fewer projects
awarded to EMCOR. Additionally, a reduction in demand for mobile services, which
services had been adversely affected by cooler than normal 2003 summer weather
conditions in parts of the United States, contributed to a decrease in 2003
revenues.
Revenues of Canada construction and facilities services decreased by $66.0
million for 2004 compared to 2003. This decrease was primarily due to the
completion in 2003 of certain long-term power generation and healthcare projects
active in 2003, partially offset by increased revenues from power transmission
projects. The decrease was also partially offset by $19.7 million of increased
revenues resulting from the impact of changes in the rates of exchange for
Canadian dollars to United States dollars due to the strengthening of the
Canadian dollar. Revenues increased by $30.5 million for 2003 as compared to
2002. The increase in revenues for 2003 was primarily attributable to an
increase of $36.7 million resulting from the impact of changes in the rates of
exchange for Canadian dollars to United States dollars due to strengthening of
the Canadian dollar. But for the exchange rates, Canada's construction and
facilities services revenues for 2003 when compared to 2002 would have decreased
due to a temporary scale-back in work on certain long-term power generation
projects attributable to a customer's project scheduling.
18
United Kingdom construction and facilities services revenues increased $107.2
million for the year ended December 31, 2004 compared to the year ended December
31, 2003. This increase in revenues was principally due to an increase of $72.6
million resulting from the impact of changes in the rates of exchange for
British pounds to United States dollars because of strengthening of the British
pound and to increases in transportation infrastructure work. Revenues increased
$37.4 million for 2003 compared to 2002, due to an increase of $47.5 million
related to changes in the rates of exchange for British pounds to United States
dollars because of strengthening of the British pound. But for exchange rates,
revenues for 2003 would have declined because of implementation of a planned
reduction in bidding for certain types of institutional and government-sponsored
construction projects.
Other international construction and facilities services activities consist
of operations primarily in South Africa (until the sale of EMCOR's interest in a
South African joint venture in July 2004) and in the Middle East. During 2004,
2003 and 2002, all of the projects in these markets were performed by joint
ventures, and accordingly, the results of these joint venture operations were
accounted for under the equity method of accounting because either EMCOR had
less than majority ownership or was not subject to a majority of the risk of
loss from the joint venture activities and was not entitled to receive a
majority of the joint venture's residual returns. Accordingly, revenues
attributable to such joint ventures were not reflected as revenues in the
consolidated financial statements. EMCOR continues to pursue new business
selectively in the Middle Eastern and European markets; however, the
availability of opportunities there has been significantly reduced as a result
of local economic factors, particularly in the Middle East.
COST OF SALES AND GROSS PROFIT
The following table presents EMCOR's cost of sales, gross profit, and gross
profit as a percentage of revenues for the years ended December 31, 2004, 2003
and 2002 (in millions, except for percentages):
2004 2003 2002
---------- ---------- ----------
Cost of sales .................................................... $ 4,301.0 $ 4,052.2 $ 3,485.4
Gross profit ..................................................... $ 446.9 $ 482.5 $ 482.6
Gross profit as a percentage of revenues ......................... 9.4% 10.6% 12.2%
2004 gross profit (revenues less cost of sales) decreased $35.6 million for
2004 compared to 2003. Gross profit as a percentage of revenues was 9.4% for
2004 compared to 10.6% for 2003. Gross profit for 2004 was lower than in the
prior year, despite greater revenues than in 2003, primarily due to: (a) greater
than originally estimated labor requirements to perform work as well as
continued reduced labor productivity due to the uncertain construction job
market; (b) reduced availability of higher margin discretionary small project
spending and repair and maintenance work; (c) increased competition for, and a
related decrease in gross profit margin on, commercial, industrial and public
sector work in the United States; and (d) increased prices for material required
for certain construction projects, which price increases particularly negatively
impacted the Canada construction and facilities services segment gross profit.
Positively impacting 2004 gross profit was improved United Kingdom construction
and facilities services segment project performance and increased gross profit
from United States transportation infrastructure, financial services, healthcare
and hospitality projects due to the increased availability and successful
performance of these types of projects. Additionally, total gross profit
increased $5.7 million in 2004 compared to 2003, primarily resulting from the
impact of changes in the rates of exchange for British pounds to United States
dollars amounting to $5.8 million, partially offset by a $0.1 million decrease
resulting from the impact of changes in the rates of exchange for Canadian
dollars to United States dollars.
Gross profit decreased $0.1 million for 2003 compared to 2002. Gross profit
as a percentage of revenues was 10.6% for 2003 compared with 12.2% for 2002.
Gross profit as a percentage of revenues for 2003 compared to 2002 decreased
primarily due to poor performance in the United Kingdom construction and
facilities services segment and the 2003 Unfavorable United States Market
Conditions (previously discussed in the Overview above); this decline was offset
in part by $93.7 million of gross profit attributable to the companies acquired
in 2003 and 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents EMCOR's selling, general and administrative
expenses, and selling, general and administrative expenses as a percentage of
revenues, for the years ended December 31, 2004, 2003 and 2002 (in millions,
except for percentages):
2004 2003 2002
-------- -------- --------
Selling, general and administrative expenses .......................................... $ 399.3 $ 435.4 $ 367.1
Selling, general and administrative expenses as a percentage of revenues .............. 8.4% 9.6% 9.3%
Selling, general and administrative expenses for 2004 decreased $36.1 million
compared to 2003. Selling, general and administrative expenses as a percentage
of revenues were 8.4% for 2004 compared to 9.6% for 2003. This decline in
selling, general and administrative expenses both in dollars and as a percentage
of revenues was primarily attributable to lower salary costs and other variable
costs associated with reductions in personnel. The decrease was offset by an
increase of $6.8 million for 2004 compared to 2003 resulting from the impact of
changes in the rates of exchange for United Kingdom and Canadian currencies to
United States dollars, and an increase of $0.6 million in expense for the
amortization of identifiable intangible assets.
19
Selling, general and administrative expenses for 2003 increased $68.3 million
compared to 2002. As a percentage of revenues, total selling, general and
administrative expenses increased from 9.3% in 2002 to 9.6% in 2003. For 2003,
selling, general and administrative expenses included amortization expense of
$2.8 million attributable to identifiable intangible assets associated with
acquisitions compared to $0.8 million for 2002. Selling, general and
administrative expenses (excluding companies acquired in 2003 and 2002 and
related amortization expense) for 2003 were approximately $302.8 million (8.4%
of revenues) compared to $307.5 million (8.9% of revenues) for 2002. This
decrease in selling, general and administrative expenses was attributable to a
managed reduction of both variable expenses (including reduced incentive
compensation related to less favorable financial performance and reduction in
personnel) and fixed expenses (such as building occupancy costs).
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance obligations,
were $8.3 million for 2004. Approximately $7.0 million of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates paying
substantially all of the remaining obligations in 2005. There were no
restructuring expenses for the year ended December 31, 2003 or 2002.
GAIN ON SALE OF ASSETS AND EQUITY INVESTMENT
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 2004 sale of assets of EMCOR's United Kingdom
Delcommerce equipment rental services division. Contemporaneously with the sale,
EMCOR entered into a long-term agreement to utilize the equipment rental
services of the purchaser, a publicly traded United Kingdom company. The $1.8
million gain on sale of an equity investment of 2004 was attributable to the
August 2004 sale of EMCOR's interest in a South African joint venture, the
operating results of which had been reported previously in the Other
international segment. There were no sales of assets or equity investments in
either 2003 or 2002 other than the disposal of property, plant and equipment in
the normal course of business.
OPERATING INCOME
The following table presents EMCOR's operating income by segment, and each
segment's operating income as a percentage of its segment's revenues, for the
years ended December 31, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2004 REVENUES 2003 REVENUES 2002 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services ...... $ 81.2 6.6% $ 57.8 4.7% $ 79.3 6.9%
United States mechanical construction and facilities services ...... (1.4) -- 25.6 1.5% 59.9 3.5%
United States facilities services .................................. 14.2 2.0% 18.4 2.8% 4.4 1.8%
------ ------ ------
Total United States operations ..................................... 94.0 2.5% 101.8 2.8% 143.6 4.6%
Canada construction and facilities services ........................ (11.9) -- 2.0 0.6% 3.3 1.0%
United Kingdom construction and facilities services ................ 0.0 -- (22.4) -- 0.0 --
Other international construction and facilities services ........... 0.5 -- 0.3 -- (0.1) --
Corporate administration ........................................... (35.0) -- (34.7) -- (31.3) --
Restructuring expense .............................................. (8.3) -- -- -- -- --
Gain on sale of assets ............................................. 2.8 -- -- -- -- --
------ ------ ------
Total worldwide operations ......................................... 42.1 0.9% 47.0 1.0% 115.5 2.9%
Other corporate items:
Interest expense ................................................... (8.9) (8.9) (4.1)
Interest income .................................................... 1.9 0.7 2.0
Gain on sale of equity investment .................................. 1.8 -- --
Minority interest .................................................. (3.8) (1.9) (1.1)
Income before taxes ................................................ $ 33.2 $ 36.9 $112.3
As described in more detail below, operating income was $42.1 million for
2004, $47.0 million for 2003 and $115.5 million for 2002. 2004 operating income
decreased $4.9 million compared to 2003, primarily due to restructuring expenses
of $8.3 million. Excluding 2004 restructuring expenses of $8.3 million and a
gain on the sale of assets of $2.8 million, operating income increased $0.5
million compared to 2003. Operating income for 2004 was also impacted by other
factors previously discussed in the Overview above. The decrease in 2003
operating income compared to 2002 operating income was primarily attributable to
the 2003 Unfavorable United States Market Conditions (previously discussed in
the Overview above), and operating losses from the United Kingdom construction
and facilities services segment. Operating income was favorably impacted by $9.8
million, $4.5 million and $2.3 million in reduction of insurance liabilities
previously established for insurance exposures as a consequence of effective
risk management and safety programs for 2004, 2003 and 2002, respectively.
20
United States electrical construction and facilities services operating
income for 2004 increased $23.4 million compared to 2003. This segment's
increased operating income in 2004 was attributable principally to increased
gross profit on transportation infrastructure, financial services, and
hospitality construction projects due to the increased availability and
successful performance of these types of projects. Selling, general and
administrative expenses decreased in 2004 due to lower salary costs and other
variable costs associated with reductions in personnel. The decrease in
operating income for 2003 of $21.5 million as compared to 2002, and the related
decrease in operating income as a percentage of revenues, was primarily
attributable to the 2003 Unfavorable United States Market Conditions (previously
discussed in the Overview above). In 2003, the New York City area market was
particularly adversely impacted by a significant decline in commercial work and
by unprofitable performance of power generation work. The overall 2003 decrease
was partially offset by profitable performance of transportation infrastructure,
certain power generation work and project close-outs. In addition, 2003 selling,
general and administrative expenses (excluding that attributable to companies
acquired in 2002) compared to 2002 decreased by approximately $19.1 million.
This decrease was mostly related to a reduction in incentive compensation, which
was attributable to less favorable financial performance, a reduction in
personnel and a reduction in other variable expenses.
The United States mechanical construction and facilities services operating
loss for 2004 was $1.4 million compared to operating income of $25.6 million for
2003. The segment's 2004 operating loss was primarily attributable to: (a)
decreases in the expected recovery of estimated costs upon completion of certain
projects, principally in the Western United States; (b) poor contract
performance on certain construction work related to greater labor requirements
than originally estimated to perform the work and continued reduced labor
productivity due to the uncertain construction job market; (c) a continued
decrease in the availability of generally more profitable discretionary small
projects and repair and maintenance work due to general economic conditions
negatively impacting commercial construction spending; and (d) increased
competition for, and a related decrease in gross profit margin on, commercial,
industrial and public sector work. Partially offsetting these operating results
were decreased selling, general and administrative expenses attributable to
lower salary costs and other variable costs associated with reductions in
personnel and to reduced incentive compensation due to less favorable financial
performance. This segment's operating income decreased by $34.3 million for 2003
compared to 2002. This decrease in operating income and decrease as a percentage
of revenues for 2003 was primarily due to the 2003 Unfavorable United States
Market Conditions (previously discussed in the Overview above). The mid-western
markets were negatively impacted by a significant reduction in available work on
manufacturing projects, the western markets were negatively impacted by reduced
income from power generation work, and other United States markets were
negatively impacted by reduced repairs and maintenance work caused largely by
the cooler than normal summer weather conditions. This decrease in operating
income was partially offset by increased income from additional water and
wastewater treatment facilities projects for 2003 compared to 2002. In addition,
selling, general and administrative expenses decreased by approximately $11.5
million in this segment for 2003 compared to 2002. This decrease was mostly
related to a reduction in incentive compensation related to less favorable
financial performance, reduction in personnel and reduction in other variable
expenses.
United States facilities services operating income for 2004 decreased $4.2
million compared to 2003. The reduced operating income was primarily related to
a decrease in revenues from, and profits earned on, discretionary small projects
and repair and maintenance work due to general economic conditions negatively
impacting commercial construction spending and an increase in expenses for
site-based facilities services business development. In addition, during 2004
this segment also incurred approximately $2.3 million of losses on certain
construction projects, outside of the normal facilities services operations of
this segment, that were contracted for by a subsidiary in this segment prior to
its acquisition by EMCOR. The decrease in operating income for 2004 was
partially offset by a reduction in selling, general and administrative expenses
related to lower salary costs and other variable costs associated with
reductions in personnel. United States facilities services operating income
increased by $14.0 million for 2003 compared to 2002. The increase in operating
income was primarily attributable to income of $13.5 million from CES and an
increase in the number of site-based facilities services contracts resulting
from business development activities. The increase was partially offset by
reduced income from certain small and discretionary projects due to increased
competition and from mobile services, which services were adversely affected by
cooler than normal summer weather conditions in parts of the United States.
Canada construction and facilities services operating loss for 2004 was $11.9
million compared to operating income of $2.0 million for 2003. The 2004 losses
were primarily due to greater labor requirements than originally estimated to
perform certain projects, increased material prices and the completion of
certain long-term power generation projects in 2003 not present in 2004. The
impact of exchange rate movements increased operating losses by $1.5 million for
2004 compared to 2003. Canada construction and facilities services operating
income decreased by $1.3 million for 2003 compared to 2002. This decrease was
principally due to: (a) increased hospital and school construction projects and
less manufacturing outage work in 2003 compared to 2002, since hospital and
school construction projects generally have lower gross profits than the
manufacturing outage work and (b) decreased profit from several longer-term
power generation projects. The decline was offset in part by $0.2 million of an
increase in operating income resulting from the impact of the change in exchange
rates due to strengthening of the Canadian dollar.
United Kingdom construction and facilities services operating income was
breakeven for 2004 compared to an operating loss of $22.4 million for 2003. This
improvement was primarily attributable to an improvement in the 2004 gross
profit as there was profitable performance of work in 2004 in contrast to
contracts causing large losses in 2003, which 2003 contracts were substantially
completed by December 31, 2003. The improvement in 2004 operating income was
also attributable to reductions in selling, general and administrative expenses
related to a reorganization of the United Kingdom operations in late 2003.
United Kingdom construction and facilities services reported a $22.4 million
operating loss in 2003 compared to breakeven results for 2002. The 2003
operating loss was primarily attributable to: (a) net unfa-
21
vorable settlements and closeouts of certain construction projects completed
during that year; (b) increased bad debt expense of $5.8 million in 2003
primarily related to the potential non-payment of a large customer account
receivable (which account receivable was written-off against the allowance for
doubtful accounts in 2004); (c) reorganization expenses of approximately $2.0
million related to employee severance expenses and the closing of several
offices; and (d) $1.5 million resulting from the impact of the change in
exchange rates due to strengthening of the British pound.
Other international construction and facilities services operating income was
$0.5 million for 2004 compared to operating income of $0.3 million for 2003 and
$0.1 million of operating loss for 2002. EMCOR continues to pursue new business
selectively in the Middle Eastern and European markets; however, the
availability of opportunities has been significantly reduced as a result of
local economic factors, particularly in the Middle East.
General corporate expenses for 2004 increased by $0.3 million compared to
2003 and increased by $3.4 million for 2003 compared to 2002. General corporate
expenses for 2004 compared to 2003 have been negatively impacted by higher audit
fees and other costs of complying with the provisions of the Sarbanes - Oxley
Act of 2002. However, these increased costs have been largely offset by other
expense reductions. The increase in general corporate expenses for 2003 compared
to 2002 was primarily related to an increase in personnel required to support
the business growth related to acquisitions and increased marketing expenses
associated with EMCOR's brand awareness campaign, which promotes the EMCOR brand
in the United States on the national and local level.
Interest expense was $8.9 million for both 2004 and 2003. The decrease in
borrowings under EMCOR's revolving credit facility for 2004 was offset by the
impact of increases in interest rates during the year. Interest expense
increased by $4.8 million in 2003 compared to 2002 principally due to increased
borrowing under EMCOR's revolving credit facility as a result of the 2002
acquisition of CES.
Interest income increased by $1.2 million for 2004 compared to 2003 due to
interest earned on cash provided by the United Kingdom construction and
facilities services segment, as such cash was invested in the United Kingdom at
interest rates greater than the net cost of borrowing under EMCOR's revolving
credit facility. Interest income decreased by $1.3 million for 2003 compared to
2002 due to repayment of increased borrowings for working capital under EMCOR's
revolving credit facility.
The income tax benefit of less than $0.05 million for 2004 was comprised of
(a) $13.9 million of income tax provision on pre-tax earnings of $33.2 million,
(b) $8.2 million of income tax provision related to a valuation allowance
recorded to reduce net deferred tax assets related to net operating losses and
other temporary differences of the United Kingdom construction and facilities
services segment inasmuch as there is uncertainty of sufficient future income to
realize the benefit of such deferred tax assets and (c) the partial offset of
such income tax provisions by $22.1 million of income tax benefits for income
tax reserves no longer required based on current analysis of probable exposures.
The provision on income before income taxes for 2004, 2003 and 2002 was recorded
at an effective income tax rate of approximately 42%.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2004 and 2003 (in millions):
2004 2003
------- -------
Net cash provided by operating activities .............. $ 54.5 $ 1.6
Net cash used in investing activities .................. $ (4.0) $ (23.6)
Net cash (used in) provided by financing activities .... $ (58.4) $ 7.1
The Company's consolidated cash balance decreased by $7.9 million from $78.3
million at December 31, 2003 to $70.4 million at December 31, 2004. Net cash
provided by operating activities for 2004 was $54.5 million, an increase of
$52.9 million from net cash provided by operating activities of $1.6 million for
2003. The increase in cash provided by operating activities in 2004 compared to
2003 was primarily due to an increase in net income of $12.6 million, a decrease
in net operating assets and liabilities of $41.2 million and a $0.9 million
decrease related to other items. This increase in 2004 cash provided by
operating activities was in contrast to the cash provided by operating
activities of $1.6 million in 2003, as 2003 was impacted by the shift toward
increased public sector work, which work typically involves larger projects and
significant working capital requirements until initial billing milestones can be
reached. Net cash used in investing activities in 2004 of $4.0 million consisted
primarily of earn-out payments of $1.6 million for acquisitions in prior
periods, net disbursements for other investments of $1.3 million and $16.1
million for purchases of property, plant and equipment, offset by $10.1 million
of proceeds from the sale of assets and an equity investment and $5.0 million of
proceeds from the sale of property, plant and equipment. This activity compares
to net cash used in investing activities for 2003 of $23.6 million, which
consisted primarily of aggregate payments of $8.9 million for acquisitions in
2003 and earn-out payments of $2.0 million for acquisitions in prior periods,
net disbursements for other investments of $1.8 million and $17.9 million for
purchases of property, plant and equipment, offset by $5.2 million of payments
received pursuant to indemnity provisions of acquisition agreements and $1.9
million of proceeds from the sale of property, plant and equipment. Net cash
used in financing activities for 2004 of $58.4 million was primarily
attributable to net payments under working capital credit lines of $59.4
million, offset by proceeds from the exercise of stock options of $1.6 million.
22
Net cash provided by financing activities for 2003 of $7.1 million was primarily
attributable to net borrowings under working capital credit lines of $27.4
million and proceeds from the exercise of stock options of $2.0 million, offset
by repayments of long-term debt of $22.2 million.
The following is a summary of EMCOR's material contractual obligations and
other commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------ -------- -------- -------- ------- -------
Other long-term debt ........................................... $ 0.5 $ 0.1 $ 0.2 $ 0.2 $ --
Capital lease obligations ...................................... 1.9 0.7 0.8 0.4 --
Operating leases ............................................... 165.6 39.6 57.4 32.8 35.8
Minimum funding requirement for pension plan ................... 10.7 10.7 -- -- --
Open purchase obligations (1) .................................. 661.2 514.1 142.1 5.0 --
Other long-term obligations (2) ................................ 88.5 17.6 70.9 -- --
-------- -------- -------- ------- -------
Total Contractual Obligations .................................. $ 928.4 $ 582.8 $ 271.4 $ 38.4 $ 35.8
======== ======== ======== ======= =======
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
------------------------------------------------------------
TOTAL LESS
OTHER COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
------------------ --------- -------- -------- ------- -------
Revolving Credit Facility (3) ...................... $ 80.0 $ -- $ 80.0 $ -- $ --
Letters of credit .................................. 54.3 -- 54.3 -- --
Guarantees ......................................... 25.0 -- -- -- 25.0
-------- -------- -------- ------- -------
Total Commercial Commitments ....................... $ 159.3 $ -- $ 134.3 $ -- $ 25.0
======== ======== ======== ======= =======
- -------------
(1) Represents open purchase orders for material and subcontracting costs
related to EMCOR's construction and service contracts. These purchase
orders are not reflected in EMCOR's consolidated balance sheet and should
not impact future cash flows as amounts will be recovered through customer
billings.
(2) Represents primarily insurance related liabilities, the timing for which
payments beyond one year is not practical to estimate.
(3) EMCOR classifies these borrowings as short-term on its consolidated balance
sheet because of EMCOR's intent and ability to repay the amounts on a
short-term basis.
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain direct and
indirect subsidiaries of EMCOR, is secured by substantially all of the assets of
EMCOR and most of its subsidiaries and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to payment of dividends,
common stock repurchases, investments, acquisitions, indebtedness and capital
expenditures. A commitment fee is payable on the average daily unused amount of
the Revolving Credit Facility. The fee ranges from 0.3% to 0.5% of the unused
amount, based on certain financial tests. Borrowings under the Revolving Credit
Facility bear interest at (a) a rate which is the prime commercial lending rate
announced by Harris Nesbitt from time to time (5.25% at December 31, 2004) plus
0% to 1.0%, based on certain financial tests or (b) United States dollar LIBOR
(at December 31, 2004 the rate was 2.42%) plus 1.5% to 2.5%, based on certain
financial tests. The interest rates in effect at December 31, 2004 were 5.50%
and 4.17% for the prime commercial lending rate and the United States dollar
LIBOR, respectively. Letter of credit fees issued under this facility range from
0.75% to 2.5% of the respective face amounts of the letters of credit issued and
are charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2004 and 2003, EMCOR had approximately $54.3 million
and $49.2 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $80.0 million and $139.4 million outstanding under the Revolving
Credit Facility at December 31, 2004 and 2003, respectively.
In August 2001, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed a credit agreement with a bank providing for an overdraft facility of up
to Cdn. $0.5 million. The facility is secured by a standby letter of credit and
provides for interest at the bank's prime rate (4.25% at December 31, 2004).
There were no borrowings outstanding under this credit agreement at December 31,
2004 or 2003.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it
has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a
60% interest. The venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to customers for use in
air conditioning private and public properties. These guarantees are not
expected to have a material effect on EMCOR's financial position or results of
operations. Each of the venturers is jointly and severally liable, in the event
of default, for the venture's $25.0 million borrowing due December 2031. During
September 2002, each venture partner contributed equity to the venture, of which
EMCOR's contribution was $14.0 million.
23
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects which secure EMCOR payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain EMCOR employees, bonds are sometimes provided
to secure obligations for wages and benefits payable to or for such employees.
EMCOR bonding requirements typically increase as the amount of public sector
work increases. As of December 31, 2004, sureties had issued bonds for the
account of EMCOR in the aggregate amount of approximately $1.6 billion. The
bonds are issued by EMCOR's sureties in return for a premium which varies
depending on the size and type of the bonds. The largest individual bond is
approximately $170.0 million. EMCOR has agreed to indemnify the sureties for any
payments made by them in respect of bonds issued on EMCOR's behalf.
EMCOR does not have any other material financial guarantees or off-balance
sheet arrangements other than those disclosed herein.
The primary source of liquidity for EMCOR has been, and is expected to
continue to be, cash generated by operating activities. EMCOR also maintains the
Revolving Credit Facility that may be utilized, among other things, to meet
short-term liquidity needs in the event cash generated by operating activities
is insufficient or to enable EMCOR to seize opportunities to participate in
joint ventures or to make acquisitions that may require access to cash on short
notice or for any other reason. EMCOR may also increase liquidity through an
equity offering or other debt instruments. Short-term changes in macroeconomic
trends may have an effect, positively or negatively, on liquidity. In addition
to managing borrowings, EMCOR's focus on the facilities services market is
intended to provide an additional buffer against economic downturns as the
facilities services market is characterized by annual and multi-year contracts
that provide a more predictable stream of cash flow than the construction
market. The acquisition in December 2002 of CES, which is primarily focused on
the facilities services market, is part of EMCOR's plan to grow its facilities
services business. Short-term liquidity is also impacted by the type and length
of construction contracts in place. During economic downturns, such as the 2001
through 2004 period for the commercial construction industry, there are
typically fewer small and discretionary projects from the private sector, and
companies such as EMCOR more aggressively bid more large long-term
infrastructure and public sector contracts. Performance of long duration
contracts typically requires working capital until initial billing milestones
are achieved. While EMCOR strives to maintain a net over-billed position with
its customers, there can be no assurance that a net over-billed position can be
maintained. EMCOR's net over-billings, defined as the balance sheet accounts
billings in excess of costs and estimated earnings on uncompleted contracts less
cost and estimated earnings in excess of billings on uncompleted contracts, was
$119.0 million and $95.8 million as of December 31, 2004 and 2003, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the Revolving Credit Facility, and the sale
of various secured or unsecured debt and/or equity interests in the public and
private markets. Based upon EMCOR's current credit ratings and financial
position, EMCOR can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, EMCOR's primary revenue risk
factor continues to be the level of demand for non-residential construction
services, which is in turn influenced by macroeconomic trends including interest
rates and governmental economic policy. In addition to the primary revenue risk
factor, EMCOR's ability to perform work at profitable levels is critical to
meeting long-term liquidity requirements.
EMCOR believes that current cash balances and borrowing capacity available
under the Revolving Credit Facility or other forms of financing available
through debt or equity offerings, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements. However,
EMCOR is a party to lawsuits and other proceedings in which other parties seek
to recover from it amounts ranging from a few thousand dollars to over $70.0
million. If EMCOR was required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on its financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2004, EMCOR utilized approximately $43.7 million of
letters of credit issued pursuant to its Revolving Credit Facility as collateral
for its insurance obligations.
NEW ACCOUNTING PRONOUNCEMENT
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("123(R)"), which is
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will no longer
be an alternative. Statement 123(R) must be adopted no later than July 1, 2005.
EMCOR will adopt Statement 123(R) on July 1, 2005.
As permitted by Statement 123, EMCOR currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall financial posi-
24
tion. EMCOR is currently evaluating the impact that adoption of Statement 123(R)
will have on the results of operations in 2005. The impact of the standard on
future operating results cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future. Statement 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While EMCOR cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior periods for
such excess tax deductions were not material. On the first business day of 2005,
options to purchase an aggregate of 290,200 shares of EMCOR common stock were
granted pursuant to the 2003 Management Stock Incentive Plan, and options to
purchase an aggregate of 31,752 shares of EMCOR common stock were granted
pursuant to the 1997 Stock Option Plan for directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR hasWe have not used any material derivative financial instruments for any purpose during the
years ended December 31, 20042006 and 2003,2005, including trading or speculating on
changes in interest rates or commodity prices of materials used in itsour business.
EMCOR is29
We are exposed to market risk for changes in interest rates for borrowings
under the 2005 Revolving Credit Facility. Borrowings under that facility bear
interest at variable rates, and the fair value of this borrowing isborrowings are not
significantly affected by
changes in market interest rates. As of December 31, 2004,2006, there was $80.0 million ofwere no
borrowings outstanding under the facility,facility. For further information on borrowing
rates, refer to the Liquidity and these borrowings bear interest at (a) a rate which is the prime commercial
lending rate announced by Harris Nesbitt from time to time (5.25% at December
31, 2004) plus 0% to 1.0%, based on certain financial tests or (b) United States
dollar LIBOR (at December 31, 2004, the rate was 2.42%) plus 1.5% to 2.5%, based
on certain financial tests. Based on the borrowings outstandingCapital Resources discussion in Item 7.
Management's Discussion and Analysis of $80.0
million, if the overall interest rates were to increase by 1.0%, the netFinancial Condition and Results of
tax
interest expense would increase approximately $0.5 million in the next twelve
months. Conversely, if the overall interest rates were to decrease by 1.0%,
interest expense would decrease by approximately $0.5 million in the next twelve
months. The Revolving Credit Facility expires in September 2007. There is no
guarantee that EMCOR will be able to renew the facility at its expiration.
EMCOR isOperations.
We are also exposed to construction market risk and the market'sits potential related
impact on accounts receivable or costs and estimated earnings in excess of
billings on uncompleted contracts. The amounts recorded may be at risk if our
customers' ability to pay these obligations isare negatively impacted by economic
conditions. EMCORWe continually monitorsmonitor the credit worthinesscreditworthiness of itsour customers and
maintainsmaintain on-going discussions with customers regarding contract status with
respect to change orders and billing terms. Therefore, EMCOR believes it takeswe believe we take
appropriate action to manage market and other risks, but there is no assurance
that itwe will be able to reasonably identify all risks with respect to
collectibility of these assets. See also the previous discussion of Accounts
Receivable under the heading "ApplicationApplication of Critical Accounting Policies"Policies in theItem 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Financial
Condition.Operations.
Amounts invested in EMCOR'sour foreign operations are translated into U. S.U.S.
dollars at the exchange rates in effect at year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income (loss), a
component of stockholders' equity, in itsour consolidated balance sheets. EMCOR believesWe
believe the exposure to the effects that fluctuating foreign currencies may have
on itsour consolidated results of operations is limited because the foreign
operations primarily invoice customers and collect obligations in their
respective local currencies. Additionally, expenses associated with these
transactions are generally contracted and paid for in their same local
currencies.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS ANNUAL REPORT ARE BASED UPON
INFORMATION AVAILABLE TO EMCOR, AND MANAGEMENT'S PERCEPTION THEREOF, AS OF THE
DATE OF THIS ANNUAL REPORT. EMCOR ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS
REGARDING MARKET SHARE GROWTH, GROSS PROFIT, PROJECT MIX, PROJECTS WITH VARYING
PROFIT MARGINS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
ACCORDINGLY, THESE STATEMENTS ARE NO GUARANTEE OF FUTURE PERFORMANCE. SUCH RISK
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE EFFECTS OF GENERAL
ECONOMIC CONDITIONS, CHANGES IN THE POLITICAL ENVIRONMENT, CHANGES IN THE
SPECIFIC MARKETS FOR EMCOR'S SERVICES, ADVERSE BUSINESS CONDITIONS, INCREASED
COMPETITION, UNFAVORABLE LABOR PRODUCTIVITY, MIX OF BUSINESS, AND RISKS
ASSOCIATED WITH FOREIGN OPERATIONS. CERTAIN OF THE RISKS AND FACTORS ASSOCIATED
WITH EMCOR'S BUSINESS ARE ALSO DISCUSSED IN OTHER REPORTS FILED BY EMCOR FROM
TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD TAKE
THE AFOREMENTIONED RISKS AND FACTORS INTO ACCOUNT IN EVALUATING ANY
FORWARD-LOOKING STATEMENTS.
25In addition, we are exposed to market risk of fluctuations in certain
commodity prices of materials such as copper and steel utilized in both our
construction and facilities services operations. We are also exposed to
increases in energy prices, particularly as they relate to gasoline prices for
our fleet of over 6,000 vehicles. While we believe we can increase our prices to
adjust for some price increases in commodities, there can be no assurance that
continued price increases of commodities, if they were to occur, would be
recoverable.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
---------------------------
2004 2003--------------------------
2006 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................................................................................................................................. $ 70,404273,735 $ 78,260103,785
Accounts receivable, less allowance for doubtful accounts of $36,185$25,021 and $43,706,$29,973, respectively ...................................................................... 1,073,454 1,009,170.... 1,184,418 1,046,380
Costs and estimated earnings in excess of billings on uncompleted contracts ...................... 240,716 249,393....................... 147,848 185,634
Inventories ...................................................................................... 10,580 9,863....................................................................................... 18,015 10,175
Prepaid expenses and other ....................................................................... 30,417 42,470........................................................................ 38,397 43,829
----------- -----------
Total current assets ........................................................................... 1,425,571 1,389,156............................................................................ 1,662,413 1,389,803
Investments, notes and other long-term receivables ................................................. 26,472 26,452.................................................. 29,630 28,659
Property, plant and equipment, net ................................................................. 56,468 66,156.................................................................. 52,780 46,443
Goodwill ........................................................................................... 279,432 277,994............................................................................................ 288,165 283,412
Identifiable intangible assets, less accumulated amortization of $7,017$14,460 and $3,573,$10,209, respectively ... 18,782 22,226.. 38,251 16,990
Other assets ....................................................................................... 11,244 13,263........................................................................................ 17,784 13,634
----------- -----------
Total assets ............................................................................................................................................................................... $ 1,817,9692,089,023 $ 1,795,2471,778,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ........................................................................................................... $ 80,000-- $ 139,400--
Current maturities of long-term debt and capital lease obligations ............................... 806 367................................ 659 551
Accounts payable ................................................................................. 467,415 451,713.................................................................................. 496,407 452,709
Billings in excess of costs and estimated earnings on uncompleted contracts ...................... 359,667 345,207....................... 412,069 330,235
Accrued payroll and benefits ..................................................................... 138,771 131,623...................................................................... 177,490 154,276
Other accrued expenses and liabilities ........................................................... 115,714 110,147............................................................ 121,723 107,545
----------- -----------
Total current liabilities ...................................................................... 1,162,373 1,178,457....................................................................... 1,208,348 1,045,316
Long-term debt and capital lease obligations ....................................................... 1,332 561........................................................ 1,239 1,406
Other long-term obligations ........................................................................ 91,903 94,873......................................................................... 169,127 116,783
----------- -----------
Total liabilities .................................................................................. 1,255,608 1,273,891................................................................................... 1,378,714 1,163,505
----------- -----------
Stockholders' equity:
Preferred stock, $0.10$0.01 par value, 1,000,000 shares authorized, zero issued and outstanding ................... -- --
Common stock, $0.01 par value, 30,000,00080,000,000 shares authorized, 16,324,33533,648,036 and 16,155,84433,266,154 shares issued,
respectively ........................................................... 163 162...................................................................................... 336 333
Capital surplus .................................................................................... 318,122 316,729..................................................................................... 355,242 325,232
Accumulated other comprehensive income ............................................................. 7,699 1,257loss ................................................................ (28,189) (5,370)
Retained earnings .................................................................................. 253,128 219,921................................................................................... 399,804 313,170
Treasury stock, at cost 1,088,2861,820,046 and 1,123,6512,162,388 shares, respectively .............................. (16,751) (16,713)................................ (16,884) (17,929)
----------- -----------
Total stockholders' equity ......................................................................... 562,361 521,356.......................................................................... 710,309 615,436
----------- -----------
Total liabilities and stockholders' equity ................................................................................................................... $ 1,817,9692,089,023 $ 1,795,2471,778,941
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2631
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2006 2005 2004 2003 2002
----------- ----------- -----------
Revenues ........................................................................................................... $ 4,747,8805,021,036 $ 4,534,6464,696,603 $ 3,968,0514,698,126
Cost of sales .................................................... 4,300,978 4,052,192 3,485,417............................................. 4,453,359 4,198,188 4,255,067
----------- ----------- -----------
Gross profit ..................................................... 446,902 482,454 482,634.............................................. 567,677 498,415 443,059
Selling, general and administrative expenses ..................... 399,338 435,397 367,095.............. 448,011 415,771 395,400
Restructuring expenses ........................................... 8,274 -- --.................................... 1,622 1,749 8,276
Gain on sale of assets ........................................... 2,839.................................... -- -- 2,839
----------- ----------- -----------
Operating income ................................................. 42,129 47,057 115,539.......................................... 118,044 80,895 42,222
Interest expense ................................................. (8,883) (8,939) (4,096).......................................... (2,340) (8,315) (8,884)
Interest income ............................................................................................. 6,235 2,729 1,886 703 1,997
Gain on sale of equity investment ................................ 1,844......................... -- -- 1,844
Minority interest ......................................................................................... (4,201) (4,515) (3,814) (1,905) (1,114)
----------- ----------- -----------
Income from continuing operations before income taxes ....................................... 33,162 36,916 112,326..... 117,738 70,794 33,254
Income tax provision (benefit) provision ................................... (45) 16,295 49,424............................ 30,484 9,641 (11)
----------- ----------- -----------
Income from continuing operations ......................... 87,254 61,153 33,265
Loss from discontinued operations, net of income tax effect (620) (1,111) (58)
----------- ----------- -----------
Net income ....................................................................................................... $ 33,20786,634 $ 20,62160,042 $ 62,90233,207
=========== =========== ===========
Net income (loss) per common share - Basic
earnings per share .........................................From continuing operations .............................. $ 2.182.76 $ 1.381.96 $ 4.231.09
From discontinued operations ............................ (0.02) (0.03) (0.00)
----------- ----------- -----------
$ 2.74 $ 1.93 $ 1.09
=========== =========== ===========
Net income (loss) per common share - Diluted
earnings per share .......................................From continuing operations .............................. $ 2.132.67 $ 1.331.92 $ 4.071.07
From discontinued operations ............................ (0.02) (0.03) (0.00)
----------- ----------- -----------
$ 2.65 $ 1.89 $ 1.07
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2732
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2006 2005 2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income ....................................................................................................................................................... $ 33,20786,634 $ 20,62160,042 $ 62,90233,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................................................................................. 17,059 19,439 20,939 21,717 15,371
Amortization of identifiable intangible assets ........................................................................... 4,251 3,192 3,444
2,818 755
ProvisionProvisions for doubtful accounts ........................................................................................................ 1,112 8,457 7,026 11,249 3,354
Minority interest ..................................................................................................................................... 4,201 4,515 3,814 1,905 1,114
Deferred income taxes ............................................................................................................................. (6,169) 5,002 13,704
7,451 7,432
GainLoss (gain) on sale of discontinued operations, sale of assets and equity investment ........................................620 1,250 (4,683) -- --
(Gain) loss on sale of property, plant and equipment ............................................................... (360) 263 (196)
314 (190)Excess tax benefits from share-based compensation .................................. (6,768) -- --
Equity income from unconsolidated entities ......................................... (4,306) (2,066) (2,230)
Non-cash expense for amortization of debt issuance costs ....................................................... 786 2,589 1,925
1,416 630
Non-cash compensation expense for Restricted Stock Units ............................................................................................... 5,868 -- --
557Distributions from unconsolidated entities ......................................... 9,660 616 2,843
----------- ----------- -----------
79,180 67,491 91,925
Change112,588 103,299 79,793
Changes in operating assets and liabilities excluding effect of businesses acquired:
(Increase) decrease in accounts receivable .......................................... (55,244) (49,171) 28,464......................................... (101,322) 9,998 (54,544)
Decrease (increase) in inventories and contracts in progress, net ................... 21,130 (29,018) (14,174)............................. 100,612 28,409 20,876
Increase (decrease) in accounts payable ........................................................ 6,912 40,931 32,653............................................ 31,359 (8,107) 7,732
Increase (decrease) in accrued payroll and benefits and other accrued expenses and liabilities .......................................................... 10,459 (27,351) 14,86042,833 14,814 10,522
Changes in other assets and liabilities, net ........................................ (7,954) (1,258) 779....................................... 23,272 (2,674) (20,759)
----------- ----------- -----------
Net cash provided by operating activities ............................................. 54,483 1,624 154,507............................................ 209,342 145,739 43,620
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations, sale of assets and equity investment ..................................1,661 4,413 10,061 -- --
Proceeds from sale of property, plant and equipment ................................. 4,964 1,872 2,009................................ 714 3,577 5,478
Purchase of property, plant and equipment ..................................................................................... (19,733) (12,445) (16,134)
(17,940) (15,585)Investment in and advances to unconsolidated entities and joint ventures ........... (4,752) (3,449) (237)
Payments for acquisitions of businesses, net of cash acquired, and related earn-out
agreements .................................................................................... (40,732) (10,690) (1,568)
(10,943) (343,358)
Net disbursements(disbursements) proceeds for other investments ............................................. (1,281) (1,810) (7,679)
Payments received pursuant to indemnity provisions of acquisition agreements ........ -- 5,244 --................................. (1,573) 58 (1,188)
----------- ----------- -----------
Net cash used in investing activities ................................................. (3,958) (23,577) (364,613)................................................ (64,415) (18,536) (3,588)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit linesline .......................................... 149,500 899,552 1,365,950 1,445,904 248,000
Repayments of working capital credit linesline .......................................... (149,500) (979,552) (1,425,350) (1,418,504) (136,000)
Borrowings for long-term debt ............................................................................................................. 2,420 -- 31 -- 70
Repayments for long-term debt ............................................................................................................. (2,475) (89) (144) (22,241) (1,100)
Repayments for capital lease obligations ....................................................................................... (615) (182) (458)
(12) (34)
Net proceedsProceeds from exercise of stock options ..................................................................................... 10,400 1,742 1,590
1,963 2,507Excess tax benefits from share-based compensation .................................. 6,768 -- --
----------- ----------- -----------
Net cash provided by (used in) provided by financing activities ..................................................................... 16,498 (78,529) (58,381) 7,110 113,443
----------- ----------- -----------
DecreaseEffect of exchange rate changes on cash and cash equivalents ......................... 8,525 (3,998) 1,749
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ................................................. (7,856) (14,843) (96,663)..................................... 169,950 44,676 (16,600)
Cash and cash equivalents at beginning of year ........................................ 78,260 93,103 189,766....................................... 103,785 59,109 75,709
----------- ----------- -----------
Cash and cash equivalents at end of year ........................................................................................... $ 70,404273,735 $ 78,260103,785 $ 93,10359,109
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2833
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS)
ACCUMULATED
TOTAL OTHER
STOCK- COMPREHENSIVE COMPRE-
HOLDERS' COMMON CAPITAL INCOME(LOSS) RETAINED TREASURY COMPREHENSIVEHENSIVE
EQUITY STOCK SURPLUS (LOSS)INCOME (1) EARNINGS STOCK INCOME
------------------- -------- --------- --------- ------------- --------- --------- ----------------------
Balance, December 31, 2001 ................2003 ........... $ 421,933521,356 $ 159323 $ 307,636316,568 $ (5,424)1,257 $ 136,398219,921 $ (16,836)
Net income .............................. 62,902 -- -- -- 62,902 -- $ 62,902
Foreign currency translation
adjustments ........................... 3,725 -- -- 3,725 -- -- 3,725
Pension plan additional
minimum liability, net of
tax benefit of $1.9 million ........... (3,449) -- -- (3,449) -- -- (3,449)
---------
Comprehensive income .................... $ 63,178
=========
Common stock issued under
stock option plans, net ............... 2,507 2 2,505 -- -- --
Value of Restricted Stock
Units (4) ............................. 2,252 -- 2,252 -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 ................ 489,870 161 312,393 (5,148) 199,300 (16,836)
Net income .............................. 20,621 -- -- -- 20,621 -- $ 20,621
Foreign currency translation
adjustments ........................... 12,440 -- -- 12,440 -- -- 12,440
Pension plan additional
minimum liability, net of
tax benefit of $2.6 million ........... (6,035) -- -- (6,035) -- -- (6,035)
---------
Comprehensive income .................... $ 27,026
=========
Common stock issued under
stock option plans, net ............... 3,026 1 2,902 -- -- 123
Value of Restricted Stock
Units (4) ............................. 1,434 -- 1,434 -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 ................ 521,356 162 316,729 1,257 219,921 (16,713)
Net income ....................................................... 33,207 -- -- -- 33,207 -- $ 33,207
Foreign currency translation
adjustments ................................................. 5,409 -- -- 5,409 -- -- 5,409
Pension plan reduction of
minimum liability, net of
tax provision of $2.6 million ................. 1,033 -- -- 1,033 -- -- 1,033
---------
Comprehensive income ................................... $ 39,649
=========
Issuance of treasury stock
for restricted stock units (2) ............... -- -- (836) -- -- 836
Treasury stock, at cost (3) ..................... (902) -- -- -- -- (902)
Common stock issued under
stock option plans, net ............................... 1,590 1 1,5613 1,559 -- -- 28
Value of Restricted Stock
Unitsrestricted stock units (4) ............................. 668 -- 668 -- -- --
--------- ----------------- --------- --------- --------- ---------
Balance, December 31, 2004 ........................... 562,361 326 317,959 7,699 253,128 (16,751)
Net income ......................... 60,042 -- -- -- 60,042 -- $ 562,36160,042
Foreign currency translation
adjustments ...................... (1,174) -- -- (1,174) -- -- (1,174)
Pension plan additional minimum
liability, net of tax benefit
of $0 ............................ (11,895) -- -- (11,895) -- -- (11,895)
---------
Comprehensive income ............... $ 16346,973
=========
Issuance of treasury stock
for restricted stock units (2) ... -- -- (540) -- -- 540
Treasury stock, at cost (3) ........ (871) -- -- -- -- (871)
Common stock issued under
stock option plans, net (5) ...... 5,615 7 6,455 -- -- (847)
Value of restricted stock units .... 1,358 -- 1,358 -- -- --
--------- -------- --------- --------- --------- ---------
Balance, December 31, 2005 ........... 615,436 333 325,232 (5,370) 313,170 (17,929)
Net income ......................... 86,634 -- -- -- 86,634 -- $ 318,12286,634
Foreign currency translation
adjustments ...................... 7,270 -- -- 7,270 -- -- 7,270
Pension plan reduction of minimum
liability, net of tax provision
of $0.4 million .................. 880 -- -- 880 -- -- 880
---------
Comprehensive income ............... $ 7,69994,784
=========
Effect of adopting Statement 158,
net of tax benefit of
$13.4 million .................... (30,969) -- -- (30,969) -- --
Issuance of treasury stock
for restricted stock units (2) ... -- -- (551) -- -- 551
Treasury stock, at cost (3) ........ (1,587) -- -- -- -- (1,587)
Common stock issued under
stock option plans, net (5) ...... 25,539 3 23,455 -- -- 2,081
Value of restricted stock units .... 1,238 -- 1,238 -- -- --
Share-based compensation expense ... 5,868 -- 5,868 -- -- --
--------- -------- --------- --------- --------- ---------
Balance, December 31, 2006 ........... $ 253,128710,309 $ (16,751)336 $ 355,242 $ (28,189) $ 399,804 $ (16,884)
========= ================= ========= ========= ========= =========
- -----------------------
(1) RepresentsAs of December 31, 2006, represents cumulative foreign currency
translation and pension liability adjustments of $18.8 million and $(47.0)
million, respectively. As of December 31, 2005, represents cumulative
foreign currency translation and net of tax minimum pension liability
adjustments of $11.5 million and $(16.9) million, respectively. As of
December 31, 2004, represents cumulative foreign currency translation and
net of tax minimum pension liability adjustments of $12.7 million and
$(5.0) million, respectively, as of December 31, 2004. Represents cumulative foreign
currency translation and net of tax minimum pension liability adjustments
of $7.3 million and $(6.0) million, respectively, as of December 31, 2003.respectively.
(2) Represents common stock transferred at cost from treasury stock upon the
vesting of restricted stock units.
(3) Represents value of shares of common stock withheld by EMCOR for income
tax withholding requirements upon the vesting of restricted stock units.
(4) Shares of common stock will be issued in respect of restricted stock
units. This amount represents the value of restricted stock units at the
date of grant plusgrant.
(5) Includes the related compensation expensetax benefit of stock option exercises of $15.1 million in
the current year due to2006 and $3.4 million in 2005. The 2006 amount includes an increase in market valueadjustment for
stock option exercises of the underlying common stock. As of October
2002, the terms of the restricted stock unit plan were changed resulting in
fixed plan accounting after the grant date$4.5 million from the date of this change for
both existing and new grants.prior periods.
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
2934
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS
References to the "Company," "EMCOR," "we," "us," "our" and words of
similar import refer to EMCOR Group, Inc., a Delaware corporation, and its consolidated subsidiaries
(collectively
"EMCOR"), isunless the context indicates otherwise.
We are one of the largest mechanicalelectrical and electricalmechanical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. EMCOR specializesWe specialize in providing services relating to mechanicalelectrical and
electricalmechanical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services." EMCOR
designs, integrates, installs, starts up, operatesWe
design, integrate, install, start-up, operate and maintainsmaintain various mechanicalelectrical
and electricalmechanical systems, including: (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b)
plumbing, process and high-purity piping systems; (c) systems for the generation and
distribution of electrical power; (d)(b) fire protection systems; (c) lighting
systems; (e)(d) low-voltage systems, such as fire alarm, security, communication
and process control systems; and (f)(e) voice and data communications systems; (f)
heating, ventilation, air conditioning, refrigeration and clean-room process
ventilation systems; and (g) plumbing, process and high-purity piping systems.
EMCOR providesWe provide electrical and mechanical and
electrical construction services and facilities
services directly to corporations, municipalities and other governmental
entities, owners/developers and tenants of buildings. ItWe also providesprovide these
services indirectly by acting as a subcontractor to general contractors, systems
suppliers and other subcontractors. MechanicalElectrical and electricalmechanical construction
services generally fall into one of two categories: (a) large installation
projects with contracts often in the multi-million dollar range that involve
construction of industrial and commercial buildings and institutional and public
works facilities or the fit-out of large blocks of space within commercial
buildings and (b) smaller installation projects typically involving fit-out,
renovation and retrofit work. EMCOR'sOur facilities services, which are needed to support the
operation of a customer's facilities, include site-based operations and
maintenance, mobile maintenance and service,services, facilities management, remote
monitoring, small modification and retrofit projects, technical consulting and
diagnostic services, installation and support for building systems, and program
development, energy management programs and the design and construction of
energy-related projects. These services are provided to a wide range of
commercial, industrial, utility and institutional facilities including those at
which EMCORwe provided construction services.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EMCORthe Company
and its majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. All investments over which EMCOR exerciseswe exercise
significant influence, but doesdo not control (a 20% to 50% ownership interest), are
accounted for using the equity method of accounting. Additionally, we
participate in a joint venture with another company, and we have consolidated
this joint venture as we have determined that through our participation we have
a variable interest and are the primary beneficiary as defined by FASB
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities".
Minority interest represents the allocation of earnings to our joint
venture partners who either have a minority-ownership interest in joint ventures
or are not at risk for the majority of losses of the joint venture, which joint
ventures have been accounted for by us using the consolidation method of
accounting.
On February 10, 2006, we effected a 2-for-1 stock split in the form of a
stock distribution of one common share for each common share owned on the record
date of January 30, 2006. The capital stock accounts, all share data and
earnings per share data give effect to the stock split, applied retroactively,
to all periods presented. See Note H - Common Stock of the notes to consolidated
financial statements for additional information.
The results of operations for all years presented reflect discontinued
operations accounting due to the year ended December 31, 2002 include, from
the respective dates of acquisition, the resultssale of a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc.
("Comfort") on March 1, 2002subsidiary in 2006 and the results of Consolidated Engineering
Services, Inc. ("CES") acquired on December 19, 2002.in 2005.
The results of operations of other acquisitions which are not material,in 2006 and 2005 have been
included in the results of operations from the date of the respective
acquisition by EMCOR.us.
PRINCIPLES OF PREPARATION
The preparation of the consolidated financial statements, in conformity
with accounting principles generally accepted in the United States, requires EMCORus
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications of the prior years presentations of minority interest in
the consolidated statements of operationsdata have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
year presentation.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of EMCOR'sour electrical
contracting business units measure percentage-of-completion by the percentage of
labor costs incurred to date for each contract to the estimated total labor
costs for such contract. Revenues from services contracts are recognized as
services are provided. There are two basic types of services contracts:contracts (a) fixed
price facilities services contracts which are signed in advance for maintenance,
repair and retrofit work over periods typically ranging from one to three years
(for(pursuant to which thereour employees may be EMCOR employees at thea customer's site full time) and (b)
services contracts which may or may not be signed in advance for similar
maintenance, repair and retrofit work on an as needed basis (frequently referred
to as time and material work). Fixed price facilities services contracts are
generally performed over the contract period, and, accordingly, revenue is
recognized on a pro-rata basis over the life of the contract. Revenues derived
from other services contracts are recognized when the services are performed in
accordance with Staff Accounting Bulletin 30
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
No. 104, "Revenue Recognition, revised
and updated."updated". Expenses related to all services contracts are recognized as
incurred. Provisions for estimated losses on uncompleted long-term contracts are
made in the period in which such losses are determined. In the case of customer
change orders for uncompleted long-term construction contracts, estimated
recoveries are included for work performed in forecasting ultimate profitability
on certain contracts. Due to uncertainties inherent in the estimation process,
it is reasonably possible that completion costs, including those arising from
contract penalty provisions and final contract settlements, will be revised in
the near-term. Such revisions to costs and income are recognized in the period
in which the revisions are determined.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts arise in the consolidated balance sheets when revenues have been
recordedrecognized but the amounts cannot be billed under the terms of the contracts.
Such amounts are recoverable from customers based upon various measures of
performance, including achievement of certain milestones, completion of
specified units or completion of the contract. Also included in costs and
estimated earnings on uncompleted contracts are amounts EMCOR seekswe seek or will seek to
collect from customers or others for errors or changes in contract
specifications or design, contract change orders in dispute or unapproved as to
both scope and price or other customer-related causes of unanticipated additional
contract costs (unapproved(claims and unapproved change orders and claims)orders). TheseSuch amounts are recorded
at their estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the
construction costs incurred in
connection with claim amounts. Claims and unapproved change orders made by EMCORus
involve negotiation and, in certain cases, litigation. In the event litigation
costs are incurred by EMCORus in connection with claims or unapproved change orders,
such litigation costs are expensed as incurred, although EMCORwe may seek to recover
these costs. EMCOR believesWe believe that it haswe have established legal bases for pursuing
recovery of itsour recorded unapproved change orders and claims, and it is
management's intention to pursue and litigate such claims, if necessary, until a
decision or settlement is reached. Unapproved change orders and claims also
involve the use of estimates, and it is reasonably possible that revisions to
the estimated recoverable amounts of recorded claims and unapproved change
orders and claims may be made in the near-term.near term. If EMCOR doeswe do not successfully resolve these
matters, a net expense (recorded as a reduction in revenues), may be required, in
addition to amounts that have been previously provided for. Claims against EMCORus
are recognized when a loss is considered probable and amounts are reasonably
determinable.
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
----------- -----------
Costs incurred on uncompleted contracts ......... $ 8,390,950 $ 7,942,997
Estimated earnings .............................. 450,481 499,556
----------- -----------
8,841,431 8,442,553
Less: billings to date .......................... 8,960,382 8,538,367
----------- -----------
$ (118,951) $ (95,814)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets at
December 31, 2004 and 2003 under the following captions (in thousands):
2004 2003
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts .................. $ 240,716 $ 249,393
Billings in excess of costs and estimated earnings on uncompleted contracts .................. (359,667) (345,207)
--------- ---------
$(118,951) $ (95,814)
========= =========
As of December 31, 2004 and 2003, costs and estimated earnings in excess of
billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $65.4 million and $43.0 million, respectively,
and for claims of approximately $53.5 million and $51.4 million, respectively.
In addition, accounts receivable as of December 31, 2004 and 2003 includes
claims of approximately $5.4 million and $9.4 million, respectively, and
contractually billed amounts related to such contracts of $75.5 million and
$53.1 million, respectively. Generally, contractually billed amounts will not be
paid by the customer to EMCOR until final resolution of related claims. Included
in the claims amount is approximately $28.6 million and $31.2 million as of
December 31, 2004 and 2003, respectively, related to projects of EMCOR's Poole &
Kent subsidiary, which projects had commenced prior to EMCOR's acquisition of
Poole & Kent in 1999. The Poole & Kent claims amount principally relates to a
civil action in which Poole & Kent is a participant, see Note O -- Legal
Proceedings.
3136
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2006 and 2005 were as follows (in thousands):
2006 2005
----------- -----------
Costs incurred on uncompleted contracts .... $ 7,983,614 $ 8,927,230
Estimated earnings ......................... 519,164 546,394
----------- -----------
8,502,778 9,473,624
Less: billings to date ..................... 8,766,999 9,618,225
----------- -----------
$ (264,221) $ (144,601)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets
at December 31, 2006 and 2005 under the following captions (in thousands):
2006 2005
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts ..... $ 147,848 $ 185,634
Billings in excess of costs and estimated earnings on uncompleted contracts ..... (412,069) (330,235)
--------- ---------
$(264,221) $(144,601)
========= =========
As of December 31, 2006 and 2005, costs and estimated earnings in excess
of billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $48.2 million and $56.3 million, respectively,
and for claims of approximately $22.4 million and $36.6 million, respectively.
In addition, accounts receivable as of December 31, 2006 and 2005 includes
claims of approximately $6.7 million and $4.7 million, respectively, plus
unapproved change orders and contractually billed amounts related to such
contracts of $76.9 million and $76.2 million, respectively. Generally,
contractually billed amounts will not be paid by the customer to us until final
resolution of related claims. Included in the claims amount is approximately
$8.2 million and $18.2 million as of December 31, 2006 and 2005, respectively,
related to projects of our Poole & Kent subsidiary, which projects had commenced
prior to our acquisition of Poole & Kent in 1999. The Poole & Kent claims amount
principally relate to a civil action in which Poole & Kent is a participant. See
Note O - Legal Proceedings of the notes to consolidated financial statements for
additional information.
CLASSIFICATION OF CONTRACT AMOUNTS
In accordance with industry practice, EMCOR classifieswe classify as current all assets
and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year,
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Accounts receivable at December 31, 20042006 and 20032005
included $212.3$216.1 million and $189.5$209.5 million, respectively, of retainage billed
under terms of thethese contracts. EMCOR estimatesWe estimate that approximately 86.2%86% of retainage
recorded at December 31, 20042006 will be collected during 2005.2007. Accounts payable at
December 31, 2006 and 2005 included $43.7 million and $43.1 million,
respectively, of retainage withheld under terms of the contracts. We estimate
that approximately 89% of retainage withheld at December 31, 2006 will be paid
during 2007. Specific accounts receivable are evaluated when we believe a
customer may not be able to meet its financial obligations. The allowance for
doubtful accounts requirements are re-evaluated and adjusted on a regular basis
and as additional information is received.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, EMCOR considerswe consider all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. EMCOR maintainsWe maintain a centralized cash management programsystem whereby itsour
excess cash balances are invested in high quality, short-term money market
instruments, which are considered cash equivalents. At times, cash balances in
EMCOR'sour bank accounts may exceed federally insured limits.
INVENTORIES
Inventories, which consist primarily of construction materials, are stated
at the lower of cost or market. Cost is determined principally using the average
cost method.
Inventories increased by $0.7 million to $10.6 million at December
31, 2004 compared to $9.9 million at December 31, 2003.37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables was $26.5were $29.6 million and
$28.7 million at December 31, 20042006 and 20032005, respectively, and primarily consistsconsist
of investments in joint ventures accounted for using the equity method of
accounting. Included as investments, notes and other long-term receivables were
investments of $18.7$16.7 million and $18.9$18.3 million as of December 31, 20042006 and 2003,2005,
respectively, relating to a venture with Baltimore Gas & Electric.Electric (a subsidiary
of Constellation Energy). This joint venture designs, constructs, owns,
operates, leases and maintains facilities to produce chilled water for use in
air conditioning commercial properties.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation, including
amortization of assets under capital leases, is recorded principally using the
straight-line method over estimated useful lives ranging from 2of 3 to 40 years.10 years for machinery
and equipment, 3 to 5 years for vehicles, furniture and fixtures and computer
hardware/software and 25 years for buildings. Leasehold improvements are
amortized over the shorter of the remaining life of the lease term or the
expected service life of the improvement. As events and circumstances indicate,
EMCOR reviewswe review the carrying amount of property, plant and equipment for impairment.
In performing this review for recoverability, long-lived assets are assessed for
possible impairment by comparing their carrying values to their undiscounted net
pre-tax cash flows expected to result from the use of the asset. Impaired assets
are written down to their fair values, generally determined based on their
estimated future discounted cash flows. Through December 31, 2004,2006, no material
adjustment for the impairment of property, plant and equipment carrying value
has been required.
Property, plant and equipment in the accompanying Consolidated Balance
Sheets consisted of the following amounts as of December 31, 20042006 and 20032005 (in
thousands):
2004 20032006 2005
--------- ---------
Machinery and equipment ................................................... $ 69,90243,723 $ 78,60931,921
Vehicles ....................................... 31,047 28,015
Furniture and fixtures ............................ 45,540 40,425......................... 19,640 20,974
Computer hardware/software ..................... 63,047 44,557
Land, buildings and leasehold improvements ........ 45,375 41,586..... 46,693 43,934
--------- ---------
160,817 160,620204,150 169,401
Accumulated depreciation and amortization ......... (104,349) (94,464)...... (151,370) (122,958)
--------- ---------
$ 56,46852,780 $ 66,15646,443
========= =========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 20042006 and 20032005 was approximately $279.4$288.2 million
and $278.0$283.4 million, respectively, and reflects the excess of cost over fair
market value of net identifiable assets of companies acquired. EMCOR hasWe have adopted
the following accounting standards issued by the Financial Accounting Standards
Board ("FASB"): Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFASStatement 141") and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" 32
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
("SFASStatement 142").
SFASStatement 141 requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. SFASStatement 142 which was adopted as of January 1, 2002,
requires goodwill toand other identifiable intangible assets that have indefinite
useful lives not be amortized, but instead must be tested at least annually for
impairment at least annually. SFAS(which we test each October 1). Furthermore, Statement 142 requires
identifiable intangible assets with finite lives be amortized over their useful
lives. Statement 142 requires that goodwill be allocated to the reporting units.
The fair value of the reporting unit is compared to the carrying amount on an
annual basis to determine if there is a potential impairment. If the fair value
of the reporting unit is less than its carrying value of such goodwill, an
impairment loss is recorded to the extent that the fair value of the goodwill
within the reporting unit is less than the carrying value. The fair value of the reporting unitfor
goodwill is determined based on discounted estimated future cash flows. Furthermore, SFASOur
annual impairment review is performed in accordance with the provisions of
Statement 142 requires identifiable intangible assets
other than goodwill to be testedand FASB Statement No. 144, "Accounting for impairment and be amortized over their
useful lives unless these lives are determined to be indefinite.
The goodwill deductible for income tax purposes was $144.3 million and $157.6
million at December 31, 2004 and 2003, respectively.the Impairment or
Disposal of Long-Lived Assets".
The changes in the carrying amount of goodwill during the year ended
December 31, 20042006 were as follows (in thousands):
2004
---------
Balance at beginning of period ..................................................................... $ 277,994283,412
Earn-out paymentspayments/accruals on prior year acquisitions ..................... 1,568........... 3,502
Goodwill recorded for acquisition of businesses ................. 1,890
Goodwill allocated to the sale of assets and other items, net .... (130)... (639)
---------
Balance at end of period ................................................................................. $ 279,432288,165
=========
There38
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
As of December 31, 2006, there are no material remaining contingent payments of
approximately $5.0 million related to acquisitions
as of December 31, 2004.prior acquisitions.
Identifiable intangible assets are comprised of $12.4$14.7 million in market value of customer
backlog, $7.0$21.9 million in market value of customer relationships, $2.1 million of
non-competition agreements and $6.4$13.8 million in market value of trademarks and tradenames, all
acquired as a result of acquisitions in 2002.2002, 2005 and 2006. The $12.4 millionamounts
attributable to backlog, and
$7.0 million attributable to customer relationships and non-competition agreements
are being amortized on a straight-line method over periods from one to sevenfifteen
years. The backlog, and
customer relationships and non-competition agreements are
presented in the consolidated balance sheets are net of accumulated amortization of
$7.0$14.5 million and $3.6$10.2 million at December 20042006 and 2003,2005, respectively. The
$6.4$13.8 million attributable to trademarks and tradenames is not being amortized
as trademarks and tradenames have indefinite lives, but are subject to an annual
review for impairment in accordance with SFASStatement 142. See Note C -
Acquisitions of Businesses and Disposition of Assets of the notes to
consolidated financial statements for additional information. The following
table presents the estimated future amortization expense of identifiable
intangible assets as of December 31, 2006 (in thousands):
2005 ................................................................2007 ................................................................. $ 3,092
2006 ................................................................ 2,740
2007 ................................................................ 2,7406,147
2008 ................................................................ 2,740................................................................. 4,970
2009 ................................................................. 2,830
2010 ................................................................. 1,744
2011 ................................................................. 1,671
Thereafter .......................................................... 1,070........................................................... 6,812
-------
$12,382$24,174
=======
INSURANCE LIABILITIES
EMCOR'sOur insurance liabilities are determined actuarially based on claims filed
and an estimate of claims incurred but not yet reported. At December 31, 20042006
and 2003,2005, the estimated current portion of undiscounted insurance liabilities of
$17.6$16.5 million and $16.0$13.0 million, respectively, were included in "Other accrued
expenses and liabilities" in the accompanying Consolidated Balance Sheets. The
estimated non-current portion of the undiscounted insurance liabilities were included
in "Other long-term obligations" and at December 31, 20042006 and 20032005 were $63.2$80.9
million and $74.6$76.9 million, respectively. EMCOR's
insurance liabilities for workers' compensation, auto liability, general
liability and property and casualty claims decreased $9.8 million for the year
ended December 31, 2004 compared to the year ended December 31, 2003 primarily
due to effective risk management and safety programs. For the years ended
December 31, 2003 and 2002 these liabilities increased over the immediately
preceeding year by $8.0 million and $9.0 million, respectively, primarily due to
increased premiums and estimated liabilities related to the increase in revenues
for the corresponding years. The decrease for 2004, and 2003 and 2002 increases
are net of $9.8 million, $4.5 million and $2.3 million, respectively, in
reduction of insurance liabilities previously established for insurance
exposures as a consequence of effective risk management and safety programs.
33
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of EMCOR'sour financial instruments, which include accounts
receivable and other financing commitments, approximate their fair values due
primarily to their short-term maturities.
FOREIGN OPERATIONS
The financial statements and transactions of EMCOR'sour foreign subsidiaries are
maintained in their functional currency and translated into U.S. dollars in
accordance with FASB Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation."Translation".
Translation adjustments have been recorded as Accumulated"Accumulated other comprehensive
income,loss", a separate component of Stockholders'equity."Stockholders' equity".
INCOME TAXES
EMCOR accountsWe account for income taxes in accordance with the provisions of FASB
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFASStatement 109"). SFASStatement
109 requires an asset and liability approach which requires the recognition of
deferred tax assets and deferred tax liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized.
DERIVATIVES AND HEDGING ACTIVITIES
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are recognized in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income as a component of Accumulated
other comprehensive income.
As of December 31, 2006, 2005 and 2004, 2003 and 2002, EMCORwe did not have any material
derivative instruments.
VALUATION OF STOCK OPTION GRANTS
At December 31, 2004, EMCOR has stock-basedSHARE-BASED COMPENSATION PLANS
We have various types of share-based compensation plans and programs which
are described more fully inadministered by our Board of Directors or its Compensation and Personnel
Committee. See Note I - Stock Options and Stock Plans. EMCOR
applies Accounting Principles Board Opinion No. 25, "AccountingPlans for Stock Issued
to Employees" ("APB 25")additional information
regarding the share-based compensation plans and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized in the
accompanying Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002 in respect of stock options granted during those years
inasmuch as EMCOR grants stock options at fair market value. Had compensation
cost for these options been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), EMCOR's net income, basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS") would have been reduced from the following
"as reported amounts" to the following "pro forma amounts" (in thousands, except
per share amounts):
FOR THE YEARS ENDED
------------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income:
As reported ...................................................................... $ 33,207 $ 20,621 $ 62,902
Less: Total stock-based compensation expense determined under fair
value based method, (described in Note I), net of related tax effects .......... 2,981 1,199 2,690
---------- ---------- ----------
Pro forma ........................................................................ $ 30,226 $ 19,422 $ 60,212
========== ========== ==========
Basic EPS:
As reported ...................................................................... $ 2.18 $ 1.38 $ 4.23
Pro forma ........................................................................ $ 1.99 $ 1.30 $ 4.05
Diluted EPS:
As reported ...................................................................... $ 2.13 $ 1.33 $ 4.07
Pro forma ........................................................................ $ 1.94 $ 1.26 $ 3.90
34programs.
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issuedJanuary 1, 2006, we adopted FASB Statement No. 123 (revised 2004)123(R), Share-Based Payment"Share-Based
Payment" ("Statement 123(R)"), which is
a revision. With the adoption of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires, all
share-based payments to our employees and non-employee directors, including
grants of employee stock options, to behave been recognized in the income statement based on
their fair values. Pro forma disclosure will no longer
be an alternative. Statement 123(R) must be adopted no later than July 1, 2005.
EMCOR will adopt Statement 123(R)values, on July 1, 2005.
As permitted by Statement 123, EMCOR currently accounts for share-based payments
to employees using Opinion 25's intrinsic valuea straight-line basis over the requisite service period,
which is generally the vesting period, utilizing the modified prospective method
and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly,of accounting. The impact of the adoption of Statement 123(R)'s resulted in $4.0
million of compensation expense for the year ended December 31, 2006. As a
result, net income was adversely impacted in this period by $2.4 million, and
basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted
EPS") were both adversely impacted by $0.07. Approximately $1.2 million of
compensation expense, net of income taxes, will be recognized over the
approximate 15 month remaining vesting period for stock options outstanding at
December 31, 2006. Prior to January 1, 2006, we applied Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25")
and related interpretations in accounting for stock options. Accordingly, no
compensation expense has been recognized in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2005 and 2004 in
respect of stock options granted during that period inasmuch as we granted stock
options at fair market value. Had compensation expense for the options for the
years ended December 31, 2005 and 2004 been determined consistent with FASB
Statement No. 123, "Accounting for Stock-Based Compensation" and FASB Statement
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure",
our net income, Basic EPS and Diluted EPS would have been reduced from the "as
reported amounts" below to the "pro forma amounts" below (in thousands, except
per share amounts):
2005 2004
---------- ----------
Income from continuing operations:
As reported .......................................................................... $ 61,153 $ 33,265
Less: Total stock-based compensation expense determined under fair value based method,
net of related tax effects ......................................................... 2,112 2,981
---------- ----------
Pro Forma ............................................................................ $ 59,041 $ 30,284
========== ==========
Basic EPS:
As reported .......................................................................... $ 1.96 $ 1.09
Pro Forma ............................................................................ $ 1.90 $ 1.00
Diluted EPS:
As reported .......................................................................... $ 1.92 $ 1.07
Pro Forma ............................................................................ $ 1.85 $ 0.97
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Post Retirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158").
Statement 158 requires that a company recognize the overfunded or underfunded
status of its defined benefit post retirement plans (other than multi-employer
plans) as an asset or liability in its statement of financial position and that
it recognize changes in the funded status in the year in which the changes occur
through other comprehensive income. Statement 158 also requires the measurement
of the fair value method will have a significant impactof plan assets and benefit obligations as of the date of the
fiscal year-end statement of financial position and to provide additional
disclosures. On December 31, 2006, we adopted the recognition and disclosure
provisions of Statement 158. The effect of adopting Statement 158 on our
resultfinancial position at December 31, 2006 has been included in the accompanying
consolidated financial statements and increased Accumulated other comprehensive
loss by $31.0 million, net of operations, although it willa deferred tax benefit. Statement 158 did not have
no impactan effect on our overall
financial position. EMCOR is currently evaluatingposition as of December 31, 2005 or 2004. We measure
the fair value of plan assets and benefit obligations on December 31 of each
year. See Note J - Retirement Plans of the notes to consolidated financial
statements for more information on the impact of adoption and the related
disclosures.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("FIN 48"), to create a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for
income taxes, by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. We will adopt
FIN 48 as of January 1, 2007, as required. The impact upon adoption is expected
to result in an immaterial reduction of retained earnings and an increase in the
accrual for income taxes. We will disclose the cumulative effect of the change
in retained earnings in the consolidated financial statements in the first
quarter of 2007.
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("Statement 157"). Statement 157 provides guidance for using fair
value to measure assets and liabilities. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances. Statement 157 is effective for our financial statements beginning
with the first quarter of 2008. Early adoption is permitted. We have not
determined the effect, if any, the adoption of Statement 123(R)157 will have on theour
financial position and results of operations in 2005. The impactoperations.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No 115" ("Statement 159"). Statement 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Statement 159 is effective for our financial statements beginning with
the first quarter of 2008. We have not determined the effect, if any, the
adoption of the standardStatement 159 will have on future operatingour financial position and results cannot be predicted at this
time because it will depend on levels of
share-based payments granted in the
future. Statement 123(R) requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While EMCOR cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were not material. On the first
business day of 2005, options to purchase an aggregate of 290,200 shares of
EMCOR common stock were granted pursuant to the 2003 Management Stock Incentive
Plan, and options to purchase an aggregate of 31,752 shares of EMCOR common
stock were granted pursuant to the 1997 Stock Option Plan for directors.operations.
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS
On March 1, 2002, EMCORDuring 2006, we acquired three companies, which were not individually or
in the Acquired Comfort Companies. Accordingly,
the Consolidated Results of Operationsaggregate material, for EMCOR for the year ended December 31,
2002 include the results of operations for the Acquired Comfort Companies since
March 1, 2002. The purchase price paid for the Acquired Comfort Companies was
$186.25 million and was comprised of $164.15$41.1 million in cashcash. Goodwill and $22.1 million
by assumption of Comfort's notes payable to former owners of certain of the
Acquired Comfort Companies. In 2002, pursuant to the terms of the acquisition
agreement, an additional $7.1 million of cash purchase price was paid by EMCOR
to Comfort subsequent to the acquisition date due to an increase in net assets
of the Acquired Comfort Companies between the closing date and an agreed upon
pre-closing date. The acquisition was funded with $121.25 million of EMCOR's
funds and $50.0 million from borrowings under EMCOR's revolving credit facility.
The Acquired Comfort Companies, which are based predominantly in the United
States midwest and New Jersey, are active in the installation and maintenance of
mechanical systems and the design and installation of process and fire
protection systems. Services are provided to a wide variety of industries,
including the food processing, pharmaceutical and manufacturing/distribution
sectors. During 2003, EMCOR reduced goodwill by $8.4 million upon receipt of
$5.2 million in settlement of Comfort's obligations to EMCOR under the indemnity
provisions of the acquisition agreement and of $3.2 million of other purchase
price adjustments primarily related to deferred income taxes.
On December 19, 2002, EMCOR acquired CES. CES primarily provides a broad
array of facilities services, including comprehensive facilities management,
operation and maintenance, mobile services, remote monitoring, technical
consulting and diagnostic services, and installation and support for building
systems. The purchase price paid for CES was $178.0 million, of which $156.0
million was paid from borrowings under EMCOR's revolving credit facility and
$22.0 million was paid from EMCOR's funds. During 2003, EMCOR reduced goodwill
by $9.4 million inasmuch as EMCOR attributed $11.2 million of the purchase price
to CES identifiableIdentifiable
intangible assets, offset by other final purchase price and
allocation adjustments of $1.8 million.
In 2003 and 2002, EMCOR acquired one additional company for which an
aggregate of $8.0 million and $3.4 million was paid, respectively.
EMCOR believes the addition of the companies acquired in 2002, which are
generally in geographic markets where EMCOR did not have significant presence,
furthers EMCOR's goal of market and geographic diversification, expansion of its
facilities services operations and expansion of its services offerings.
Additionally, the acquisitions create more opportunities for EMCOR companies to
collaborate on national facilities services contracts. These factors contributed
to total goodwill, representing the excess purchase price over the fair value of
amounts assigned to the net tangible assets acquired (primarily current assets
and current liabilities), was preliminarily valued at $5.1 million and $20.0
million, respectively. In November 2005, we acquired one company for cash of
$207.9$13.6 million. Goodwill and Identifiable intangible assets were valued at $5.2
million in 2003 comparedand $7.1 million, respectively, after completion of the final valuation
and purchase price adjustments.
We believe the additions of these companies further our goal of market and
geographic diversification, expansion of our fire protection and our facilities
services operations and overall expansion of our service offerings.
Additionally, these acquisitions create more opportunities for our subsidiaries
to total preliminary goodwillcollaborate on national facilities services contracts. See Note B - Summary
of $225.8 million in 2002.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS -- (CONTINUED)Significant Accounting Policies of the notes to consolidated financial
statements for a discussion of Goodwill and Identifiable intangible assets.
During 20042006 and 2003, EMCOR paid2005, we recorded an aggregate of $1.6$3.5 million and $2.0$0.7
million, in cash, respectively, by reason of earn-out obligations in respect of prior
year acquisitions.
On January 31, 2006, we sold a subsidiary that had been part of our United
States mechanical construction and facilities services segment. On September 30,
2005, we sold a subsidiary that had been part of our United States facilities
services segment. Results of these operations for all periods presented in our
consolidated financial statements reflect discontinued operations accounting.
Included in the results of discontinued operations for the year ended December
31, 2006 was a loss of $0.6 million (net of income taxes) which relates to the
January 2006 sale of the subsidiary that had been part of our United States
mechanical construction and facilities services segment. Included in the $1.1
million loss (net of income taxes) from discontinued operations for the year
ended December 31, 2005 is a loss of $1.0 million (net of income taxes) which
relates to the September 2005 sale of a subsidiary that had been part of our
United States facilities services segment. An aggregate of $1.7 million and $4.4
million in cash and notes was received as consideration for both of these sales
in 2006 and 2005, respectively. As of December 31, 2006 and 2005, the notes in
respect of each year had been paid in full. We will not have any future
involvement with these subsidiaries. The components of the results of operations
for the discontinued operations are not presented as they are not material to
the consolidated results of operations.
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 1, 2004 sale of assets of EMCOR'sour United Kingdom
Delcommerce equipment rental servicesservice division. ContemporaneouslyConcurrently with the sale, EMCORwe
entered into a long-term agreement to utilize the equipment rental services of
the purchaser, a publicly traded United Kingdom company.purchaser. The $1.8 million gain in 2004 on the sale of an equity investment of 2004
was attributable to the August 2004 sale of EMCOR'sour interest in a South African
joint venture, the operating results of which had been reported in the Other
international construction and facilities services segment. There were no other
sales of such assets or equity investments in either of the years ended December 31, 20032006,
2005 and 20022004 other than the disposal of property, plant and equipment in the
normal course of business.
The following tables present unaudited pro forma results of operations
including all companies acquired during 2002 as if the acquisitions had occurred
at the beginning of fiscal 2002. The unaudited pro forma results of operations
for companies acquired during 2003 have been excluded due to immateriality. The
unaudited pro forma results of operations are not necessarily indicative of the
results of operations had the acquisitions actually occurred at the beginning of
fiscal 2002, nor is it necessarily indicative of future operating results (in
thousands, except per share data):
ADJUSTMENTS TO ARRIVE AT PRO FORMA RESULTS OF OPERATIONS
--------------------------------------------------------
(UNAUDITED)
-------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------------
EMCOR ACQUIRED COMFORT OTHER
AS REPORTED COMPANIES (1) CES (2) ACQUISITIONS (3) PRO FORMA
------------ ---------------- ------------ ---------------- ------------
Revenues .................................. $ 3,968,051 $ 94,084 $ 403,900 $ 15,284 $ 4,481,319
Operating income (loss) ................... $ 115,539 $ (40) $ 11,401 $ 1,401 $ 128,301
Interest (expense) income, net ............ $ (2,099) $ 162 $ (6,509) $ 7 $ (8,439)
Income before income taxes ................ $ 112,326 $ 122 $ 4,892 $ 1,408 $ 118,748
Net income ................................ $ 62,902 $ 68 $ 2,740 $ 788 $ 66,498
Basic earnings per share .................. $ 4.23 $ 0.01 $ 0.18 $ 0.05 $ 4.47
Diluted earnings per share ................ $ 4.07 $ 0.00 $ 0.18 $ 0.05 $ 4.30
- -------------
(1) Adjustments to arrive at pro forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of March 1, 2002.
(2) Adjustments to arrive at pro forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of December 19, 2002.
(3) Adjustments to arrive at pro forma results of operations for the year ended
December, 31, 2002 represent results from January 1, 2002 through the date
of each acquisition.
3641
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- EARNINGS PER SHARE
The following tables summarize EMCOR'sour calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 2004, 20032006, 2005 and 2002:
INCOME SHARES PER SHARE
2004 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $33,207,000 15,197,905 $2.18
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 368,832
----------- ----------
DILUTED EPS .............................. $33,207,000 15,566,737 $2.13
=========== ========== =====
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $20,621,000 14,986,079 $1.38
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 475,619
----------- ----------
DILUTED EPS .............................. $20,621,000 15,461,698 $1.33
=========== ========== =====
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $62,902,000 14,876,906 $4.23
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 580,096
----------- ----------
DILUTED EPS .............................. $62,902,000 15,457,002 $4.07
=========== ========== =====2004:
2006 2005 2004
------------ ------------ ------------
NUMERATOR:
Income before discontinued operations ...................................... $ 87,254,000 $ 61,153,000 $ 33,265,000
Loss from discontinued operations .......................................... (620,000) (1,111,000) (58,000)
------------ ------------ ------------
Net income available to common stockholders ................................ $ 86,634,000 $ 60,042,000 $ 33,207,000
============ ============ ============
DENOMINATOR:
Weighted average shares outstanding used to compute basic earnings per share 31,607,715 31,143,363 30,395,810
Effect of diluted securities - Share-based awards .......................... 1,132,482 691,518 737,664
------------ ------------ ------------
Shares used to compute diluted earnings per share .......................... 32,740,197 31,834,881 31,133,474
============ ============ ============
Basic earnings (loss) per share:
Continuing operations .................................................... $ 2.76 $ 1.96 $ 1.09
Discontinued operations .................................................. (0.02) (0.03) (0.00)
------------ ------------ ------------
Total .................................................................... $ 2.74 $ 1.93 $ 1.09
============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .................................................... $ 2.67 $ 1.92 $ 1.07
Discontinued operations .................................................. (0.02) (0.03) (0.00)
------------ ------------ ------------
Total .................................................................... $ 2.65 $ 1.89 $ 1.07
============ ============ ============
The number of EMCOR's options granted whichto purchase shares of our common stock that
were excluded from the computation of Diluted EPS for the years ended December
31, 2004, 20032006, 2005 and 20022004 because they would be antidilutive were 886,647, 425,499zero, 365,940
and 45,000,1,773,294, respectively.
NOTE E -- CURRENT DEBT
2002 CREDIT FACILITY
On September 26, 2002, EMCOR entered into a $275.0 million five yearFACILITIES
Our previous revolving credit agreement (the "Revolving"Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility with an amended and restated $350.0 million revolving
credit facility (the "2005 Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased itsThe 2005 Revolving
Credit Facility expires on October 17, 2010. It permits us to increase our
borrowing to $500.0 million if additional lenders are identified and/or existing
lenders are willing to increase their current commitments. We utilized this
feature to increase the line of credit under the 2005 Revolving Credit Facility
from $350.0 million to $375.0 million on November 29, 2005. We may allocate up
to $125.0 million of the borrowing capacity under the 2005 Revolving Credit
Facility to $350.0 million.letters of credit. The 2005 Revolving Credit Facility which replaced a credit
facility entered into on December 22, 1998, is guaranteed
by certain of our direct and indirect subsidiaries, of EMCOR, is secured by substantially
all of our assets and most of the assets of EMCOR and most of itsour subsidiaries, and provides for
borrowings in the form of revolving loans and letters of credit. The 2005
Revolving Credit Facility contains various covenants requiring, among other
things, maintenance of certain financial ratios and certain restrictions with
respect to payment of dividends, common stock repurchases, investments,
acquisitions, indebtedness and capital expenditures. A commitment fee is payable
on the average daily unused amount of the 2005 Revolving Credit Facility. The
fee ranges from 0.3%0.25% to 0.5% of the unused amount, based on certain financial
tests. LoansBorrowings under the 2005 Revolving Credit Facility bear interest at (a)(1)
a rate which is the prime commercial lending rate announced by Harris Nesbitt
from time to time (5.25%(8.25% at December 31, 2004)2006) plus 0%0.0% to 1.0%0.5%, based on
certain financial tests or (b)(2) United States dollar LIBOR (at(5.35% at December 31,
2004, the rate was 2.42%)2006) plus 1.5%1.0% to 2.5%2.25%, based on certain financial tests. The interest rates
in effect at December 31, 20042006 were 5.50%8.25% and 4.17%6.35% for the prime commercial
lending rate and the United States dollar LIBOR, respectively. Letter of credit
fees issued under this facility range from 0.75%1.0% to 2.5%2.25% of the respective face
amounts of the letters of credit issued and are charged based on the type of
letter of credit issued and certain financial tests. In connection with the
replacement of the Old Revolving Credit Facility, $0.4 million of prepaid
commitment fees were recorded as interest expense for 2005. As of December 31,
20042006 and 2003, EMCOR2005, we had approximately $54.3$55.6 million and $49.2$53.3 million of letters
of credit outstanding, respectively. EMCOR hadThere were no borrowings of $80.0 million and $139.4 million outstanding under the 2005
Revolving Credit Facility atas of December 31, 20042006 and 2003, respectively.
372005.
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT -- (CONTINUED)
FOREIGN BORROWINGS
In August 2001, EMCOR'sOur Canadian subsidiary, Comstock Canada Ltd., renewedhas a credit agreement with
a bank providing for an overdraft facility of up to Cdn. $0.5 million. The
facility is secured by a standby letter of credit and provides for interest at
the bank's prime rate, which was 4.25%6.0% at December 31, 2004.2006. There were no
borrowings outstanding under this credit agreement at December 31, 20042006 or 2003.2005.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted
of the following amounts as of December 31, 20042006 and 20032005 (in thousands):
2004 20032006 2005
------ ------
Capitalized Lease Obligations at weighted average interest rates from 2.0%5.0% to 8.25%,6.0%
payable in varying amounts through 2009 ............................................................ $1,662 $ 3392011 .......................................... $1,566 $1,570
Other, at weighted average interest rates of approximately 10.0%, payable in varying
amounts through 2012 ............................................................................... 476 589............................................................. 332 387
------ ------
2,138 9281,898 1,957
Less: current maturities ............................................................................. 806 367........................................................... 659 551
------ ------
$1,332 $ 561$1,239 $1,406
====== ======
CAPITALIZED LEASE OBLIGATIONS
See Note K --- Commitments and Contingencies.Contingencies of the notes to consolidated
financial statements for additional information.
OTHER LONG-TERM DEBT
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. The aggregate amount of other
long-term debt maturing is approximately $0.1 million in each of the next five
years.
NOTE G -- INCOME TAXES
The 2006 income tax provision was $30.5 million compared to $9.6 million
for 2005 and a benefit of approximately $0.01 million for 2004.
The 2006 income tax provision was comprised of: (a) $46.6 million of
income tax provision in respect of pre-tax earnings of $117.7 million; (b) $8.4
million of income tax benefit related to the reversal of a valuation allowance
based on the determination that sufficient taxable income existed in the past
and will continue in the future to realize the related United Kingdom tax
assets; (c) a $3.9 million income tax benefit related to the realization of net
operating losses for which valuation allowances had previously been recorded in
Canada; (d) an income tax benefit of less than $0.05$1.9 million for income tax reserves no
longer required based on a current analysis of probable exposures; and (e)
income tax benefits related to items aggregating approximately $1.9 million
principally due to the deductibility of certain compensation arrangements for
income tax purposes.
The income tax provision for 2005 was comprised of: (a) $27.1 million of
income tax provision in respect of pre-tax earnings of $70.8 million; (b) $5.2
million of income tax provision related to a valuation allowance recorded to
reduce deferred tax assets related to net operating losses and other temporary
differences with respect to our Canadian construction and facilities services
segment, since there is uncertainty as to whether the segment will have
sufficient taxable income in the future to realize the benefit of such deferred
tax assets; and (c) the offset of such income tax provisions by a $22.7 million
income tax benefit for income tax reserves no longer required based on a current
analysis of probable exposures.
The income tax benefit of approximately $0.01 million for 2004 was
comprised ofof: (a) $13.9 million of income tax provision on pre-tax earnings of
$33.2 million,$33.3 million; (b) $8.2 million of income tax provision related to a valuation
allowance recorded to reduce net deferred tax assets related to net operating
losses and other temporary differences of the United Kingdom construction and
facilities services segment inasmuch as there is uncertainty of sufficentsufficient
future income to realize the benefit of such deferred tax assetsassets; and (c) the
partial offset of such income tax provisions by $22.1 million of income tax
benefits for income tax reserves no longer required based on current analysis of
probable exposures. The provision on income before income taxes for 2006, 2005
and 2004 each was recorded at an effective income tax rate of approximately 40%,
38% and 42%, respectively, excluding the items discussed above.
43
EMCOR filesGROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
We have recorded liabilities for our best estimate of the probable loss on
certain positions taken on our income tax returns. We believe our recorded
income tax liabilities are adequate for all tax years subject to audit based on
our assessment of many factors. Although we believe our recorded income tax
assets and liabilities are reasonable, tax regulations are subject to
interpretation and tax litigation is inherently uncertain; therefore, our
assessments involve judgments about future events and rely on reasonable
estimates and assumptions. These income tax liabilities generally are not
finalized with the individual tax authorities until several years after the end
of the annual period for which income taxes have been estimated. As of December
31, 2006 and 2005, we had income tax reserves of $5.6 million and $7.5 million
(included in "Other accrued expenses and liabilities"), respectively. The
decrease in income tax reserves relates to the reversals discussed above.
We file a consolidated federal income tax return including all itsof our U.S.
subsidiaries. At December 31, 2004, EMCOR2006, we had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $2.0$7.0 million, which
expire in the year 2009. In addition, at December 31, 2004, EMCOR2006, we had NOLsnon-trade and
capital losses for United Kingdom income tax purposes of approximately $21.8$0.8 million,
which have no expiration date and NOLs for Canadian income tax purposes of
approximately $9.0$7.1 million, which expire in 2011.2015. The NOLs are subject to review
by taxing authorities.
38The income tax provision (benefit) in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2006, 2005 and 2004
consisted of the following (in thousands):
2006 2005 2004
-------- -------- --------
Current:
Federal provision (benefit) ..... $ 29,546 $ (237) $(16,397)
State and local ................. 9,917 5,628 4,988
Foreign benefit ................. (2,810) (752) (2,306)
-------- -------- --------
36,653 4,639 (13,715)
-------- -------- --------
Deferred ........................ (6,169) 5,002 13,704
-------- -------- --------
$ 30,484 $ 9,641 $ (11)
======== ======== ========
Factors accounting for the variation from U.S. statutory income tax rates
for the years ended December 31, 2006, 2005 and 2004 were as follows (in
thousands):
2006 2005 2004
-------- -------- --------
Federal income taxes at the statutory rate ............... $ 41,207 $ 24,778 $ 11,639
State and local income taxes, net of federal tax benefits 5,596 1,641 3,244
Foreign income taxes ..................................... (6,122) (1,673) (2,086)
Adjustments to valuation allowance for deferred tax assets (8,446) 5,181 7,387
Reversal of tax reserves ................................. (1,881) (22,745) (22,083)
Other .................................................... 130 2,459 1,888
-------- -------- --------
$ 30,484 $ 9,641 $ (11)
======== ======== ========
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
The income tax provision (benefit) in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2004, 2003 and 2002
consisted of the following (in thousands):
2004 2003 2002
-------- ------- -------
Current:
Federal ............................................................................ $(16,431) $ 3,062 $33,762
State and local .................................................................... 4,988 4,987 7,686
Foreign ............................................................................ (2,306) 795 544
-------- ------- -------
(13,749) 8,844 41,992
-------- ------- -------
Deferred ........................................................................... 13,704 7,451 7,432
-------- ------- -------
$ (45) $16,295 $49,424
======== ======= =======
Factors accounting for the variation from U.S. statutory income tax rates for
the years ended December 31, 2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
-------- ------- -------
Federal income taxes at the statutory rate .......................................... $ 11,607 $12,921 $39,314
State and local income taxes, net of federal tax benefits ........................... 3,242 3,242 7,742
Foreign income taxes ................................................................ (2,086) (158) 85
Adjustments to valuation allowance for deferred tax assets .......................... 7,387 (153) --
Reversal of tax reserves ............................................................ (22,083) -- --
Other ............................................................................... 1,888 443 2,283
-------- ------- -------
$ (45) $16,295 $49,424
======== ======= =======
The components of the net deferred income tax asset are included in
"Prepaid expenses and other" ($17.1 million)of $19.9 million and "Other long-term liabilities" ($14.6
million)assets" of $8.3 million
at December 31, 20042006 and "Prepaid expenses and other" ($23.0 million)of $22.0 million and
"Other assets" ($4.2 million)long-term liabilities" of $9.7 million at December 31, 20032005 in the
accompanying Consolidated Balance Sheets. The amounts recorded for the years
ended December 31, 20042006 and 20032005 were as follows (in thousands):
2004 20032006 2005
-------- --------
Deferred income tax assets:
Net operating loss carryforwards .......................................................................................................................... $ 11,4964,974 $ 7,0799,486
Excess of amounts expensed for financial statement purposes over amounts deducted
for income tax purposes ................................................................. 34,451 46,240purposes:
Insurance liabilities .............................................................. 22,622 27,357
Pension liability .................................................................. 17,953 5,070
Other liabilities .................................................................. 33,744 20,715
-------- --------
Total deferred income tax assets ................................................................... 45,947 53,319....................................................... 79,293 62,628
Valuation allowance for deferred tax assets ........................................................ (10,859) (1,971)............................................ (12,893) (18,738)
-------- --------
Net deferred income tax assets ..................................................................... 35,088 51,348......................................................... 66,400 43,890
-------- --------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes ............ (32,595) (32,565)purposes:
Depreciation of property, plant and equipment ...................................... (27,505) (23,442)
Other .............................................................................. (10,741) (8,134)
-------- --------
Total deferred income tax liabilities .............................................................. (32,595) (32,565).................................................. (38,246) (31,576)
-------- --------
Net deferred income tax asset ................................................................................................................................ $ 2,49328,154 $ 18,78312,314
======== ========
As of December 31, 2006 and 2005, the total valuation allowance on net
deferred tax assets was approximately $12.9 million and $18.7 million,
respectively. The primary reason for the decrease in the valuation allowance for
2006 was related to an $8.4 million reversal of a United Kingdom valuation
allowance based on the determination that sufficient taxable income existed in
the past and will continue in the future to realize the related United Kingdom
tax assets.
Income (loss) from continuing operations before income taxes for the years
ended December 31, 2004, 20032006, 2005 and 20022004 consisted of the following (in
thousands):
2004 2003 2002
--------- --------- ---------
United States ................................... $ 39,604 $ 55,013 $ 108,733
Foreign ......................................... (6,442) (18,097) 3,593
--------- --------- ---------
$ 33,162 $ 36,916 $ 112,326
========= ========= =========
The Company has2006 2005 2004
-------- -------- --------
United States .............. $107,651 $ 68,162 $ 39,696
Foreign .................... 10,087 2,632 (6,442)
-------- -------- --------
$117,738 $ 70,794 $ 33,254
======== ======== ========
We have not recorded deferred income taxes on the undistributed earnings
of itsour foreign subsidiaries because of management'sour intent to indefinitely reinvest such
earnings. Upon distribution of these earnings in the form of dividends or
otherwise, EMCORwe may be subject to U.S. income taxes and foreign withholding taxes.
It is not practical, however, to estimate the amount of taxes that may be
payable on the eventual remittance of these earnings. 39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)If invested capital was
repatriated to the United States, there could be income taxes payable on any
such amount.
NOTE H -- COMMON STOCK
On January 27, 2006, our stockholders approved an amendment to our
Restated Certificate of Incorporation authorizing an increase in the number of
shares of our common stock from 30 million shares to 80 million shares.
Following this approval, we effected on February 10, 2006 a 2-for-1 stock split
in the form of a stock distribution of one common share for each common share
owned, payable to shareholders of record on January 30, 2006. As of December 31,
20042006 and 2003, 15,236,0492005, 31,827,990 and 15,032,19331,103,766 shares of EMCORour common stock were
outstanding, respectively. Pursuant to a program authorized by theour Board of
Directors, EMCORwe purchased 1,131,9852,263,970 shares of itsour common stock prior to January 1,
2000. The aggregate amount of $16.8$16.9 million paid for those shares
purchased prior to January 1, 2000 has been
classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at
December 31, 2004. EMCOR2006, less the value of shares reissued pursuant to the exercise of
stock options or issuance of restricted stock units as described in Note I -
Stock Options and Stock Plans. Our management is authorized to expend up to an
additional $3.2 million to purchase EMCOR'sour common stock under this program.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS
EMCOR hasWe have stock option plans and programs under which employees may receive
stock options, and certain executives have a stock bonus plan for executivesand a long-term
incentive plan pursuant to which the
executivesthey receive restricted stock units. EMCOR also
has stock option plans under which non-employee directors may receive stock
options. A summary of the general terms of the grants under stock option plans
and programs and stock plans are as follows:follows (adjusted for the February 10, 2006
2-for-1 stock split):
AUTHORIZED EXERCISE PRICE/
SHARES VESTING EXPIRATION VALUATION DATE
------ ------- ---------- ------------------- ---------------- -------------------------------
1994 Management Stock Option Plan 1,000,0002,000,000 Generally, 331/33 1/3% Ten years from Fair market value
(the "1994 Plan") on each anniversary grant date of common stock
of grant date on grant date
1995 Non-Employee Directors' Non- 200,000400,000 100% on grant date Ten years from Fair market value
QualifiedNon-Qualified Stock Option Plan grant date of common stock
(the "1995 Plan") on grant date
1997 Non-Employee Directors' Non- 300,000600,000 (1) Five years from Fair market value
QualifiedNon-Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock on grant date (3)
Option Plan")
1997 Stock Plan for Directors (the 150,000300,000 (2) Five years from Fair market value
(the "1997 Directors' Stock Plan") grant date of common stock
on grant date (3)
2003 Non-Employee Directors' 120,000240,000 100% on grant date Ten years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "2003 Directors' Stock Option Plan") on grant date
2003 Management Stock 330,000660,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2003 Management Plan") on grant date
Executive Stock Bonus Plan 220,000440,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
2005 Management Stock 900,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2005 Management Plan") on grant date
2005 Stock Plan for Directors 52,000 50% on grant or award Ten years from Fair market value
(the "2005 Directors' Stock Plan") date, 50% on the first grant date of common stock
anniversary of grant date on grant date
Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value
100% on first grant date of common stock
anniversary of grant on grant date
date or 25% on grant and
25% on each anniversary
of grant date
- ----------------------
(1) Until July 2000, non-employee directors could elect to receive one-third,
two-thirds or all of their retainer for a calendar year in the form of
stock options. Since then such directors have received and will receive all of their
retainer in the form of stock options. All options under this plan become
exercisable quarterly over the calendar year in which they are granted. In
addition, each director will receivereceived additional stock options equal to the
product of 0.5 times the amount of stock options otherwise issued.
(2) The plan terminated during 2003.
(3) Generally, the grant date was the first business day of a calendar year.
4046
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes EMCOR'sour stock option and restricted stock bonus planunit
activity since December 31, 2001:2003:
1997 DIRECTORS' STOCK 1994 PLAN 1995 PLAN OPTION PLAN
-------------------------- -------------------------- --------------------------OPTIONS RESTRICTED STOCK UNITS
- --------------------------------------------------------------- ----------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE
AVERAGE
SHARES PRICE SHARES
PRICE SHARES PRICE
-------- --------- -------- --------- -------- ---------
Balance, December 31, 2001 ............ 584,401 $ 9.90 103,500 $ 23.39 139,885 $ 19.64
Granted ............................. -- -- 18,000 $ 54.87 16,933 $ 46.81
Forfeited ........................... (3,000) $ 19.75 -- -- -- --
Exercised ........................... (57,200) $ 14.46 (10,500) $ 6.34 (24,296) $ 20.00
-------- ------- -------
Balance, December 31, 2002 ............ 524,201 $ 9.35 111,000 $ 30.10 132,522 $ 23.04
Granted ............................. -- -- 3,000 $ 48.15 19,962 $ 53.63
Forfeited ........................... -- -- -- -- (6,074) $ 20.00
Exercised ........................... (32,000) $ 10.59 (15,000) $ 25.66 (52,482) $ 17.68
-------- ------- -------
Balance, December 31, 2003 ............ 492,201 $ 9.27 99,000 $ 31.32 93,928 $ 32.73
Granted ............................. -- -- -- -- 25,650 $ 43.83
Forfeited ........................... (3,000) $ 10.62 -- -- -- --
Exercised ........................... (123,083) $ 6.33 -- -- (30,408) $ 17.56
-------- ------- -------
Balance, December 31, 2004 ............ 366,118 $ 10.25 99,000 $ 31.32 89,170 $ 41.10
======== ======= =======
1997 DIRECTORS' OTHER STOCK
STOCK PLAN ESBP OPTION GRANTS
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- --------- ---------
Balance, December 31, 2001 ............ 330 $ 19.63 56,707 $ 21.62 652,434 $ 26.10
Granted ............................. -- -- 36,569 $ 46.35 157,700 $ 47.00
Forfeited ........................... -- -- -- -- (2,000) $ 16.50
Exercised ........................... -- -- -- -- (13,167) $ 19.52
-------- ------- ---------
Balance, December 31, 2002 ............ 330 $ 19.63 93,276 $ 31.32 794,967 $ 30.38
Granted ............................. -- -- 37,330 $ 39.12 143,335 $ 54.64
Forfeited ........................... -- -- -- -- -- --
Exercised ........................... (330) $ 19.63 -- -- (13,834) $ 19.52
-------- ------- ---------
Balance, December 31, 2003 ............ -- -- 130,606 $ 33.55 924,468 $ 34.30
Granted ............................. -- -- 42,638 $ 38.35 222,398 $ 43.14
Forfeited ........................... -- -- -- -- (5,000) $ 31.63
Exercised ........................... -- -- (56,707) $ 21.62 (18,000) $ 16.24
-------- ------- ---------
Balance, December 31, 2004 ............ -- -- 116,537 $ 41.11 1,123,866 $ 36.35
======== ======= =========
2003 DIRECTORS'
STOCK OPTION PLAN 2003 MANAGEMENT PLAN
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
-------- --------- -------- --------------- ----- ------
Balance, December 31, 2003 ............ 30,000 $ 52.78 10,000 $ 41.61........ 3,298,394 $13.48 Balance, December 31, 2003 .................. 261,212
Granted ............................. 30,000 $ 43.96 -- --......................... 556,096 $21.65 Granted ................................... 85,276
Forfeited ........................... -- -- --....................... (14,000) $12.03 Forfeited ................................. --
Exercised ........................... -- -- -- --
-------- -------....................... (342,982) $ 4.69 Issued .................................... (113,414)
---------- ----------
Balance, December 31, 2004 ............ 60,000........ 3,497,508 $15.65 Balance, December 31, 2004 .................. 233,074
Granted ......................... 762,904 $22.84 Granted ................................... 31,276
Forfeited ....................... -- -- Forfeited ................................. --
Exercised ....................... (610,484) $ 48.37 10,0004.45 Issued .................................... (98,138)
---------- ----------
Balance, December 31, 2005 ........ 3,649,928 $19.03 Balance, December 31, 2005 .................. 166,212
Granted ......................... 79,060 $42.77 Granted ................................... 148,141
Forfeited ....................... -- -- Forfeited ................................. (15,284)
Exercised ....................... (662,124) $15.92 Issued .................................... (99,660)
---------- ----------
Balance, December 31, 2006 ........ 3,066,864 $20.31 Balance, December 31, 2006 .................. 199,409
========== ==========
In addition, 4,140 shares were issued to certain non-employee directors
pursuant to annual retainer arrangements. As a result of stock option exercises,
$10.4 million of proceeds were received during the year ended December 31, 2006.
The income tax benefit derived in 2006 as a result of such exercises and
share-based compensation was $8.9 million, of which $6.8 million represented
excess tax benefits. This compares to $1.7 million of proceeds from stock option
exercises for the year ended December 31, 2005. The income tax benefit from the
stock option exercises and other share-based compensation for the year ended
December 31, 2005 was $3.9 million.
The director shares and restricted stock units were awarded to directors
and employees pursuant to non-employee director and key-person long-term
incentive plans and a separation agreement for which $1.9 million and $0.9
million of compensation expense was recognized for the years ended December 31,
2006 and 2005, respectively. We also have outstanding phantom equity units for
which $2.8 million of expense was recognized for the year ended December 31,
2006 due to changes in the market price of our common stock from the award date.
The total intrinsic value of options (the amounts by which the stock price
exceeded the exercise price of the option on the date of exercise)that was
exercised during 2006, 2005 and 2004 was $23.7 million, $12.3 million and $5.5
million, respectively.
At December 31, 2006, 2005 and 2004 approximately 2,620,000, 2,700,000 and
2,920,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2006, 2005 and 2004 was
approximately $19.93, $17.73 and $14.17, respectively.
The following table summarizes information about our stock options at
December 31, 2006 (adjusted for the February 10, 2006 2-for-1 stock split):
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ -------------- -------------- ------ --------------
$8.10 - $10.00 610,666 1.28 Years $ 41.61
======== =======9.57 610,666 $ 9.57
$10.97 - $13.57 170,000 3.68 Years $12.48 170,000 $12.48
$18.93 - $21.15 388,466 5.40 Years $20.63 368,466 $20.71
$21.92 - $23.18 1,312,968 6.72 Years $22.43 926,037 $22.39
$23.63 - $27.75 505,702 6.28 Years $26.64 466,369 $26.86
$35.58 - $45.05 79,062 8.14 Years $42.77 79,062 $42.77
4147
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
AtThe total aggregate intrinsic value of options outstanding as of December
31, 2006, 2005 and 2004 2003was approximately $112.1 million, $53.8 million and
2002 approximately 1,460,000, 1,454,000 and
1,542,000 stock$24.4 million, respectively. The total aggregate intrinsic value of options
were exercisable. The weighted average exercise priceexerciseable as of
exercisable options at December 31, 2004, 20032006, 2005 and 20022004 was approximately $28.34, $23.77$96.8
million, $43.3 million and $22.50, respectively.
The following table summarizes information about EMCOR's stock options at
December 31, 2004:
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- -------- ---------------- ---------------- ------- ----------------
$4.75-$5.13 235,117 0.26 Years $4.88 235,117 $4.88
$14.31-$20.00 500,334 3.93 Years $18.91 500,334 $18.91
$21.62-$22.13 21,000 4.74 Years $22.08 21,000 $22.08
$25.44-$27.13 111,625 4.75 Years $25.67 111,625 $25.67
$38.68-$46.35 652,348 7.60 Years $43.54 434,961 $43.58
$48.15-$55.49 227,730 7.57 Years $54.23 157,067 $54.01
The weighted average fair value of stock options granted during 2004, 2003
and 2002 were $12.41, $14.57 and $26.96,$24.7 million, respectively.
The pro forma effect on EMCOR'sour net income, Basic EPS and Diluted EPS, had
compensation costs been determined consistent with the recognition of
compensation costs provisions of SFASStatement No. 123, is presented in Note B -
Summary of Significant Accounting Policies. The associated pro forma
compensation costs related to the provisions of SFASStatement No. 123, net of tax
effects, were $3.0 million,
$1.2$2.1 million and $2.7$3.0 million for the years ending December 31,
2004, 20032005 and 2002,2004, respectively.
The pro forma effect was calculated using an estimated fair value of each option grant on the date of grant was calculated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants induring the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005 2004
2003 and 2002: risk-free interest rates of 1.9% to 4.0% (representing the
risk-free-------- -------- --------
Dividend yield .......................... 0% 0% 0%
Expected volatility ..................... 34.0% 36.8% 28.4%
Risk-free interest rate at................. 4.9% 3.9% 3.2%
Expected life of options in years ....... 5.8 6.3 4.5
Weighted average grant date fair value .. $ 18.72 $ 9.97 $ 6.33
Forfeitures of stock options have been historically insignificant to the
date of the grant); expected dividend yields ofcalculation and are estimated to be zero percent; expected terms of 3.6 to 4.7 years; and average expected
volatility of 27.2%, 30.3% and 67.2% for options granted during 2004, 2003 and
2002, respectively.in all periods presented.
During 2004, 227,927455,854 of out-of-the-money stock options were vested in full
in anticipation of a change in accounting rules requiring the expensing of stock
options beginning in July 2005as of January 1, 2006 (see New Accounting Pronouncements"Valuation of Share-Based
Compensation Plans" in Note B - Summary of Significant Accounting Policies)Policies of
the notes to consolidated financial statements for additional information).
This vesting resultedNOTE J -- RETIREMENT PLANS
Our United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees (the "UK Plan"). The benefits under the UK Plan are based
on wages and years of service with the subsidiary. Our policy is to fund the
minimum amount required by law. The measurement date of the UK Plan is December
31 of each year.
On December 31, 2006, we adopted the recognition and provisions of
Statement 158. Statement 158 requires us to recognize the funded status (i.e.,
the difference between the fair value of plan assets and the projected benefit
obligations) of the UK Plan in no impactthe December 31, 2006 statement of financial
position, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax. The adjustment to accumulated other comprehensive
income (loss) at adoption represents the net unrecognized actuarial losses
remaining from the initial adoption of Statement No. 87, "Employers' Accounting
for Pensions" ("Statement 87"), all of which were previously netted against the
plan's funded status in our statement of financial position pursuant to the
provisions of Statement 87. These amounts will be subsequently recognized as net
periodic pension cost pursuant to our historical accounting policy for
amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic pension cost in the
same periods will be recognized as a component of accumulated other
comprehensive income (loss). Those amounts will be subsequently recognized as a
component of net periodic pension cost on the 2004same basis as the amounts
recognized in accumulated other comprehensive income (loss) at the adoption of
Statement 158.
The incremental effects of adopting the provisions of Statement 158 for
the UK Plan on our consolidated resultsstatement of financial position at December 31,
2006 are presented in the following table. The adoption of Statement 158 had no
effect on our consolidated statement of operations as EMCOR accounts for stock
options in accordance with APB 25,the year ended December
31, 2006, or for any prior period presented, and such stock options were outit will have no effect on our
future operating results. Had we not been required to adopt Statement 158 at
December 31, 2006, we would have recognized a minimum pension liability pursuant
to the provisions of the money.
The vesting did increase the stock-based compensation expense in the pro forma
valuationStatement 87 of stock options, as prepared in accordance with SFAS 123, by $1.7
million after tax (see Valuation of Stock Option Grants in Note B - Summary of
Significant Accounting Policies).
42$15.6 million.
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS EMCOR's United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees.-- (CONTINUED)
The benefits undereffect of recognizing the plan are based on wages and years
of service withadditional minimum liability for the subsidiary. EMCOR's policyUK Plan
is included in the table below in the column labeled "Prior to fund the minimum amount
required by law. The measurement date of the defined benefit pension plan is
December 31 of each year.Adopting
Statement 158" (in thousands):
AT DECEMBER 31, 2006
-----------------------------------------------------
PRIOR TO EFFECT OF AS REPORTED
ADOPTING ADOPTING AT
STATEMENT 158 STATEMENT 158 DECEMBER 31, 2006
------------- ------------- -----------------
Intangible asset (pension) .................. $ -- $ -- $ --
Accrued pension liability ................... $ 16,592 $ 43,250 $ 59,842
Net deferred income tax asset ............... $ 15,179 $ 12,975 $ 28,154
Accumulated other comprehensive income (loss) $ 2,086 $(30,275) $(28,189)
The change in benefit obligations and plan assets of the UK Plan for the years
ended December 31, 20042006 and 20032005 consisted of the following components (in
thousands):
2004 20032006 2005
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year ............................................................................ $ 159,802206,460 $ 136,181192,360
Service cost ......................................................................... 4,906 4,837......................................................... 4,285 3,896
Interest cost ........................................................................ 8,891 8,183........................................................ 10,484 9,701
Plan participants' contributions ..................................................... 3,656 3,506..................................... 2,794 3,226
Actuarial loss (gain) ................................................................ 6,988 (4,595)....................................................... 20,224 24,314
Benefits paid ........................................................................ (4,674) (3,951)........................................................ (7,970) (5,313)
Foreign currency exchange rate changes ............................................... 12,798 15,662............................... 30,359 (21,724)
--------- ---------
Benefit obligation at end of year ........................................................................................ $ 192,367266,636 $ 159,823
--------- ---------206,460
========= =========
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year .............................................................. $ 121,262163,630 $ 91,592150,533
Actual return on plan assets ......................................................... 13,050 12,407......................................... 18,195 25,365
Employer contributions ............................................................... 7,329 6,026............................................... 6,349 6,933
Plan participants' contributions ..................................................... 3,656 3,506..................................... 2,794 3,226
Benefits paid ........................................................................ (4,674) (3,951)........................................................ (7,970) (5,313)
Foreign currency exchange rate changes ............................................... 9,910 11,682............................... 23,796 (17,114)
--------- ---------
Fair valuesvalue of plan assets at end of year ......................................................................... $ 150,533206,794 $ 121,262163,630
--------- ---------
Funded status ........................................................................at end of year ......................................... $ (41,834)(59,842) $ (38,561)(42,830)
========= =========
AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
2006
---------
Unrecognized transition amount ....................................................... -- (61)losses .................................................. $ 58,888
=========
RECONCILIATION OF FUNDED STATUS TO NET AMOUNTS RECOGNIZED IN
THE CONSOLIDATED BALANCE SHEETS
2006 2005
--------- ---------
Funded status ........................................................ $ (59,842) $ (42,830)
Unrecognized prior service cost ...................................................... 165 238...................................... -- 67
Unrecognized losses .................................................................. 37,794 33,759.................................................. -- 40,984
--------- ---------
Net amount recognized .............................................................................................................. $ (3,875)(59,842) $ (4,625)(1,779)
========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued benefit liability ............................................................ $ (9,042) $ (13,484)BALANCE SHEETS
2006 2005
--------- ---------
Intangible asset ..................................................................... 165 238..................................................... $ -- $ 67
Current liability .................................................... -- (1,846)
Non-current liability ................................................ (59,842) (16,897)
Accumulated other comprehensive income ............................................... 5,002 8,621loss ................................. -- 16,897
--------- ---------
Net amount recognized .............................................................................................................. $ (3,875)(59,842) $ (4,625)(1,779)
========= =========
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The assumptions used as of December 31, 2004, 20032006, 2005 and 20022004 in determining
pension cost and liability shown above were as follows:
2006 2005 2004 2003 2002
------ ------ ------
Discount rate ................................................................... 5.1% 4.8% 5.4% 5.5% 6.0%
Annual rate of salary provision ............................... 3.8% 3.1% 3.1% 4.0%
Annual rate of return on plan assets ..................... 6.5% 6.3% 6.8% 7.0% 7.0%
The annual rate of return on plan assets is based on the United Kingdom
Government Bond yield, plus an estimated margin, at each year's measurement
date. This annual rate approximates the historical annual return on plan assets
and considers the expected asset allocation between equity and debt securities.
For measurement purposes, the annual rates of increase in the per capita costinflation of covered pension
benefits assumed for 20042006 and 20032005 were 2.5%2.8% and 2.6%2.5%, respectively.
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The components of net periodic pension benefit cost for the years ended
December 31, 2004, 20032006, 2005 and 20022004 were as follows (in thousands):
2006 2005 2004
2003 2002
------- ------- --------------- -------- --------
Service cost ................................................................................................................ $ 4,285 $ 3,896 $ 4,906
$ 4,837 $ 7,240
Interest cost .............................................................................................................. 10,484 9,701 8,891 8,183 7,532
Expected return on plan assets ............................................................................ (11,175) (9,890) (8,933) (6,708) (7,144)
Net amortization of prior service cost and actuarial loss/(gain) ................loss 72 85 19 (5) (5)
Amortization of unrecognized loss ...................................................................... 1,675 1,351 1,402
2,280 765
------- ------- --------------- -------- --------
Net periodic pension benefit cost ...................................................................... $ 5,341 $ 5,143 $ 6,285
$ 8,587 $ 8,388
======= ======= =============== ======== ========
The estimated net loss for the UK Plan that will be amortized from
Accumulated other comprehensive loss into net periodic benefit cost over the
next year is $2.7 million.
UK PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 20042006 were as follows:
% OF PLAN ASSETS
-------------------------
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 20042006 ALLOCATION
- -------------- ------------ ---------------------
Equity securities ........................ 65.1% 65.0%.................... 71.6% 70.0%
Debt securities .......................... 33.4 35.0...................... 27.8 30.0
Other .................................... 1.5................................ 0.6 --
----- ------------ -------
Total .................................................................... 100.0% 100.0%
===== ============ =======
Plan assets of EMCOR's United Kingdom subsidiary pension planour UK Plan include marketable equity securities in both
United Kingdom and United States companies. Debt securities consist mainly of
fixed interest bonds.
The investment policies and strategies for plan assets are established to
ensure that obligations to beneficiaries of the plan are met to achieve a reasonable balance between risk, likely return and administration
expense, as well as to maintain funds at a level to meet minimum funding
requirements. In order to ensure that an appropriate investment strategy is in
place, an analysis of the UK Plan's assets and liabilities is completed
periodically.
CASH FLOWS:
CONTRIBUTIONS
EMCOR'SOur United Kingdom subsidiary expects to contribute $10.7approximately $7.0
million to its pension planUK Plan in 2005.2007.
50
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
ESTIMATED FUTURE BENEFIT PAYMENTS
The following estimated benefit payments, which reflect expected future
service, as appropriate, are expected to be paid in the following years (in
thousands):
PENSION
BENEFITS
----------------
2005 ........................................................ $ 5,040
2006 ........................................................ 5,498--------
2007 ........................................................ 5,957............................................................. $6,853
2008 ........................................................ 6,415............................................................. 7,343
2009 ........................................................ 6,873............................................................. 7,832
2010 ............................................................. 8,322
2011 ............................................................. 8,811
Succeeding five years ....................................... 41,238
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)............................................ 51,398
The accumulated benefit obligation for the defined benefit pension planUK Plan for the years ended
December 31, 20042006 and 20032005 was $159.6$223.4 million and $134.7$182.4 million, respectively.
EMCOR contributesThe following table shows certain information for the UK Plan where the
accumulated benefit obligation is in excess of plan assets as of December 31,
2006 and 2005 (in thousands):
2006 2005
-------- --------
Projected benefit obligation ................. $266,636 $206,460
Accumulated benefit obligation ............... $223,386 $182,373
Fair value of plan assets .................... $206,794 $163,630
We also sponsor two domestic defined benefit plans for which participation
by new individuals is frozen. The benefit obligation associated with these plans
as of December 31, 2006 and 2005 was approximately $5.3 million and $5.2
million, respectively. The estimated fair value of the plan assets as of
December 31, 2006 and 2005 was approximately $5.5 million and $4.9 million,
respectively. The prepaid balances as of December 31, 2006 are classified as
long-term assets on the balance sheet. As a result of adopting Statement 158 as
of December 31, 2006 for these plans, Accumulated other comprehensive loss was
increased by approximately $0.7 million, net of income taxes. The major
assumptions used in the actuarial valuations included a discount rate of 6.0%
and an expected rate of return of 8.5%. The estimated loss for these plans that
will be amortized from Accumulated other comprehensive loss into net periodic
benefit cost over the next year is less than $0.1 million. The future estimated
benefit payments associated with the plans for the next ten years is
approximately $0.3 million per year.
We contribute to various union pension funds based upon wages paid to itsour
union employees. Such contributions approximated $133.9$150.1 million, $134.8$133.5 million
and $101.2$133.9 million for the years ended December 31, 2006, 2005 and 2004,
2003respectively. The increase in contributions of $16.6 million for 2006 compared
to 2005 was primarily related to increased hours worked and 2002,
respectively.
EMCOR haswages earned and
incremental contributions for acquired companies of approximately $3.0 million.
We have retirement and savings plans that cover U.S. eligible non-union
employees. Contributions to these profit sharing and voluntary savings planplans are based on a percentage of the
employee's base compensation. The expenseexpenses recognized for the years ended
December 31, 2006, 2005 and 2004 2003 and 2002 for this plan
wasthese plans were $6.4 million, $6.2 million
$3.8 million and $3.5$6.2 million, respectively.
The increase in
the 2004 and 2003 expense compared to the respective prior years is primarily
due to an increase in the number of participants in these plans.
EMCOR'sOur United Kingdom subsidiary has a defined contribution retirement plan
that began in 2002. The expense recognized for the years ended December 31,
2004, 2003, and 2002 was $1.2 million, $0.7 million and $0.3 million
respectively.
EMCOR's Canadian subsidiary has a defined contribution retirement plan.
The expense recognized for the years ended December 31, 2006, 2005 and 2004 2003 and 2002 was
$0.6$1.9 million, $0.4$1.7 million and $1.2 million, respectively.
Our Canadian subsidiary has a defined contribution retirement plan. The
expense recognized was $0.3 million for each of the years ended December 31,
2006, 2005 and 2004, respectively.
51
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES
EMCOR and its subsidiariesWe lease land, buildings and equipment under various leases. The leases
frequently include renewal options and require EMCORus to pay for utilities, taxes,
insurance and maintenance expenses.
Future minimum payments, by year and in the aggregate, under capital
leases, non-cancelable operating leases and related subleases with initial or
remaining terms of one or more years at December 31, 2004,2006, were as follows (in
thousands):
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
-------- --------- --------
2005 .........................................2007 ...................................... $ 676663 $ 39,56843,656 $ 404
2006 ......................................... 418 32,151 22
2007 ......................................... 355 25,249306
2008 ...................................... 506 36,862 168
2009 ...................................... 370 28,734 168
2010 ...................................... 148 22,320 --
2008 ......................................... 285 19,249 --
2009 ......................................... 152 13,5502011 ...................................... 11 14,575 --
Thereafter ................................................................... -- 35,80929,042 --
-------- -------- --------
Total minimum lease payment .................. 1,886 $165,576............... 1,698 $175,189 $ 426642
======== ========
Amounts representing interest ................ (224)............. (132)
--------
Present value of net minimum lease payments .. $ 1,6621,566
========
Rent expense for operating leases and other rental items for the years
ended December 31, 2006, 2005 and 2004 2003 and 2002 was $54.9$74.0 million, $52.9$61.5 million and
$36.5$54.9 million, respectively. Rent expense for the years ended December 31, 2004, 20032006,
2005 and 20022004 included sublease rental income of $0.3 million, $0.5 million and
$0.7 million, $1.1 million and $0.8
million, respectively.
Certain subsidiaries of EMCOR lease real estate from employees of such
subsidiaries.
EMCOR hasWe have agreements with itsour executive officers and certain other key
management personnel providing for severance benefits tofor such employees upon
termination of their employment under certain circumstances.
EMCOR isWe are contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects, which secure EMCORour payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain EMCORof our employees, bonds are sometimes provided
to secure such obligations for wages and benefits payable to or for such employees.
EMCOROur bonding requirements typically increase as the amount of public sector work
increases. As of December 31, 2004, sureties2006, based on our percentage-of-completion of our
projects covered by Surety Bonds, our aggregate estimated exposure, had issued bonds for the account of EMCOR in the aggregate amount ofthere
been defaults on all our existing contractual obligations, would have been
approximately $1.6$1.0 billion. The bonds are issued by EMCOR'sour sureties in return for
a premium,premiums, which variesvary depending on the size and type of the bonds. The largest individual
bond is approximately $170.0 million. EMCOR hasbond. We have agreed to
indemnify the sureties for amounts, if any, payments madepaid by them in respect of bonds
issued on EMCOR'sour behalf.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
EMCOR isWe are subject to regulation with respect to the handling of certain
materials used in construction which are classified as hazardous or toxic by
Federal, State and local agencies. EMCOR'sOur practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, when remediation is required as part of itsour contract performance, EMCOR
believes it complieswe
believe we comply with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
A subsidiaryOne of EMCORour subsidiaries has guaranteed indebtedness$25.0 million of borrowings of a
venture in which it has a 40% interest; the other venture partner, Baltimore Gas
and Electric (a subsidiary of Constellation Energy), has a 60% interest. The
venture designs, constructs, owns, operates, leases and maintains facilities to
produce chilled water for sale to customers for use in air conditioning
private and publiccommercial properties. These guarantees are not expected to have a material
adverse affect on EMCOR'sour financial position or results of operations. Each of the venturers
is jointly and severally liable, in the event of default, for the venture's
$25.0 million borrowingin borrowings due December 2031.
During September 2002, each venture partner contributed equityWe presently employ approximately 27,000 people, approximately 69% of whom
are represented by various unions pursuant to the
venture,more than 400 collective
bargaining agreements between our individual subsidiaries and local unions. We
believe that our employee relations are generally good. Only two of which EMCOR's contribution was $14.0 million.these
collective bargaining agreements are national or regional in scope.
Restructuring expenses, primarily relating to employee severance
obligations and reduction of leased facilities, were $1.6 million, $1.8 million
and $8.3 million for 2004. Approximately $7.0 million2006, 2005 and 2004, respectively. As of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates paying
substantially all2006
and 2005, the balance of the remainingthese obligations in 2005. There were no
restructuring expenses for the year endedwas $0.2 million at each date,
respectively. The December 31, 2003 or 2002.2005 obligation was paid in 2006.
52
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes and non-cash financing activities for the years ended December 31, 2004,
20032006, 2005 and 20022004 (in thousands):
2004 2003 2002
------- ------- -------
Cash paid during the year for:
Interest ..................................... $ 7,486 $ 7,251 $ 7,042
Income taxes ................................. $ 1,759 $17,910 $45,785
Non-cash financing activities:
Borrowings under capital lease obligations ... $ 1,781 $ 314 $ 52
Debt assumed in acquisition ..................
2006 2005 2004
------- ------- -------
Cash paid during the year for:
Interest ...................................... $ 1,788 $ 8,573 $ 7,486
Income taxes .................................. $29,205 $ 9,858 $ 1,759
Non-cash financing activities:
Assets acquired under capital lease obligations $ 612 $ 412 $ 1,781
Capital lease obligations terminated .......... $ -- $ (322) $ --
Contingent purchase price accrued ............. $ 3,372 $ -- $ --
$22,115
NOTE M -- SEGMENT INFORMATION
EMCOR hasWe have the following reportable segments: United States electrical
construction and facilities services,services; United States mechanical construction and
facilities services,services; United States facilities services,services; Canada construction and
facilities services,services; United Kingdom construction and facilities servicesservices; and
Other international construction and facilities services. The segment "United
States facilities services" principally consists of those operations which
primarily provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR'sour operations outside of the
United States, Canada and the United Kingdom (primarily in South Africa,
the Middle East and Western Europe)East)
performing electrical construction, mechanical construction and facilities
services. EMCOR'sOur interest in the South African joint venture, which had been
reflected in the "Other international construction and facilities services"
segment, was sold in August 2004. The following tables present information about
industry segments and geographic areas for the years ended December 31, 2004, 20032006,
2005 and 2002.
46
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
The tables also present unaudited pro forma revenues and operating income as
if2004. Insignificant reclassifications of certain business units among
the acquisitions had occurred at the beginning of fiscal 2002. The unaudited
pro forma revenues and operating income are not necessarily indicative of future
operating resultssegments have been made for all periods presented due to changes in our
internal reporting structure (in millions):
PRO FORMA
-----------
AS REPORTED (UNAUDITED)
---------------------------------------- -----------
2004 2003 2002 2002
---------- ---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3 $ 1,239.5 $ 1,152.4 $ 1,154.8
United States mechanical construction and facilities services ........ 1,825.7 1,715.8 1,715.4 1,846.5
United States facilities services .................................... 727.6 661.2 250.0 629.8
---------- ---------- ---------- ----------
Total United States operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1
Canada construction and facilities services .......................... 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................. 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. -- -- -- --
---------- ---------- ---------- ----------
Total worldwide operations ........................................... $ 4,747.9 $ 4,534.6 $ 3,968.0 $ 4,481.3
========== ========== ========== ==========
Total revenues:
United States electrical construction and facilities services ........ $ 1,275.8 $ 1,264.6 $ 1,191.3 $ 1,193.6
United States mechanical construction and facilities services ........ 1,839.4 1,733.3 1,719.3 1,850.4
United States facilities services .................................... 728.9 665.4 252.0 631.9
Less intersegment revenues ........................................... (55.5) (46.8) (44.8) (44.8)
---------- ---------- ---------- ----------
Total United States operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1
Canada construction and facilities services .......................... 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................. 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. -- -- -- --
---------- ---------- ---------- ----------
Total worldwide operations ........................................... $ 4,747.9 $ 4,534.6 $ 3,968.0 $ 4,481.3
========== ========== ========== ==========
Operating income (loss):
United States electrical construction and facilities services ........ $ 81.2 $ 57.8 $ 79.3 $ 79.6
United States mechanical construction and facilities services ........ (1.4) 25.6 59.9 62.4
United States facilities services .................................... 14.2 18.4 4.4 14.4
---------- ---------- ---------- ----------
Total United States operations ....................................... 94.0 101.8 143.6 156.4
Canada construction and facilities services .......................... (11.9) 2.0 3.3 3.3
United Kingdom construction and facilities services .................. 0.0 (22.4) 0.0 0.0
Other international construction and facilities services ............. 0.5 0.3 (0.1) (0.1)
Corporate administration ............................................. (35.0) (34.7) (31.3) (31.3)
Restructuring expenses ............................................... (8.3) 0.0 0.0 0.0
Gain on sale of assets ............................................... 2.8 0.0 0.0 0.0
---------- ---------- ---------- ----------
Total worldwide operations ........................................... 42.1 47.0 115.5 128.3
Other corporate items:
Interest expense ..................................................... (8.9) (8.9) (4.1) (10.7)
Interest income ...................................................... 1.9 0.7 2.0 2.2
Gain on sale of equity investment .................................... 1.8 0.0 0.0 0.0
Minority interest .................................................... (3.8) (1.9) (1.1) (1.1)
Income before taxes .................................................. $ 33.2 $ 36.9 $ 112.3 $ 118.7
4753
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
AS REPORTED
----------------------------------
2006 2005 2004
2003 2002
--------- --------- --------------- -------- --------
Capital expenditures:Revenues from unrelated entities:
United States electrical construction and facilities services .......................... $ 1.7 $ 4.6 $ 3.0............ $1,280.2 $1,224.6 $1,235.3
United States mechanical construction and facilities services .......................... 2.9 4.5 5.1............ 1,820.9 1,671.6 1,778.3
United States facilities services ...................................................... 6.1 3.4 1.2
--------- --------- -------........................................ 960.7 785.2 725.2
-------- -------- --------
Total United States operations ......................................................... 10.7 12.5 9.3........................................... 4,061.8 3,681.4 3,738.8
Canada construction and facilities services ............................................ 0.8 0.5 0.3.............................. 287.8 342.1 280.8
United Kingdom construction and facilities services .................................... 3.7 4.0 4.2...................... 671.4 673.1 678.5
Other international construction and facilities services ................................................ -- -- --
Corporate administration ............................................................... 0.9 0.9 1.8
--------- --------- --------------- -------- --------
Total worldwide operations ............................................................. $ 16.1 $ 17.9 $ 15.6
========= ========= =======
Depreciation and amortization of Property, plant and equipment:............................................... $5,021.0 $4,696.6 $4,698.1
======== ======== ========
Total revenues:
United States electrical construction and facilities services .......................... $ 3.3 $ 3.4 $ 3.5............ $1,284.7 $1,236.9 $1,275.8
United States mechanical construction and facilities services .......................... 5.9 6.5 6.9............ 1,845.8 1,681.8 1,792.0
United States facilities services ...................................................... 5.8 6.4 1.9
--------- --------- -------........................................ 966.4 787.6 726.5
Less intersegment revenues ............................................... (35.1) (24.9) (55.5)
-------- -------- --------
Total United States operations ......................................................... 15.0 16.3 12.3........................................... 4,061.8 3,681.4 3,738.8
Canada construction and facilities services ............................................ 0.9 0.7 0.6.............................. 287.8 342.1 280.8
United Kingdom construction and facilities services .................................... 4.3 4.0 2.4...................... 671.4 673.1 678.5
Other international construction and facilities services ................................................ -- -- --
Corporate administration ............................................................... 0.7 0.7 0.1
--------- --------- --------------- -------- --------
Total worldwide operations ............................................................... $ 20.9 $ 21.7 $ 15.4
========= ========= =======
2004 2003
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts:............................................... $5,021.0 $4,696.6 $4,698.1
======== ======== ========
Operating income (loss):
United States electrical construction and facilities services ...................................... $ 57.446.7 $ 60.479.8 $ 81.2
United States mechanical construction and facilities services .......................... 128.3 135.5............ 82.1 20.2 (1.5)
United States facilities services ...................................................... 11.4 9.4
--------- ---------........................................ 39.0 26.3 14.4
-------- -------- --------
Total United States operations ......................................................... 197.1 205.3........................................... 167.8 126.3 94.1
Canada construction and facilities services ............................................ 19.9 17.8.............................. 1.0 (7.9) (11.9)
United Kingdom construction and facilities services .................................... 23.7 26.3...................... 6.8 7.5 0.0
Other international construction and facilities services ................................................ (0.1) 0.0 0.5
Corporate administration ................................................. (55.9) (43.2) (35.0)
Restructuring expenses ................................................... (1.6) (1.8) (8.3)
Gain on sale of assets ................................................... -- -- --------- ---------2.8
-------- -------- --------
Total worldwide operations ............................................................. $ 240.7 $ 249.4
========= =========
Billings in excess............................................... 118.0 80.9 42.2
Other corporate items:
Interest expense ......................................................... (2.3) (8.3) (8.9)
Interest income .......................................................... 6.2 2.7 1.9
Gain on sale of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services .......................... $ 129.6 $ 152.7
United States mechanical construction and facilities services .......................... 131.1 126.6
United States facilities services ...................................................... 6.5 6.7
--------- ---------
Total United States operations ......................................................... 267.2 286.0
Canada construction and facilities services ............................................ 10.1 9.5
United Kingdom construction and facilities services .................................... 82.4 49.7
Other international construction and facilities services ...............................equity investment ........................................ -- -- --------- ---------
Total worldwide1.8
Minority interest ........................................................ (4.2) (4.5) (3.8)
Income from continuing operations .............................................................before income taxes .................... $ 359.7117.7 $ 345.2
========= =========70.8 $ 33.3
4854
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2006 2005 2004
2003
---------- ------------------ -------- --------
Capital expenditures:
United States electrical construction and facilities services ............ $ 2.8 $ 2.4 $ 1.7
United States mechanical construction and facilities services ............ 3.4 2.5 2.8
United States facilities services ........................................ 9.3 3.9 6.2
-------- -------- --------
Total United States operations ........................................... 15.5 8.8 10.7
Canada construction and facilities services .............................. 2.5 1.3 0.8
United Kingdom construction and facilities services ...................... 1.1 0.3 3.7
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 0.6 2.0 0.9
-------- -------- --------
Total worldwide operations ............................................... $ 19.7 $ 12.4 $ 16.1
======== ======== ========
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services ............ $ 3.1 $ 3.0 $ 3.3
United States mechanical construction and facilities services ............ 5.3 5.6 5.9
United States facilities services ........................................ 4.1 5.8 5.8
-------- -------- --------
Total United States operations ........................................... 12.5 14.4 15.0
Canada construction and facilities services .............................. 1.0 0.9 0.9
United Kingdom construction and facilities services ...................... 2.8 2.8 4.3
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 0.8 1.3 0.7
-------- -------- --------
Total worldwide operations ............................................... $ 17.1 $ 19.4 $ 20.9
======== ======== ========
2006 2005
-------- --------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 49.3 $ 64.2
United States mechanical construction and facilities services ............ 62.8 70.5
United States facilities services ........................................ 11.1 10.3
-------- --------
Total United States operations ........................................... 123.2 145.0
Canada construction and facilities services ............................... 18.3 21.7
United Kingdom construction and facilities services ...................... 6.3 18.9
Other international construction and facilities services ................. -- --
-------- --------
Total worldwide operations ............................................... $ 147.8 $ 185.6
======== ========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 144.8 $ 120.2
United States mechanical construction and facilities services ............ 166.8 135.9
United States facilities services ........................................ 15.9 11.4
-------- --------
Total United States operations ........................................... 327.5 267.5
Canada construction and facilities services .............................. 17.1 13.1
United Kingdom construction and facilities services ...................... 67.5 49.6
Other international construction and facilities services ................. -- --
-------- --------
Total worldwide operations ............................................... $ 412.1 $ 330.2
======== ========
55
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2006 2005
-------- --------
Long-lived assets:
United States electrical construction and facilities services .......................... $ 12.111.1 $ 13.711.4
United States mechanical construction and facilities services .......................... 187.7 191.5206.8 183.9
United States facilities services ...................................................... 136.4 140.2
---------- ----------........................... 145.9 136.7
-------- --------
Total United States operations ......................................................... 336.2 345.4.............................. 363.8 332.0
Canada construction and facilities services ............................................ 5.7 3.9................. 6.5 4.8
United Kingdom construction and facilities services .................................... 10.6 14.9......... 6.4 7.1
Other international construction and facilities services ................................... -- --
Corporate administration ............................................................... 2.2 2.2
---------- ----------.................................... 2.5 2.9
-------- --------
Total worldwide operations ............................................................................................... $ 354.7379.2 $ 366.4
========== ==========346.8
======== ========
Goodwill:
United States electrical construction and facilities services .......................... $ 3.8 $ 3.8
United States mechanical construction and facilities services .......................... 163.5 162.8166.9 164.2
United States facilities services ...................................................... 112.1 111.4
---------- ----------........................... 117.5 115.4
-------- --------
Total United States operations ......................................................... 279.4 278.0.............................. 288.2 283.4
Canada construction and facilities services ............................................................. -- --
United Kingdom construction and facilities services ............................................. -- --
Other international construction and facilities services ................................... -- --
Corporate administration ................................................................................................... -- --
---------- ------------------ --------
Total worldwide operations ............................................................................................... $ 279.4288.2 $ 278.0
========== ==========283.4
======== ========
Total assets:
United States electrical construction and facilities services .......................... $ 358.1363.7 $ 362.3357.5
United States mechanical construction and facilities services .......................... 776.4 771.6748.0 673.2
United States facilities services ...................................................... 304.5 280.5
---------- ----------........................... 370.4 331.5
-------- --------
Total United States operations ......................................................... 1,439.0 1,414.4.............................. 1,482.1 1,362.2
Canada construction and facilities services ............................................ 108.8 98.2................. 83.4 137.2
United Kingdom construction and facilities services .................................... 199.2 198.4......... 255.1 154.6
Other international construction and facilities services ............................... 3.9 4.5.... 0.5 3.0
Corporate administration ............................................................... 67.1 79.7
---------- ----------.................................... 267.9 121.9
-------- --------
Total worldwide operations ............................................................. $ 1,818.0 $ 1,795.2
========== ==========.................................. $2,089.0 $1,778.9
======== ========
56
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters may not
equal per share amounts for the year.
MARCHMarch 31 JUNEJune 30 SEPT.Sept. 30 DEC.Dec. 31
---------- ---------- ---------- --------------------- ----------- ----------- -----------
20042006 QUARTERLY RESULTS
Revenues ....................................... $1,109,086 $1,193,213 $1,215,911 $1,229,670............................ $ 1,151,077 $ 1,220,423 $ 1,269,634 $ 1,379,902
Gross profit ........................................................... $ 101,163114,833 $ 101,512133,528 $ 114,980147,872 $ 129,247171,444
Net income ............................................................... $ 5,7177,013 $ 1,44516,861 $ 15,46622,553 $ 10,57940,207
Basic EPS ......................................- continuing operations ... $ 0.380.24 $ 0.100.53 $ 0.71 $ 1.26
Basic EPS - discontinued operations . (0.02) -- -- --
----------- ----------- ----------- -----------
$ 0.22 $ 0.53 $ 0.71 $ 1.26
=========== =========== =========== ===========
Diluted EPS - continuing operations . $ 0.24 $ 0.52 $ 0.69 $ 1.22
Diluted EPS - discontinued operations (0.02) -- -- --
----------- ----------- ----------- -----------
$ 0.22 $ 0.52 $ 0.69 $ 1.22
=========== =========== =========== ===========
2005 QUARTERLY RESULTS
Revenues ............................ $ 1,083,755 $ 1,168,831 $ 1,210,354 $ 1,233,663
Gross profit ........................ $ 99,202 $ 111,971 $ 131,083 $ 156,159
Net income .......................... $ 1,913 $ 7,933 $ 30,864 $ 19,332
Basic EPS - continuing operations ... $ 0.07 $ 0.24 $ 1.02 $ 0.69
========== ========== ========== ==========
Diluted0.62
Basic EPS ....................................- discontinued operations . (0.01) 0.01 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.370.06 $ 0.090.25 $ 0.99 $ 0.68
========== ========== ========== ==========
2003 QUARTERLY RESULTS
Revenues ....................................... $1,061,030 $1,144,378 $1,157,588 $1,171,650
Gross profit ................................... $ 116,769 $ 123,275 $ 118,206 $ 124,204
Net income ..................................... $ 3,256 $ 8,273 $ 6,468 $ 2,624
Basic EPS ...................................... $ 0.22 $ 0.55 $ 0.43 $ 0.17
========== ========== ========== ==========0.62
=========== =========== =========== ===========
Diluted EPS ....................................- continuing operations . $ 0.210.06 $ 0.530.24 $ 0.421.00 $ 0.17
========== ========== ========== ==========0.60
Diluted EPS - discontinued operations (0.00) 0.01 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.97 $ 0.60
=========== =========== =========== ===========
49NOTE O -- LEGAL PROCEEDINGS
In July 2003, our subsidiary, Poole and Kent Corporation ("Poole & Kent"),
was served with a subpoena duces tecum by a grand jury empanelled by the United
States District Court for the District of Maryland investigating, among other
things, public corruption and fraud in the use of minority and woman-owned
business enterprises. On April 26, 2004, Poole & Kent was identified as a target
of that investigation. Poole & Kent has cooperated with investigators from the
time it first learned of the investigation, has responded to various subpoenas
and requests for documents and other information, and, in the course of its
cooperation with investigators, has waived its attorney client privilege and
other client/lawyer confidentiality protections. In connection with such
investigation, on September 6, 2005, a former employee of Poole & Kent and his
wife pled guilty to federal mail fraud charges that they used a fraudulent
woman's owned business enterprise ("WBE") in order to enrich themselves, to help
Poole & Kent qualify for certain public construction projects and to corrupt a
former Maryland state senator. The former employee also pled guilty to filing a
false federal personal income tax return as a result of his failure to report on
his federal income tax return the value of free work that was done at his home
by Poole & Kent. On October 17, 2005, the grand jury returned an indictment
charging W. David Stoffregen ("Stoffregen"), the former President and Chief
Executive Officer of Poole & Kent, and a former Maryland state senator and his
wife with racketeering, mail fraud and related offenses, related to the
fraudulent WBE and corruption schemes. On October 26, 2005, a former Poole &
Kent project manager pled guilty to making false statements to federal
investigators during the grand jury investigation. More recently, on October 20,
2006, Stoffregen's former administrative assistant pled guilty to a charge of
misprision of a felony for deliberately withholding from investigators and the
grand jury a scheme by Stoffregen to defraud Poole & Kent. On December 4, 2006,
Stoffregen entered a plea of guilty to racketeering conspiracy, mail fraud and
tax charges, related to the fraudulent WBE scheme, his efforts to corrupt the
Maryland state senator and his defrauding of Poole & Kent. Poole & Kent had
terminated Stoffregen prior to his indictment in October 2005 because of his
refusal to cooperate with federal investigators.
57
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
EMCOR and three of its officers (Chairman of the Board and Chief Executive
Officer Frank T. MacInnis, Executive Vice President and Chief Financial Officer
Leicle E. Chesser, and Senior Vice President-Chief Accounting Officer and
Treasurer Mark A. Pompa) have been named as defendants in a purported
consolidated class action filed in the United States District Court of
Connecticut entitled IN RE EMCOR GROUP, INC SECURITIES LITIGATION. Plaintiff
purports to represent a class composed of all persons who purchased or otherwise
acquired EMCOR common stock and/or other securities between April 9, 2003 and
October 2, 2003, inclusive. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder and of Section 20(A) of
the Securities Exchange Act, relating to alleged misstatements and omissions in
certain of the Company's filings with the Securities and Exchange Commission,
press releases and other public statements between April 9 and October 2, 2003,
and seeks damages on behalf of the purported class in unspecified amounts. A
motion to dismiss the Complaint filed by EMCOR and the individual defendants is
currently under submission. As set forth in the motion, EMCOR and the individual
defendants believe that the plaintiff's allegations are without merit and are
vigorously defending against them.
In July 2003, EMCOR's subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.-- (CONTINUED)
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against EMCOR'sour United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named EMCOR Drake & Scull Group plcplc) ("D&S"), in connection with a
subcontract D&S entered into with Mowlem with respect to a project for the
United Kingdom Ministry of Defence at Abbey Wood in Bristol, U.K. Mowlem seeks
damages arising out of alleged defects in the D&S design and construction of the
mechanicalelectrical and electricalmechanical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $75.8$77.3 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $22.3$22.7 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCOR or its
subsidiaries are involved range from a few thousand dollars to over $75.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR's financial position and/or results of
operations. These proceedings include the following: (a) aA civil action, brought(the "First Anti-Trust Action") is pending against EMCOR'sour
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW from at least 1996 through 2002, conspired
to prevent competition and to monopolize the market for communicationstelecommunications
wiring services in the New York City area thereby excluding plaintiffs from
wiring jobs in that market. Plaintiffs allege they have lost profits as a result
of this concerted activity and seek damages in the amount of $50$50.0 million after
trebling plus attorney's fees.fees and unspecified compensatory and punitive damages
on their common law claims. However, plaintiffs' damages expert has stated in
his pre-trial deposition that he estimates plaintiffs' total damages atof $8.7
million before trebling. Forest has denied the allegations of wrongdoing set
forth in the complaint, and pre-trial discovery has been completed. No trial
date has been set by the Court. Forest
believesDefendants are scheduled to move for summary
judgment dismissing all claims in February 2007. The parties do not know when
the motion will be decided, and there is no assurance that the suit is without merit. (b) Amotion will be
granted in the action.
Another civil action brought(the "Second Anti-Trust Action") is pending against
Forest and seven other defendants in the United States District Court for the
Southern District of New York under the Sherman Act and New York common law by a
joint
venture (the "JV") between EMCOR's subsidiary Poole & Kent Corporation
50
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS -- (CONTINUED)
("Poole & Kent") and an unrelated companycompetitor, who is one of the plaintiffs in the Fairfax, Virginia Circuit
CourtFirst Anti-Trust Action
described above, and whose employees are not members of the IBEW. The Second
Anti-Trust Action alleges, among other things, that Forest, six other electrical
contractors (four of whom were named as defendants in the First Anti-Trust
Action) and the IBEW conspired from at least January 2003 to prevent competition
in the market for telecommunications wiring services in the New York City area
thereby excluding plaintiffs from wiring jobs in that market. Plaintiff alleges
that it lost profits as a result of the concerted activity and seeks an
undetermined amount of damages for its anti-trust claims, which it seeks to have
trebled, plus attorneys' fees and alleges $30.0 million in compensatory damages
and unspecified punitive damages for its common law claims. Forest has not yet
answered the complaint.
We are involved in other proceedings in which the JV seeks damages from the Upper Occoquan Sewage Authority
("UOSA") resulting from material breachesand claims have been
asserted against us. We believe that we have a number of a construction contract (the
"Contract") entered into between the JVvalid defenses to such
proceedings and UOSA for construction of a
wastewater treatment facility. Poole & Kent incurred unrecovered costs in
completing this project, which are included in the balance sheet account "costsclaims and estimated earnings in excess of billings on uncompleted contracts" in
EMCOR's consolidated balance sheets as of December 31, 2004intend to vigorously defend ourselves and 2003. A jury has
returned a verdict findingdo not
believe that UOSA committed material breaches of the Contract
and a jury trial to establish the JV's damages is currently in process. The JV
claims total damages, based upon alternative measures of damages, in excess of
$75.0 million (exclusive of interest), and in a jury trial to be subsequently
held the JV intends to claim damages in excess of $18.0 million (exclusive of
interest). In accordance with the joint venture agreement establishing the JV,
Poole & Kent would be entitled to approximately one-half of any damage award
received by the JV.
51significant liabilities will result.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersShareholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR
Group, Inc. and subsidiariesSubsidiaries as of December 31, 20042006 and 2003,2005, and the related
consolidated statements of operations, cash flows, and stockholders' equity and
comprehensive income for each of the three years in the period ended December
31, 2004.2006. Our audits also included the financial statement schedule listed on
Schedule II in Item 15. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the auditsaudit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EMCOR Group,
Inc. and subsidiariesSubsidiaries at December 31, 20042006 and 2003,2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004,2006, in conformity with accounting principlesU.S. generally accepted
in the United States.accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note B to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123(R) (revised 2004),
"Share-Based Payment" and Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans" in fiscal year 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of EMCOR
Group, Inc.'s internal control over financial reporting as of December 31, 2004,2006,
based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 8, 2005February 20, 2007 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
March 8, 2005
52February 20, 2007
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersShareholders of EMCOR Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report onof Internal Control over Financial Reporting, that EMCOR
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2004,2006, based on criteria established in Internal Control--IntegratedControl-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). EMCOR Group, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company,company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that EMCOR Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2004,2006, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, EMCOR Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004,2006, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EMCOR Group, Inc. as of December 31, 20042006 and 20032005, and the related
consolidated statements of operations, cash flows, and stockholders' equity and
comprehensive income for each of the three years in the period ended December
31, 20042006 of EMCOR Group, Inc. and our report dated March 8, 2005February 20, 2007 expressed
an unqualified opinion thereon.
Stamford, Connecticut /S/ ErnstERNST & YoungYOUNG LLP
March 8, 2005
53February 20, 2007
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on an evaluation of EMCOR'sour disclosure controls and procedures (as
required by RuleRules 13a-15(b) of the Securities Exchange Act of 1934), theour
Chairman of the Board and Chief Executive Officer, of EMCOR , Frank T. MacInnis, and theour
Chief Financial Officer, of EMCOR , Leicle E. Chesser,Mark A. Pompa, have concluded that EMCOR'sour disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934) are effective as of the end of the period covered by this report.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of EMCOROur management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities and Exchange Act of 1934). EMCOR'sOur internal control
over financial reporting is a process designed with the participation of EMCOR'sour
principal executive officer and principal financial officer or persons
performing similar functions to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of EMCOR'sour financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.
EMCOR'sOur internal control over financial reporting includes policies and
procedures that: (a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of
assets of
EMCOR;assets; (b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures of
EMCOR
are being made only in accordance with authorizations of our management and
the directorsBoard of EMCOR;Directors; and (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of EMCOR'sour assets
that could have a material effect on EMCOR'sour financial statements.
Because of its inherent limitations, EMCOR'sour disclosure controls and
procedures may not prevent or detect misstatements. A control system, no matter
how well conceived and operated, can only provide reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
As of December 31, 2004,2006, our management conducted an evaluation of the
effectiveness of EMCOR'sour internal control over financial reporting based on the
framework established in Internal ControlINTERNAL CONTROL - Integrated FrameworkINTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this evaluation, management has determined that EMCOR's internal control over
financial reporting is effective as of December 31, 2004.2006.
Management's assessment of the effectiveness of EMCOR'sour internal control over
financial reporting as of December 31, 20042006 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in its report
appearing in this Annual Report on Form 10-K, which such report expressed
unqualified opinions on our management's assessment and on the effectiveness of
EMCOR'sour internal control over financial reporting as of December 31, 2004.2006.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In addition, our management with the participation of EMCOR'sour principal
executive officer and principal financial officer or persons performing similar
functions has determined that no change in EMCOR'sour internal control over financial
reporting occurred during the fourth quarter of EMCOR'sour fiscal year ended December
31, 20042006 that has materially affected, or is (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably
likely to materially affect, EMCOR'sour internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
5461
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
REGISTRANT
The information required by this Item 10 with respect to directors is
incorporated herein by reference to the sectionsSection of the Company'sour definitive Proxy
Statement for the 20052007 Annual Meeting of Stockholders entitled "Election of
Directors,"Directors", which Proxy Statement is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates (the "Proxy Statement").
The information required by this Item 10 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
to the sectionsections of the Proxy Statement entitled "Section 16(a) Beneficial
Ownership Reporting Compliance."Compliance". The information required by this Item 10
concerning the Audit Committee of the Company'sour Board of Directors and Audit Committee
financial experts is incorporated by reference to the Sectionsection of the Proxy
Statement entitled "Audit
Committee.""Meetings and Committees of the Board of Directors" and
"Corporate Governance". Information regarding our executive officers is
contained in Part I of this Form 10-K following Item 4 under the heading
"Executive Officers of the Registrant." The Company hasRegistrant". We have adopted a Code of Ethics that
applies to itsour chief executive officer and itsour senior financial officers, a copy
of which is filed as an Exhibit hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the sections of the Proxy Statement entitled "Compensation
Discussion and Analysis", "Executive Compensation"
"Employment and ChangeRelated Information",
"Potential Post Employment Payments", "Compensation of Control Arrangements," "Director Compensation,"Directors", "Compensation
Committee Interlocks and Insider Participation,"Participation" and "Compensation Committee
Report."Report".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 (other than the information
required by Section 201 (d) of Regulation S-K, which is set forth in Part I,II,
Item 5 of this Form 10-K) is incorporated herein by reference to the sections of
the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management."Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 is incorporated herein by
reference to the sectionsections of the Proxy Statement entitled "Other Matters - Related
Transactions.""Related Party
Transactions" and "Corporate Governance".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Except as set forth below, the information required by this Item 14 is
incorporated herein by reference to the section of the Proxy Statement entitled
"Ratification of Appointment of Independent Auditors."
The Company has recently been informed by its independent registered public
accounting firm, Ernst & Young LLP ("E&Y"), that Boardroom Limited
("Boardroom"), an entity which provided certain secretarial and directorship
services in Singapore during the period from July 1, 2002 to August 31, 2004 to
an inactive subsidiary of the Company, JWP Technical Services Pte Ltd ("JWP
Singapore"), would be considered an affiliate of E&Y for independence purposes
during such time period because 80% of Boardroom was owned in a personal
capacity by certain E&Y Singapore partners. In September 2004, the services of
Boardroom were terminated as JWP Singapore was dissolved. In addition, as of
November 1, 2004, Boardroom no longer would be considered an affiliate of E&Y
under the independence rules as on such date the E&Y Singapore partners sold
their interests in Boardroom. Regardless, because Boardroom would be considered
an affiliate of E&Y during the period from July 1, 2002 to August 31, 2004, the
non-audit services rendered by Boardroom may raise issues under the auditor
independence rules of Regulation S-X.
Based upon E&Y's disclosure, the Company, its Audit Committee and E&Y have
considered the impact the provision of such non-audit services may have had on
E&Y's independence with respect to the Company and have concluded there has been
no impairment of E&Y's independence as (a) such services were administrative in
nature, (b) the associated fees over the period during which the services were
provided aggregated to approximately $7,000.00, (c) the Company's subsidiary
involved was not material to the consolidated financial statements of the
Company and (d) the services have been discontinued.
55Auditors".
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)The following consolidated financial statements of EMCOR Group, Inc.
and Subsidiaries are included in Part II, Item 8:
Financial Statements:
Consolidated Balance Sheets -- December 31, 20042006 and 20032005
Consolidated Statements of Operations -- Years Ended December 31,
2004,
20032006, 2005 and 20022004
Consolidated Statements of Cash Flows -- Years Ended December 31,
2004,
20032006, 2005 and 20022004
Consolidated Statements of Stockholders' Equity and Comprehensive
Income -- Years Ended December 31, 2004, 20032006, 2005 and 20022004
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(a)(2)The following financial statement schedules are included in this Form
10-K report:
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(a)(3)The exhibits listed on the Exhibit Index are filed herewith in
response to this Item.
5663
SCHEDULE II
EMCOR GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2)ACCOUNTS (1) DEDUCTIONS (2) END OF YEAR
- --------------------------------------------------- ---------- --------- ----------------- ------------------------------- -------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 20042006 ...................... $43,706 7,026 -- (14,547) $36,185$29,973 1,112 957 (7,021) $25,021
Year Ended December 31, 20032005 ...................... $40,611 11,249 376 (8,530) $43,706$36,185 8,457 (540) (14,129) $29,973
Year Ended December 31, 20022004 ...................... $35,091 3,354 5,129 (2,963) $40,611$43,706 7,026 -- (14,547) $36,185
- ----------------------
(1) Amount principally relates to business acquisitions.acquisitions and divestitures.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
5764
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
2(a) -- Disclosure Statement and Third Amended Joint Plan of Exhibit 2(a) to EMCOR's
Reorganization (the "Plan of Reorganization") proposed by Registration Statement on Form 10 as
EMCOR Group, Inc. (formerly JWP INC.) (the "Company" originally filed March 17, 1995
or "EMCOR") and its subsidiary SellCo Corporation ("SellCo"), ("Form 10")
as approved for dissemination by the United States Bankruptcy
Court, Southern District of New York (the "Bankruptcy Court"),
on August 22, 1994.
2(b) -- Modification to the Plan of Reorganization dated September 29, 1994 Exhibit 2(b) to Form 10
2(c) -- Second Modification to the Plan of Reorganization dated Exhibit 2(c) to Form 10
September 30, 1994
2(d) -- Confirmation Order of the Bankruptcy Court dated September 30, Exhibit 2(d) to Form 10
1994 (the "Confirmation Order") confirming the Plan of
Reorganization, as amended
2(e) -- Amendment to the Confirmation Order dated December 8, 1994 Exhibit 2(e) to Form 10
2(f) -- Post-confirmation modification to the Plan of Reorganization Exhibit 2(f) to Form 10
entered on December 13, 1994
2.1 -- Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR's Report on Form
Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. Form 8-K dated February 14, 2002
3(a-1) -- Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10
December 15, 1994
3(a-2) -- Amendment dated November 28, 1995 to the Restated Certificate Exhibit 3(a-2) to EMCOR's Annual Report
of Incorporation of EMCOR Report on Form 10-K for the year ended
December 31, 1995 ("1995 Form 10-K")
3(a-3) -- Amendment dated February 12, 1998 to the Restated Certificate Exhibit 3(a-3) to EMCOR's Annual Report
of Incorporation Report on Form 10-K for the year ended
December 31, 1997 ("1997 Form 10-K")
3(a-4) Amendment dated January 27, 2006 to the Restated Certificate of Exhibit 3(a-4) to EMCOR's Annual Report
Incorporation for the year ended December 31, 2006
("2006 Form 10-K")
3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report
on Form 10-K for the year ended
December 31, 1998 ("1998 Form 10-K")
3(c) -- Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on theForm 8-K
Bank of New York Form 8-K dated March 3, 1997
4.1(a) --4(a) U.S. $275,000,000$375,000,000 Credit Agreement dated October 14, 2005 by and among EMCOR Exhibit 4.1(a)4 to EMCOR's Report on Form 8-K
and among EMCOR Group, Inc.Inc and certain of its Subsidiariessubsidiaries and (Date of Report October 17, 2005)
Harris Trust and Form 8-K
Savings BankN.A. individually and as Agent andfor the Lenders which dated October 4, 2002 are
or become parties thereto dated as of September 26, 2002
(the "Credit Agreement")
4.1(b) -- Amendment4(b) Assignment and Waiver letterAcceptance dated December 10, 2002October 14, 2005 between Exhibit 4(b) to 2006 Form 10-K
Harris Nesbitt Financing, Inc. ("HNF") as assignor, and Bank of
Montreal, as assignee of 100% interest of HNF in the Exhibit 4.1(b) to EMCOR's Annual Credit
Agreement Report onto Bank of Montreal
4(c) Commitment Amount Increase Request dated November 21, 2005 Exhibit 4(c) to 2006 Form 10-K
forbetween EMCOR and the year
ended December 31, 2002 ("2002Northern Trust Company effective
November 29, 2005 pursuant to Section 1.10 of the Credit
Agreement
4(d) Commitment Amount Increase Request dated November 21, 2005 Exhibit 4(d) to 2006 Form 10-K")10-K
between EMCOR and Bank of Montreal effective November 29,
2005 pursuant to Section 1.10 of the Credit Agreement
4(e) Commitment Amount Increase Request dated November 21, 2005 Exhibit 4(e) to 2006 Form 10-K
between EMCOR and National City Bank of Indiana effective
November 29, 2005 pursuant to Section 1.10 of the Credit
Agreement
4(f) Assignment and Acceptance dated November 29, 2005 between Exhibit 4(f) to 2006 Form 10-K
Bank of Montreal, as assignor, and Fifth Third Bank, as assignee,
of 30% interest of Bank of Montreal in the Credit Agreement to
Fifth Third Bank
5865
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
4.1(c) -- First Amendment4(g) Assignment and Acceptance dated November 29, 2005 between Exhibit 4(g) to Credit Agreement dated as of June 2003 Exhibit 4.1(c) to EMCOR's Quarterly
Report on2006 Form 10-Q for the quarter
ended June 30, 2003 ("June 2003
Form 10-Q")
4.1(d) -- Second Amendment to Credit Agreement dated as of June 2003 Exhibit 4.1(d) to June 2003 Form 10-Q
4.1(e) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(e) to June 2003 Form 10-Q
Harris, National City Bank and EMCOR
4.1(f) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(f) to June 2003 Form 10-Q
Harris, Webster Bank and EMCOR
4.1(g) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(g) to June 2003 Form 10-Q
Harris, Union10-K
Bank of California, N.A.Montreal, as assignor, and EMCOR
4.1(h) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(h) to June 2003 Form 10-Q
Harris, Sovereign Bank and EMCOR
4.1(i) -- Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(i) to June 2003 Form 10-Q
Harris, Bank Hapoalim B.M. and EMCOR
4.1(j) -- Commitments Amount Increase Request dated July 9, 2003 among Exhibit 4.1(j) to June 2003 Form 10-Q
Harris, The Governor andNorthern Trust Company,
as assignee, of 20% interest of Bank of Scotland and
EMCOR
4.1(k) - Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(k)Montreal in the Credit
Agreement to June 2003 Form 10-Q
Harris, U.S. Bank, National Association and EMCOR
4.2 -- Subordinated Indenture dated as of March 18, 1998 Exhibit 4(b) to EMCOR's Quarterly
("Indentured") between EMCOR and State Street Bank and Report on Form 10-Q for the quarterNorthern Trust Company
as Trustee ("State Street Bank") ended March 31, 1998 ("March 1998
Form 10-Q")
4.3 -- First Supplemental Indenture dated as of March 18, 1998 to Exhibit 4(c) to March 1998 Form 10-Q
Indenture10(a) Severance Agreement between EMCOR and State Street Bank
4.4 -- Indenture dated as of December 15, 1994, between SellCo and Exhibit 4.4 to Form 10
Fleet National Bank of Connecticut, as trustee, in
respect of SellCo's 12% Subordinated Contingent Payment
Notes, Due 2004
10(a) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(a) to EMCOR's Annual EMCOR and Frank T. MacInnis Exhibit 10.2 to EMCOR's Report on
Form 8-K (Date of Report April 25, 2005)
("April 2005 Form 8-K")
10(b) Form of Severance Agreement between EMCOR and each of Exhibit 10.1 to the April 2005 Form 8-K
Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz and
Mark A. Pompa
10(c) Letter Agreement dated October 12, 2004 between Anthony Guzzi Exhibit 10.1 to EMCOR's Report on Form
and EMCOR (the "Guzzi Letter Agreement") 8-K (Date of Report October 12, 2004)
10(d) Form of Confidentiality Agreement Exhibit C to Guzzi Letter Agreement
10(e) Form of Indemnification Agreement between EMCOR and each Exhibit F to Guzzi Letter Agreement
of its officers and directors
10(f) Severance Agreement dated October 25, 2005 between Anthony Exhibit D to the Guzzi Letter Agreement
Guzzi and EMCOR
10(g-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(g-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report
on Form 10-K for the year ended
December 31, 2001 ("2001 Form 10-K")
10(b) -- Employment Agreement made as10(g-3) Amendment to Section 13 of January 1, 2002 betweenthe 1994 Option Plan Exhibit 10(b)(g-3) to 2001 Form 10-K
EMCOR and Sheldon I. Cammaker
10(c) -- Employment Agreement made as of January 1, 2002 between10(h-1) 1995 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(c)10(p) to 2001 Form 10-K
EMCOR and Leicle E. Chesser
10(d) -- Employment Agreement made as("1995 Option Plan")
10(h-2) Amendment to Section 10 of January 1, 2002 betweenthe 1995 Option Plan Exhibit 10(d)(h-2) to 2001 Form 10-K
EMCOR and Jeffrey M. Levy
10(e) -- Employment Agreement made as10(i-1) 1997 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(k) to EMCOR's Annual Report
("1997 Option Plan") on Form 10-K for the year ended
December 31, 1999 ("1999 Form 10-K")
10(i-2) Amendment to Section 9 of January 1, 2002 betweenthe 1997 Option Plan Exhibit 10(e)10(i-2) to 2001 Form 10-K
EMCOR and R. Kevin Matz
10(f) -- Employment10(j) 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
10(k-1) Continuity Agreement madedated as of January 1, 2002June 22, 1998 between Frank T. Exhibit 10(f)10(a) to 2001EMCOR's Quarterly
MacInnis and EMCOR ("MacInnis Continuity Agreement") Report on Form 10-K10-Q for the quarter ended
June 30, 1998 ("June 1998 Form 10-Q")
10(k-2) Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) for the quarter ended June
Agreement 30, 1999 ("June 1999 Form 10-Q")
10(l-1) Continuity Agreement dated as of June 22, 1998 between Sheldon Exhibit 10(c) to the June 1998 Form 10-Q
I. Cammaker and EMCOR ("Cammaker Continuity Agreement")
10(l-2) Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to the June 1999 Form 10-Q
Agreement
10(m-1) Continuity Agreement dated as of June 22, 1998 between Leicle Exhibit 10(d) to the June 1998 Form 10-Q
E. Chesser and Mark A. PompaEMCOR ("Chesser Continuity Agreement")
5966
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(m-2) Amendment dated as of May 4, 1999 to Chesser Continuity Exhibit 10(j) to the June 1999 Form 10-Q
Agreement
10(n-1) Continuity Agreement dated as of June 22, 1998 between R. Exhibit 10(f) to the June 1998 Form 10-Q
Kevin Matz and EMCOR ("Matz Continuity Agreement")
10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q
Agreement
10(n-3) Amendment dated as of January 1, 2002 to Matz Continuity Exhibit 10(o-3) to Form 10-Q for the
Agreement quarter ended March 31, 2002 ("March
2002 Form 10-Q")
10(o-1) Continuity Agreement dated as of June 22, 1998 between Mark A. Exhibit 10(g) --to the June 1998 Form 10-Q
Pompa and EMCOR ("Pompa Continuity Agreement")
10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Exhibit 10(n) to the June 1999 Form 10-Q
Agreement
10(o-3) Amendment dated as of January 1, 2002 to Pompa Continuity Exhibit 10(p-3) to the March 2002 Form
Agreement 10-Q
10(p) Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
dated October 12,between Anthony Guzzi ("Guzzi") and EMCOR
10(q-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Exhibit 4.1 to EMCOR's Registration
Plan") Statement on Form S-8 (No. 333-112940
filed with the Securities and Exchange
Commission on February 18, 2004
between("2004 Form S-8")
10(q-2) Form of Certificate Representing Restrictive Stock Units Exhibit 10.1 to EMCOR's Report on Form
("RSU's") issued under the Stock Bonus Plan Manditorily 8-K (Date of Report March 4, 2005) (the
Awarded "March 4, 2005 Form 8-K")
10(q-3) Form of Certificate Representing RSU's issued under the Stock Exhibit 10.2 to March 4, 2005 Form 8-K
Bonus Plan Voluntarily Awarded
10(r) Incentive Plan for Senior Executive Officers of EMCOR Group, Exhibit 10.110.3 to March 4, 2005 Form 8-K
Inc. ("Incentive Plan for Senior Executives")
10(s) First Amendment to Incentive Plan for Senior Executives Exhibit 10(t) to 2006 Form 10-K
10(t) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of and Anthony Guzzi (the "Guzzi Letter Agreement") Report
October 12, 2004)
10(h) -- Severance Agreement dated October 25, 2005 between EMCOR Exhibit D to the Guzzi Letter
and Anthony Guzzi Agreement
10(h-1) -- 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(h-2) -- Amendment to Section 12 of the 1994 Option Plan Exhibit 10(g-2) to 2001 Form 10-K
10(h-3) -- Amendment to Section 13 of the 1994 Option Plan Exhibit 10(g-3) to 2001 Form 10-K
10(i-1) -- 1995December 15, 2005)
10(u-1) 2003 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(p)A to Form 10EMCOR's proxy statement
("1995 Option Plan"2003 Proxy Statement") 10(i-2) --for its annual
meeting held June 12, 2003
10(u-2) First Amendment to Section 10 of the 1995 Option2003 Non-Employees Director Plan * Page __
10(v-1) 2003 Management Stock Incentive Plan Exhibit 10(h-2)B to 2001 Form 10-K
10(j-1) -- 1997 Non-Employee Directors' Non-QualifiedEMCOR's 2003 Proxy Statement
10(v-2) Amendments to 2003 Management Stock OptionIncentive Plan Exhibit 10(k)10(t-2) to EMCOR's Annual
("1997 Option Plan") Report
on Form 10-K for the year ended
December 31, 1999 (the "1999
Form 10-K")
10(j-2) -- Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 20012003 ("2003 Form 10-K
10(k) -- 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
10(l-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(a) to EMCOR's Quarterly
Frank T. MacInnis and EMCOR ("MacInnis Continuity Agreement"10-K") Report on Form 10-Q for the quarter
ended June 30, 1998 ("June 1998 Form
10-Q")
10(l-2) -- Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) for the quarter ended
Agreement June 30, 1999 (June 1999 Form 10-Q)
10(m-1) -- Continuity Agreement dated as of June 22, 1998 between Sheldon I. Exhibit 10(c) to the June 1998 Form
Cammaker and EMCOR ("Cammaker Continuity Agreement") 10-Q
10(m-2) -- Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to June 1999 Form 10-Q
Agreement
10(n-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(d) to the June 1998 Form
Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement") 10-Q
10(n-2) -- Amendment dated as of May 4, 1999 to Chesser Continuity Agreement Exhibit 10(j) to June 1999 Form 10-Q
10(o-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(b) to the June 1998 Form
Jeffrey M. Levy and EMCOR ("Levy Continuity Agreement") 10-Q
10(o-2) -- Amendment dated as of May 4, 1999 to Levy Continuity Agreement Exhibit 10(l) to June 1999 Form 10-Q
10(p-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form
R. Kevin Matz and EMCOR ("Matz Continuity Agreement") 10-Q
10(p-2) -- Amendment dated as of May 4, 1999 to Matz Continuity Agreement Exhibit 10(m) to June 1999 Form 10-Q
10(p-3) -- Amendment dated as of January 1, 2002 to Matz Exhibit 10(o-3) to Form 10-Q for the
Continuity Agreement quarter ended ("March 2002 10-Q")
10(p-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form
Mark A. Pompa and EMCOR ("Pompa Continuity Agreement") 10-Q
10(p-2) -- Amendment dated as of May 4, 1999 to Pompa Continuity Agreement Exhibit 10(n) to June 1999 Form 10-Q
6067
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(p-3) --10(v-3) Second Amendment dated asto 2003 Management Stock Incentive Plan * Page __
10(w) Form of Stock Option Agreement evidencing grant of stock Exhibit 10.1 to Form 8-K (Date of Report
options under the 2003 Management Stock Incentive Plan January 1, 2002 to Pompa Exhibit 10(p-3) to March 2002
Continuity Agreement Form 10-Q
10(p-4) -- Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
between Anthony Guzzi and EMCOR
10(q) -- Release and Settlement Agreement dated December 22, 1999 Exhibit 10(q) to 1999 Form 10-K
between EMCOR and Thomas D. Cunningham
10(r) --5, 2005)
10(x) Key Executive StockIncentive Bonus Plan as amended Exhibit 4.1B to EMCOR's RegistrationProxy Statement on Form S-8) (No.
333-112940) filed with the
Securities and Exchange Commission
on February 18, 2004 (the "2004 Form
S-8")
10(s) -- 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's proxy statement for
its annual meeting held June 12, 200316, 2005
("20032005 Proxy Statement")
10(t-1) -- 200310(y) 2005 Management Stock Incentive Plan Exhibit BC to EMCOR's 20032005 Proxy Statement
10(t-2) -- Amendments10(z) First Amendment to 20032005 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual
Report on Form 10-K* Page __
10(a)(a-1) 2005 Stock Plan for the year
ended December 31, 2003 ("2003
Form 10-K")
10(u) -- Key Executive Incentive Bonus PlanDirectors Exhibit C to EMCOR's 20032005 Proxy Statement
10(v) --10(a)(a-2) First Amendment to 2005 Stock Plan for Directors * Page __
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis dated Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(w) --10(c)(c) Form of EMCOR Option Agreement for Messrs. Frank T. MacInnis, Exhibit 4.5 to 2004 Form S-8
MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E.
Chesser, R. Kevin Matz and Mark A. Pompa (collectively the
"Executive Officers") for options granted January 4, 1999,
January 3, 2000 and January 2, 2001
10(x) --10(d)(d) Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.6 to 2004 Form S-8
granted December 14, 2001
10(y) --10(e)(e) Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.7 to 2004 Form S-8
granted January 2, 2002, January 2, 2003 and January 2, 2004
10(z) --10(f)(f) Form of EMCOR Option Agreement for Directors granted June 19, Exhibit 4.8 to 2004 Form S-8
19, 2002, October 25, 2002 and February 27, 2003
10(aa) --10(g)(g) Form of EMCOR Option Agreement between EMCORfor Executive Officers and AnthonyExhibit 10(g)(g) to 2005 Form 10-K
Guzzi Exhibit A to Guzzi Letter Agreement
dated October 25, 2004
10(bb) -- Form of Option Agreement between EMCOR and executive
officers Exhibit 10.1 to Form 8-K (Date of dated January 3, 2005
Report January 3, 2005)
10(cc) -- Restricted Stock Unit Agreement between EMCOR and Anthony Guzzi Exhibit B to Guzzi Letter Agreement
dated October 25, 2004
10(d)(d) --10(h)(h) Release and Settlement Agreement dated February 25, 2004 PageExhibit 10 (a)(a) to EMCOR's Annual
between Jeffrey M. Levy*Levy and EMCOR Report on Form 10-K for the year ended
December 31, 2004 ("2004 Form 10-K")
10(i)(i) Form of letter agreement between EMCOR and each Executive Exhibit 10(b)(b) to 2004 Form 10-K
Officer with respect to acceleration of options granted
January 2, 2003 and January 2, 2004
11 Computation of Basic EPS and Diluted EPS for the years ended Page __
December 2006 and 2005*
14 Code of Ethics of EMCOR for Chief Executive Officer and Senior Exhibit 14 to 2003 Form 10-K
Financial Officers
21 List of Significant Subsidiaries * Page __
23.1 Consent of Ernst & Young LLP * Page __
6168
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(e)(e) -- Form of letter agreement between EMCOR and each executive officer Page
with respect to acceleration of options granted January 2, 2003
and January 2, 2004*
10(ff) -- Form of Confidentiality Agreement between EMCOR and Executive Exhibit C to Guzzi Letter Agreement
Officers
10(gg) -- Form of Indemnification Agreement between EMCOR and each of Exhibit F to Guzzi Letter Agreement
its officers and directors
11 -- Computation of Basic EPS and Diluted EPS for the years ended Page
December 2004 and 2003*
14 -- Code of Ethics of EMCOR for Chief Executive Officer and Exhibit 14 to EMCOR's 2003 Form
Senior Financial Officers 10-K
16 -- Current Report on Form 8-K - Changes in Registrant's Certifying Exhibit 16 to EMCOR's Report on
Accountant, dated May 15, 2002 Form 8-K dated May 15, 2002
21 -- List of Significant Subsidiaries* Page
23.1 -- Consent of Ernst & Young LLP* Page
31.1 -- Certification Pursuant to Section 302 of the Sarbanes -- OxleySarbanes-Oxley Act Page Act__
of 2002 by the Chairman of the Board of Directors and Chief
Executive Officer*Officer *
31.2 -- Certification Pursuant to Section 302 of the Sarbanes -- OxleySarbanes-Oxley Act Page Act__
of 2002 by the Executive Vice President and Chief Financial
Officer*Officer *
32.1 -- Certification Pursuant to Section 906 of the Sarbanes -- OxleySarbanes-Oxley Act Page Act__
of 2002 by the Chairman of the Board of Directors and Chief
Executive Officer**Officer **
32.2 -- Certification Pursuant to Section 906 of the Sarbanes -- OxleySarbanes-Oxley Act Page __
of 2002 by the Executive Vice President and Chief Financial
Officer**Officer **
- --------------------------
* Filed Herewith
** Furnished Herewith
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Registrant hereby undertakes to furnish
a copy of any unfiledunfilled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
6269
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
EMCOR GROUP, INC.
(Registrant)
Date: March 8, 2005February 22, 2007 by /s/ FRANK T. MACINNIS
----------------------------------
FRANK T. MACINNIS
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 8, 2005.FEBRUARY 22, 2007.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors and
- -------------------------------------------------------------- Chief Executive Officer
Frank T. MacInnis (Principal Executive Officer)
/s/ STEPHEN W. BERSHAD Director
- --------------------------------------------------------------
Stephen W. Bershad
/s/ DAVID A. B. BROWN Director
- --------------------------------------------------------------
David A. B. Brown
/s/ LARRY J. BUMP Director
- --------------------------------------------------------------
Larry J. Bump
/s/ ALBERT FRIED, JR. Director
- --------------------------------------------------------------
Albert Fried, Jr.
/s/ RICHARD F. HAMM, JR. Director
- --------------------------------------------------------------
Richard F. Hamm, Jr.
/s/ MICHAEL T. YONKER Director
- --------------------------------------------------------------
Michael T. Yonker
/s/ LEICLE E. CHESSERMARK A. POMPA Executive Vice President and
- -------------------------------------------------------------- Chief Financial Officer
Leicle E. Chesser (Principal Financial Officer)
/s/ MARK A. POMPA Senior Vice President,
- -------------------------------- Chief Accounting Officer and Treasurer
Mark A. Pompa (Principal Financial and Accounting Officer)
6370