FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 0-2315
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EMCOR Group, Inc.
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(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 Number)
101 Merritt Seven Corporate Park
Norwalk, Connecticut 06851-1060
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(Address of principal executive offices) (Zip Code)
(203) 849-7800
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(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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
filing requirements for the past 90 days. Yes X No ___
--- ---
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on
October 21, 2002: 14,907,973 shares.
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
as of September 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Operations -
three months ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income -
nine months ended September 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
Item 4 Controls and Procedures 25
PART II - Other Information
Item 1 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 6 Exhibits and Reports on Form 8-K 26
16
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 88,853 $ 189,766
Accounts receivable, net 926,291 777,102
Costs and estimated earnings in excess
of billings on uncompleted contracts 237,296 221,272
Inventories 10,536 7,158
Prepaid expenses and other 25,693 22,026
---------- ----------
Total current assets 1,288,669 1,217,324
Investments, notes and other long-term
receivables 26,604 16,817
Property, plant and equipment, net 55,966 42,548
Goodwill, net 186,862 56,011
Other assets 23,064 16,964
---------- ----------
Total assets $1,581,165 $1,349,664
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 22,193 $ 947
Accounts payable 361,916 313,227
Billings in excess of costs and estimated
earnings on uncompleted contracts 404,882 319,165
Accrued payroll and benefits 138,107 121,196
Other accrued expenses and liabilities 101,420 99,726
---------- ----------
Total current liabilities 1,028,518 854,261
Long-term debt and capital lease obligations 815 848
Other long-term obligations 82,371 72,622
---------- ----------
Total liabilities 1,111,704 927,731
---------- ----------
Stockholders' equity:
Preferred stock, $0.10 par value, 1,000,000
shares authorized, zero issued and outstanding -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,905,896 and 14,815,007 shares
issued and outstanding, respectively 159 159
Capital surplus 311,122 307,636
Accumulated other comprehensive loss (2,940) (5,424)
Retained earnings 177,956 136,398
Treasury stock, at cost 1,131,985 shares (16,836) (16,836)
---------- ----------
Total stockholders' equity 469,461 421,933
---------- ----------
Total liabilities and stockholders' equity $1,581,165 $1,349,664
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
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Three months ended September 30, 2002 2001
- --------------------------------------------------------------------------------
Revenues $1,052,285 $848,629
Cost of sales 923,052 747,762
---------- --------
Gross profit 129,233 100,867
Amortization of goodwill -- 1,275
Selling, general and administrative expenses 93,375 73,357
----------- --------
Operating income 35,858 26,235
Interest (expense) income, net (1,073) 1,070
----------- --------
Income before income taxes 34,785 27,305
Income tax provision 15,306 12,014
---------- --------
Net income $ 19,479 $ 15,291
========== ========
Basic earnings per share $ 1.31 $ 1.03
========== ========
Diluted earnings per share $ 1.26 $ 1.00
========== ========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
- ------------------------------------------------------------- ------------------
Nine months ended September 30, 2002 2001
- ------------------------------------------------------------- ------------------
Revenues $2,848,983 $2,555,690
Cost of sales 2,510,148 2,281,560
---------- ----------
Gross profit 338,835 274,130
Amortization of goodwill -- 3,949
Selling, general and administrative expenses 263,522 211,939
---------- ----------
Operating income 75,313 58,242
Interest (expense) income, net (1,101) 85
---------- ----------
Income before income taxes 74,212 58,327
Income tax provision 32,654 25,757
---------- ----------
Net income $ 41,558 $ 32,570
========== ==========
Basic earnings per share $ 2.80 $ 2.64
========== ==========
Diluted earnings per share $ 2.69 $ 2.25
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
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Nine months ended September 30, 2002 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 41,558 $ 32,570
Depreciation and amortization 11,477 9,272
Amortization of goodwill -- 3,949
Other non-cash expenses 2,421 27,401
Changes in operating assets and liabilities,
excluding the effect of business acquired 34,657 (19,507)
--------- ---------
Net cash provided by operating activities 90,113 53,685
--------- ---------
Cash flows from investing activities:
Payments for acquisitions of businesses, net of
cash acquired, and related earn-out agreements (169,787) (6,636)
Proceeds from sale of assets 987 1,066
Purchase of property, plant and equipment (12,935) (12,646)
Net (increase) decrease in investments (9,641) 94
--------- --------
Net cash used in investing activities (191,376) (18,122)
--------- --------
Cash flows from financing activities:.......
Net repayments of long-term debt and capital lease
obligations (1,047) (462)
Net proceeds from exercise of stock options 1,397 1,946
--------- --------
Net cash provided by financing activities 350 1,484
--------- --------
(Decrease) increase in cash and cash equivalents (100,913) 37,047
Cash and cash equivalents at beginning of year 189,766 137,685
--------- --------
Cash and cash equivalents at end of period $ 88,853 $174,732
========= ========
Supplemental cash flow information:
Cash paid for:
Interest $ 5,413 $ 3,567
Income taxes $ 41,059 $ 4,513
Non-cash financing activities:
Debt assumed in acquisition $ 22,115 --
5 3/4% Convertible Subordinated Notes due
2005, converted into common stock -- $115,000
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Capital comprehensive Retained Treasury Comprehensive
Total stock surplus loss (1) earnings stock income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 $233,503 $117 $167,742 $(3,906) $ 86,386 $(16,836)
Net income 32,570 -- -- -- 32,570 -- $32,570
Foreign currency translation
adjustments (1,197) -- -- (1,197) -- -- (1,197)
-------
Comprehensive income -- -- -- -- -- -- $31,373
=======
Provision in lieu of
income taxes 21,449 -- 21,449 -- -- --
Common stock issued under
stock option plans 1,946 -- 1,946 -- -- --
Conversion of 5 3/4%
convertible subordinated
notes (2) 113,874 42 113,832 -- -- --
Value of Restricted Stock
Units (3) 2,050 -- 2,050 -- -- --
-------- ---- -------- ------- -------- --------
Balance, September 30, 2001 $404,195 $159 $307,019 $(5,103) $118,956 $(16,836)
======== ==== ======== ======= ======== ========
Balance, January 1, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836)
Net income 41,558 -- -- -- 41,558 -- $41,558
Foreign currency translation
adjustments 2,484 -- -- 2,484 -- -- 2,484
-------
Comprehensive income -- -- -- -- -- -- $44,042
=======
Common stock issued under
stock option plans 1,397 -- 1,397 -- -- --
Value of Restricted Stock
Units (3) 2,089 -- 2,089 -- -- --
-------- ---- -------- ------- -------- --------
Balance, September 30, 2002 $469,461 $159 $311,122 $(2,940) $177,956 $(16,836)
======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments.
(2) Represents conversion of $115.0 million 5 3/4% convertible subordinated
notes into common stock, net of related interest and deferred financing
costs.
(3) 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 and the current year compensation expense due to an increase in
market value of the underlying common stock.
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
by EMCOR Group, Inc. and Subsidiaries ("EMCOR"), without audit, pursuant to the
interim period reporting requirements of Form 10-Q. Consequently, certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. Readers of this report should
refer to the consolidated financial statements and the notes thereto included in
EMCOR's latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
In the opinion of EMCOR, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of a normal
recurring nature) necessary to present fairly the financial position of EMCOR
and the results of its operations. The results of operations for the three and
nine month periods ended September 30, 2002 are not necessarily indicative of
the results to be expected for the year ending December 31, 2002.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
NOTE B Acquisition of Businesses
On March 1, 2002, EMCOR acquired nineteen subsidiaries of Comfort Systems USA,
Inc. ("Comfort"). Accordingly, the Consolidated Results of Operations for EMCOR
for the three and nine months ended September 30, 2002 include the results of
operations for the acquired companies since March 1, 2002. The purchase price
paid for a 100% voting interest of the acquired Comfort Companies was $186.25
million and was comprised of $164.15 million in cash and $22.1 million by
assumption of Comfort's notes payable to former owners of certain of the
acquired companies. Pursuant to the terms of the acquisition agreement an
additional $7.1 million of purchase price was paid by EMCOR to Comfort
subsequent to the acquisition date due to a working capital adjustment related
to excess cash and/or net assets in the opening balance sheet. The acquisition
was paid with $114.15 million of EMCOR's funds and $50.0 million from borrowings
under EMCOR's revolving credit facility. The acquired companies, which are based
predominantly in the Midwest United States 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.
EMCOR believes the addition of these companies, which are in geographic markets
where EMCOR did not have significant presence, will further EMCOR's goal of
market and geographic diversification. Additionally, the acquisition creates
more opportunities for EMCOR companies to collaborate on national facilities
services contracts. These factors contributed to preliminary goodwill of $122.2
million, which represents the excess of purchase price paid to the estimated
fair value of the net assets at date of acquisition.
The Comfort acquisition is being accounted for in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141 is discussed further in Note C, "Significant Accounting Policies." The
cost of the acquisition was preliminarily allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. EMCOR is currently finalizing the fair value of these assets and
liabilities. Therefore, the allocation of the purchase price is subject to
adjustment.
NOTE B Acquisition of Businesses - (Continued)
The following table summarizes the preliminary purchase price allocation related
to the aforementioned acquisition (in thousands):
At Sept. 30, 2002
-----------------
Current assets, including cash acquired $161,197
Property, plant and equipment 11,384
Goodwill 122,187
Other assets 3,184
--------
Total assets acquired 297,952
--------
Current liabilities 104,299
Long-term obligations 288
--------
Total liabilities assumed 104,587
--------
Net assets acquired 193,365
Notes payable assumed 22,115
--------
Cash purchase price $171,250
========
The goodwill of $122.2 million was allocated primarily to the United States
mechanical construction and facilities services operating segment. It is
expected that most of the goodwill associated with the acquisition will be
deductible for tax purposes. In accordance with SFAS 141 and SFAS 142, goodwill
will not be amortized, while certain other intangible assets that have been
identified will be subject to amortization over their useful lives. As of
September 30, 2002, $0.3 million of the Notes payable assumed have been paid by
EMCOR.
NOTE C Significant Accounting Policies
EMCOR has adopted the following accounting standards issued by the Financial
Accounting Standards Board ("FASB"): SFAS 141 and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 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. SFAS 142
requires goodwill to be tested for impairment on an annual basis and between
annual tests under certain circumstances, and written down when impaired, rather
than being amortized as previous standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite. After the
initial impairment review required by SFAS 142, EMCOR has determined that the
adoption of SFAS 142 did not result in the impairment of the carrying value of
its existing goodwill.
NOTE C Significant Accounting Policies - (Continued)
The following table provides a reconciliation of the prior year's reported net
income to adjusted net income had SFAS 142 been applied as of the beginning of
fiscal 2001.
For the three months ended
September 30, 2001
------------------------------------------------------------------
Basic Diluted
-------------------------------- --------------------------------
Income available Income available
to common Earnings to common Earnings
stockholders per share stockholders per share
------------------ --------- ------------------ ---------
Reported net income attributed to
EMCOR common stock $15,291,000 $1.03 $15,291,000 $1.00
Add back amortization of goodwill,
net of income tax 714,000 0.05 714,000 0.05
----------- ----- ----------- -----
Adjusted net income attributed to
EMCOR common stock $16,005,000 $1.08 $16,005,000 $1.05
=========== ===== =========== =====
For the nine months ended
September 30, 2001
------------------------------------------------------------------
Basic Diluted
-------------------------------- --------------------------------
Income available Income available
to common Earnings to common Earnings
stockholders per share stockholders per share
---------------- --------- ------------------ ---------
Reported net income attributed to
EMCOR common stock $32,570,000 $2.64 $34,305,395 $2.25
Add back amortization of goodwill,
net of income tax 2,211,440 0.18 2,211,440 0.15
----------- ----- ----------- -----
Adjusted net income attributed to
EMCOR common stock $34,781,440 $2.82 $36,516,835 $2.40
=========== ===== =========== =====
The changes in the carrying amount of Goodwill during the nine months ended
September 30, 2002 were as follows (in thousands):
For the nine months
ended Sept. 30, 2002
---------------------
Balance at beginning of period $ 56,011
Acquisition of businesses 123,278
Earn-out payments on acquisitions 7,573
--------
Balance at end of period $186,862
========
As of September 30, 2002, the purchase accounting related to the acquisition of
the companies acquired was preliminary. As such, the allocation of goodwill to
operating segments has not been finalized. Preliminarily, however, the goodwill
of $122.2 million has been allocated primarily to the United States mechanical
construction and facilities services segment.
NOTE C Significant Accounting Policies - (Continued)
The FASB has issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 establishes a single accounting model based on the framework
established in Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS
144 provides accounting guidance for long-lived assets to be disposed of by
sale, and resolves significant implementation issues related to SFAS 121. This
statement also supercedes the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the
disposal of a segment of a business. The adoption of SFAS 144, which was
effective January 1, 2002, did not have a material impact on EMCOR's results of
operations, financial position or cash flows.
NOTE D Pro Forma Results of Operations
The following tables present pro forma results of operations including the
companies acquired from Comfort as if the acquisition had occurred at the
beginning of fiscal 2001. The unaudited pro forma results of operations are not
necessarily indicative of the results of operations had the acquisition actually
occurred at the beginning of fiscal 2001, nor is it necessarily indicative of
future operating results (in thousands, except per share data):
Actual Pro Forma
------ ---------
Results of Operations Pro Forma Results of Operations
For the three months ended For the nine months ended
---------------------------------- ---------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $1,052,285 $1,021,597 $2,943,067 $3,054,840
Operating income $ 35,858 $ 35,167 $ 75,273 $ 80,603
Interest (expense) income, net $ (1,073) $ 688 $ (939) $ ( 1,066)
Income before income taxes $ 34,785 $ 35,855 $ 74,334 $ 79,537
Net income $ 19,479 $ 20,079 $ 41,627 $ 44,541
Basic earnings per share $ 1.31 $ 1.36 $ 2.80 $ 3.61
Diluted earnings per share $ 1.26 $ 1.31 $ 2.69 $ 2.92
The pro forma results of operations, for segment information, is included in
Note G Segment Information.
NOTE E Earnings Per Share
The following tables summarize EMCOR's calculation of Basic and Diluted Earnings
per Share ("EPS") for the three and nine month periods ended September 30, 2002
and 2001:
Three months ended
September 30, 2002
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
Basic EPS
Income available to common
stockholders $19,479,000 14,905,849 $1.31
=====
Effect of Dilutive Securities
Options to purchase shares of
common stock -- 560,118
----------- ----------
Diluted EPS $19,479,000 15,465,967 $1.26
=========== ========== =====
Nine months ended
September 30, 2002
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
Basic EPS
Income available to common
stockholders $41,558,000 14,866,212 $2.80
=====
Effect of Dilutive Securities
Options to purchase shares of
common stock -- 590,183
----------- ----------
Diluted EPS $41,558,000 15,456,395 $2.69
=========== ========== =====
Three months ended
September 30, 2001
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
Basic EPS
Income available to common
stockholders $15,291,000 14,801,296 $1.03
=====
Effect of Dilutive Securities:
Options to purchase shares of
common stock -- 495,295
----------- ----------
Diluted EPS $15,291,000 15,296,591 $1.00
=========== ========== =====
NOTE E Earnings Per Share (Continued)
Nine months ended
September 30, 2001
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------
Basic EPS
Income available to common
stockholders $32,570,000 12,323,302 $2.64
=====
Effect of Dilutive Securities
Convertible Subordinated Notes, including
assumed interest savings, net of tax 1,735,395 2,430,258
Options to purchase shares of
common stock -- 461,444
----------- ----------
Diluted EPS $34,305,395 15,215,004 $2.25
=========== ========== =====
There were no anti-dilutive stock options that were required to be excluded from
the calculation of diluted EPS for the three and nine month periods ended
September 30, 2002 and 2001.
NOTE F Long-Term Debt
Long-term debt in the accompanying Condensed Consolidated Balance Sheets
consisted of the following amounts (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Notes assumed in acquisition of Comfort
companies $21,815 $ --
Note Payable -- 573
Capitalized lease obligations 352 249
Other 841 973
------- ------
23,008 1,795
Less: current maturities 22,193 947
------- ------
$ 815 $ 848
======= ======
The notes assumed in connection with the acquisition of the Comfort companies
represent payments due to certain former owners of the acquired companies. The
notes assumed accrue interest at a 10% annual interest rate and are payable in
full in April 2003. The $573,000 Note Payable outstanding at December 31, 2001
was paid in January 2002.
NOTE G Segment Information
EMCOR has the following reportable segments: United States electrical
construction and facilities services, United States mechanical construction and
facilities services, United States other services, Canada construction and
facilities services, United Kingdom construction and facilities services and
Other international construction and facilities services. The segment "United
States other services" primarily represents those operations which principally
provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR's operations outside of
the United States, Canada, and the United Kingdom, primarily South Africa, the
Middle East and Europe performing electrical construction, mechanical
construction and facilities services. The pro forma information includes the
results of operations for the companies acquired from Comfort as if they were
acquired by EMCOR effective January 1, 2001.
The following presents information about industry segments and geographic areas
(in thousands):
For the three months ended September 30,
As Reported Pro Forma
-----------------------------------------
2002 2001 2001
---- ---- ----
Revenues from unrelated entities:
United States electrical construction and facilities services $ 291,999 $300,873 $ 304,369
United States mechanical construction and facilities services 458,408 322,167 491,639
United States other services 66,455 57,048 57,048
---------- -------- ----------
Total United States operations 816,862 680,088 853,056
Canada construction and facilities services 91,329 53,415 53,415
United Kingdom construction and facilities services 144,094 110,332 110,332
Other international construction and facilities services -- 4,794 4,794
---------- -------- ----------
Total worldwide operations $1,052,285 $848,629 $1,021,597
========== ======== ==========
Total revenues:
United States electrical construction and facilities services $ 307,497 $307,006 $ 310,502
United States mechanical construction and facilities services 459,222 328,734 498,206
United States other services 66,857 58,211 58,211
Less intersegment revenues (16,714) (13,863) (13,863)
---------- -------- ----------
Total United States operations 816,862 680,088 853,056
Canada construction and facilities services 91,329 53,415 53,415
United Kingdom construction and facilities services 144,094 110,332 110,332
Other international construction and facilities services -- 4,794 4,794
---------- -------- ----------
Total worldwide operations $1,052,285 $848,629 $1,021,597
========== ======== ==========
NOTE G Segment Information - (Continued)
For the nine months ended September 30,
As Reported Pro Forma
-----------------------------------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 864,879 $ 991,651 $ 866,540 $1,001,325
United States mechanical construction and facilities services 1,213,356 906,006 1,305,779 1,395,482
United States other services 165,300 161,429 165,300 161,429
---------- ---------- ---------- ----------
Total United States operations 2,243,535 2,059,086 2,337,619 2,558,236
Canada construction and facilities services 229,980 131,197 229,980 131,197
United Kingdom construction and facilities services 375,468 354,113 375,468 354,113
Other international construction and facilities services -- 11,294 -- 11,294
---------- ---------- ---------- ----------
Total worldwide operations $2,848,983 $2,555,690 $2,943,067 $3,054,840
========== ========== ========== ==========
Total revenues:
United States electrical construction and facilities services $ 889,244 $1,024,130 $ 890,905 $1,033,804
United States mechanical construction and facilities services 1,215,799 935,680 1,308,222 1,425,156
United States other services 166,910 166,716 166,910 166,716
Less intersegment revenues (28,418) (67,440) (28,418) (67,440)
---------- ---------- ---------- ----------
Total United States operations 2,243,535 2,059,086 2,337,619 2,558,236
Canada construction and facilities services 229,980 131,197 229,980 131,197
United Kingdom construction and facilities services 375,468 354,113 375,468 354,113
Other international construction and facilities services -- 11,294 -- 11,294
---------- ---------- ---------- ----------
Total worldwide operations $2,848,983 $2,555,690 $2,943,067 $3,054,840
========== ========== ========== ==========
For the three months ended September 30,
As Reported Pro Forma
----------------------------------------
2002 2001 2001
---- ---- ----
Operating income (loss):
United States electrical construction and facilities services $21,855 $17,179 $17,757
United States mechanical construction and facilities services 16,151 15,049 23,403
United States other services 2,497 (396) (396)
------- ------- -------
Total United States operations 40,503 31,832 40,764
Canada construction and facilities services 1,276 366 366
United Kingdom construction and facilities services 435 733 733
Other international construction and facilities services 142 82 82
Corporate administration (6,498) (6,778) (6,778)
------- ------- -------
Total worldwide operations 35,858 26,235 35,167
Other corporate items:
Interest expense (1,411) (408) (790)
Interest income 338 1,478 1,478
------- ------- -------
Income before income taxes $34,785 $27,305 $35,855
======= ======= =======
NOTE G Segment Information - (Continued)
For the nine months ended September 30,
As Reported Pro Forma
-----------------------------------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating income (loss):
United States electrical construction and facilities services $52,814 $48,051 $53,071 $49,715
United States mechanical construction and facilities services 42,650 31,689 42,353 52,386
United States other services 1,290 (3,689) 1,290 (3,689)
------- ------- ------- -------
Total United States operations 96,754 76,051 96,714 98,412
Canada construction and facilities services 1,510 1,337 1,510 1,337
United Kingdom construction and facilities services 88 3,189 88 3,189
Other international construction and facilities services 85 (1,469) 85 (1,469)
Corporate administration (23,124) (20,866) (23,124) (20,866)
------- ------- ------- -------
Total worldwide operations 75,313 58,242 75,273 80,603
Other corporate items:
Interest expense (2,751) (4,381) (2,589) (5,532)
Interest income 1,650 4,466 1,650 4,466
------- ------- ------- -------
Income before income taxes $74,212 $58,327 $74,334 $79,537
======= ======= ======= =======
As Reported
----------------------------
Sept. 30, Dec. 31,
2002 2001
------------- -----------
Total assets:
United States electrical construction and facilities services $ 330,295 $ 417,678
United States mechanical construction and facilities services 817,651 457,596
United States other services 73,283 60,965
---------- ----------
Total United States operations 1,221,229 936,239
Canada construction and facilities services 72,534 62,234
United Kingdom construction and facilities services 187,549 152,981
Other international construction and facilities services 3,917 11,497
Corporate administration 95,936 186,713
---------- ----------
Total worldwide operations $1,581,165 $1,349,664
========== ==========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Unaudited)
Highlights
EMCOR Group, Inc.'s ("EMCOR") revenues for the three months ended September 30,
2002 and 2001 were $1,052.3 million and $848.6 million, respectively. Net income
for the three months ended September 30, 2002 was $19.5 million compared to net
income of $15.3 million for the three months ended September 30, 2001. Diluted
Earnings Per Share ("Diluted EPS") were $1.26 per share for the three months
ended September 30, 2002 compared to Diluted EPS of $1.00 per share in the year
earlier period.
Revenues for the nine months ended September 30, 2002 and 2001 were $2,849.0
million and $2,555.7 million, respectively. Net income for the nine months ended
September 30, 2002 and 2001 was $41.6 million and $32.6 million, respectively.
Diluted EPS were $2.69 per share for the nine months ended September 30, 2002
compared to $2.25 per share for the same period in the prior year.
The results of operations for the three and nine months ended September 30, 2002
include results for cettain companies acquired from Comfort Systems USA, Inc.
("Comfort") from the acquisition date of March 1, 2002.
Operating Segments
EMCOR has the following reportable segments: United States electrical
construction and facilities services, United States mechanical construction and
facilities services, United States other services, Canada construction and
facilities services, United Kingdom construction and facilities services and
Other international construction and facilities services. The segment "United
States other services" primarily represents those operations which principally
provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR's operations outside of
the United States, Canada, and the United Kingdom, primarily South Africa, the
Middle East and Europe performing electrical construction, mechanical
construction and facilities services.
Results of Operations
Revenues
The following table presents EMCOR's operating segment revenues and their
respective percentage of total revenues (in thousands, except for percentages):
For the three months ended September 30,
----------------------------------------
% of % of
2002 Total 2001 Total
---- ----- ---- ----
Revenues:
United States electrical construction and facilities services $ 291,999 28% $300,873 35%
United States mechanical construction and facilities services 458,408 44% 322,167 38%
United States other services 66,455 6% 57,048 7%
---------- --------
Total United States operations ........................... 816,862 78% 680,088 80%
Canada construction and facilities services .............. 91,329 9% 53,415 6%
United Kingdom construction and facilities services ...... 144,094 14% 110,332 13%
Other international construction and facilities services.. -- -- 4,794 1%
---------- --------
Total worldwide operations ............................... $1,052,285 100% $848,629 100%
========== ========
For the nine months ended September 30,
---------------------------------------
% of % of
2002 Total 2001 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 864,879 30% $ 991,651 39%
United States mechanical construction and facilities services 1,213,356 43% 906,006 35%
United States other services ............................. 165,300 6% 161,429 6%
---------- ----------
Total United States operations ........................... 2,243,535 79% 2,059,086 81%
Canada construction and facilities services .............. 229,980 8% 131,197 5%
United Kingdom construction and facilities services ...... 375,468 13% 354,113 14%
Other international construction and facilities services.. -- -- 11,294 --
---------- ----------
Total worldwide operations ............................... $2,848,983 100% $2,555,690 100%
========== ==========
EMCOR's revenues increased $203.7 million for the three months ended September
30, 2002 compared to the third quarter of 2001, primarily due to revenues of
$153.8 million derived from the acquired Comfort companies and to increased
revenues in Canada and the United Kingdom of $37.9 million and $33.8 million,
respectively. Revenues increased by $293.3 million for the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001,
primarily due to revenues of $350.2 million derived from the acquired Comfort
companies and to increased revenues in Canada and the United Kingdom of $98.8
million and $21.4 million, respectively. Revenues for the EMCOR United States
operations (excluding the acquired Comfort companies) in both the three and nine
month periods decreased principally due to a decline in "fast-track" contracts,
an increase in longer duration projects which results in revenue recognition
over a longer time period and the elimination of new work in the North and South
Carolina markets. Revenues for the Canada and United Kingdom segments increased
primarily due to long-duration contracts that began to generate revenues in 2002
and increased facilities services revenues, respectively.
Revenues of United States electrical construction and facilities services
business units for the three months ended September 30, 2002 were $292.0 million
compared to $300.9 million for the three months ended September 30, 2001.
Revenues for the nine months ended September 30, 2002 were $864.9 million
compared to $991.7 million in the same period a year earlier. The decrease in
revenues of $8.9 million and $126.8 million for the three and nine month periods
ended September 30, 2002, respectively, when compared to the same period in
2001, was primarily due to a reduction in "fast-track" telecom projects in the
current year compared to the prior year. Transportation infrastructure and power
plant work, however, remained steady compared to the prior year.
Revenues of United States mechanical construction and facilities services
business units for the three months ended September 30, 2002 were $458.4 million
compared to $322.2 million for the three months ended September 30, 2001.
Revenues for the nine months ended September 30, 2002 were $1,213.4 million
compared to $906.0 million in the same period in the prior year. The increase in
revenues of $136.2 million for the three month period was attributable to
revenues from the acquired Comfort companies of $150.8 million and increased
revenues from other operations in the northern California, Denver and Las Vegas
markets. This increases in the three month period was partially offset by
decreases in revenues from operations in certain markets due to completion of
certain large contracts in the prior quarter that have not been replaced with
projects in the current quarter. The revenues increase of $307.4 million for the
nine month period was primarily derived from revenues from the acquired Comfort
companies of $344.3 million and growth in revenues in the northern California
market. These increases in the nine month period were partially offset by
decreased revenues in operations in some other markets due to fewer fast-track
contracts available. Additionally, these increases were offset in both the three
and nine month periods by the elimination of new work in the North and South
Carolina markets.
United States other services revenues of $66.5 million for the three months
ended September 30, 2002, which include those operations which principally
provide consulting and maintenance services, increased by $9.4 million from
$57.0 million in the same three months in 2001. Revenues for the nine months
ended September 30, 2002 were $165.3 million compared to $161.4 million in the
same period in the prior year. These increases in revenues for the three and
nine month periods were primarily due to an increase in facilities services
contracts performed, partially offset by a decline in telecommunications
industry related work due to the slow-down in that industry.
Revenues of Canada construction and facilities services for the three months
ended September 30, 2002 were $91.3 million compared to $53.4 million for the
three months ended September 30, 2001. Revenues for the nine months ended
September 30, 2002 were $230.0 million compared to $131.2 million in the same
period in the prior year. The increases in revenues for the both three and nine
month periods were primarily attributable to the performance of work on certain
long-term contracts, partially offset by a reduced number of "fast-track" type
contracts in the same period in the prior year.
Revenues from United Kingdom construction and facilities services business units
for the three months ended September 30, 2002 were $144.1 million compared to
$110.3 million for the three months ended September 30, 2001. Revenues for the
nine months ended September 30, 2002 were $375.5 million compared to $354.1
million in the same period in the prior year. The increases in the three and
nine month periods were principally attributable to growth in the facilities
services market offsetting a decrease in the overall construction market
principally resulting in fewer attractive bid opportunities, and thereby causing
EMCOR to be more selective in submitting project bids. Construction revenues do
not include revenues from certain multi-year rail projects that have been
awarded but which will not produce revenues until future periods.
Other international construction and facilities services revenues primarily
consists of EMCOR's operations in the Middle East, South Africa and Europe.
Revenues from those operations for the three and nine months ended September 30,
2002 decreased by $4.8 million and $11.3 million, respectively, compared to the
same periods in the prior year. All of the 2002 projects in these markets are
being performed by joint ventures. The results of these joint venture operations
are accounted for under the equity method of accounting because EMCOR has less
than majority ownership in these joint ventures, and, accordingly, revenues
attributable to such joint ventures are not reflected as revenues in the
consolidated financial statements. In 2001, certain European projects were
performed entirely by EMCOR and therefore revenues were recorded. EMCOR
continues to pursue new business selectively in those markets; however, the
availability of opportunities has been significantly reduced as a result of
local market conditions, 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 (in thousands, except for percentages):
For the three months ended September 30,
----------------------------------------
2002 2001
---- ----
Cost of sales ................................ $923,052 $747,762
Gross profit.................................. $129,233 $100,867
Gross profit, as a percentage of revenues..... 12.3% 11.9%
For the nine months ended September 30,
---------------------------------------
2002 2001
---- ----
Cost of sales ................................ $2,510,148 $2,281,560
Gross profit.................................. $ 338,835 $ 274,130
Gross profit, as a percentage of revenues..... 11.9% 10.7%
Gross profit (revenues less cost of sales) increased $28.4 million for the three
months ended September 30, 2002 to $129.2 million compared to $100.9 million for
the three months ended September 30, 2001. As a percentage of revenues, gross
profit increased to 12.3% from 11.9% for the three months ended September 30,
2002 and 2001, respectively. Gross profit for the nine months ended September
30, 2002 of $338.8 million was $64.7 million higher than the $274.1 million in
the same period last year. As a percentage of revenues, gross profit increased
to 11.9% from 10.7% for the nine months ended September 30, 2002 and 2001,
respectively. The dollar increase in gross profit in both the three and nine
month periods, as well as the increase in gross profit as a percentage of
revenues in those periods, was primarily due to gross profit of $25.5 million
and $56.8 million earned by the acquired Comfort companies in the three and nine
month periods, respectively. The increase in gross profit of $2.9 million and
$7.9 million attributable to EMCOR's other subsidiaries in both the three and
nine month periods, respectively, was due to the type and location of
construction and facilities services contracts performed, efficient deployment
of local labor, effective procurement of materials and focus on risk management
programs.
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 (in thousands, except for percentages):
For the three months
ended September 30,
--------------------
2002 2001
---- ----
Selling, general and administrative expenses....... $93,375 $73,357
Selling, general and administrative expenses,
as a percentage of revenues....................... 8.9% 8.6%
For the nine months
ended September 30,
--------------------
2002 2001
---- ----
Selling, general and administrative expenses....... $263,522 $211,939
Selling, general and administrative expenses,
as a percentage of revenues....................... 9.2% 8.3%
Selling, general and administrative expenses for the three months ended
September 30, 2002 increased $20.0 million to $93.4 million from $73.4 million
in the same period last year. Selling, general and administrative expenses as a
percentage of revenues were 8.9% for the three months ended September 30, 2002
compared to 8.6% for the three months ended September 30, 2001. Selling, general
and administrative expenses for the nine months ended September 30, 2002 were
$263.5 million, an increase of $51.6 million compared to $211.9 million for the
nine months ended September 30, 2001. Selling, general and administrative
expenses as a percentage of revenues were 9.2% for the nine months ended
September 30, 2002, compared to 8.3% for the nine months ended September 30,
2001. For the three and nine month periods ended September 30, 2002 the increase
in selling, general and administrative expense, and the increase as a percentage
of revenues compared to the prior year, was attributable to $17.9 million and
$41.2 million of expenses, respectively, of the acquired Comfort companies.
Exclusive of the acquired Comfort companies, an increase in selling, general and
administrative expense of $2.1 million and $10.4 million for the three and nine
month periods ended September 30, 2002, respectively, when compared to the same
periods in 2001, was primarily attributable to higher variable selling, general
and administrative expenses associated with certain markets in which EMCOR is
currently generating more of its gross profits than it had in 2001. The
increases were partially offset by expense reductions in order to adjust to
current market conditions.
Beginning in 2002, the amortization of goodwill is no longer required per
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Goodwill amortization expense for the three and nine months
ended September 30, 2001 was $1.3 million and $3.9 million, respectively.
Operating income
The following table presents EMCOR's operating income, and operating income as a
percentage of segment revenues (in thousands, except for percentages):
For the three months ended September 30,
----------------------------------------
% of % of
Segment Segment
2002 Revenues 2001 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $21,855 7.5% $17,179 5.7%
United States mechanical construction and facilities services 16,151 3.5% 15,049 4.7%
United States other services 2,497 3.8% (396) --
------- -------
Total United States operations 40,503 5.0% 31,832 4.7%
Canada construction and facilities services 1,276 1.4% 366 0.7%
United Kingdom construction and facilities services 435 0.3% 733 0.7%
Other international construction and facilities services 142 -- 82 1.7%
Corporate administration (6,498) -- (6,778) --
------- -------
Total worldwide operations 35,858 3.4% 26,235 3.1%
Other corporate items:
Interest expense (1,411) (408)
Interest income 338 1,478
------- -------
Income before income taxes $34,785 $27,305
======= =======
For the nine months ended September 30,
---------------------------------------
% of % of
Segment Segment
2002 Revenues 2001 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $52,814 6.1% $48,051 4.8%
United States mechanical construction and facilities services 42,650 3.5% 31,689 3.5%
United States other services 1,290 0.8% (3,689) --
------- -------
Total United States operations 96,754 4.3% 76,051 3.7%
Canada construction and facilities services 1,510 0.7% 1,337 1.0%
United Kingdom construction and facilities services 88 -- 3,189 0.9%
Other international construction and facilities services 85 -- (1,469) --
Corporate administration (23,124) -- (20,866) --
------- -------
Total worldwide operations 75,313 2.6% 58,242 2.3%
Other corporate items:
Interest expense (2,751) (4,381)
Interest income 1,650 4,466
------- -------
Income before income taxes $74,212 $58,327
======= =======
EMCOR had operating income of $35.9 million and $26.2 million for the three
months ended September 30, 2002 and 2001, respectively. Operating income was
$75.3 million and $58.2 million for the nine months ended September 30, 2002 and
2001, respectively. The increase of $9.6 million and $17.1 million in operating
income for the three and nine month periods ended September 30, 2002 as compared
to the same periods in 2001 was due primarily to incremental operating income of
the acquired Comfort companies, increased operating income attributable to
electrical operations in New York City, operating income from the United States
other services segment and increased operating income associated with increased
revenues in the Canada construction and facilities services segment.
United States electrical construction and facilities services operating income
(before deduction of general corporate and other expenses discussed below) for
the three months ended September 30, 2002 was $21.9 million or 7.5% of revenues
compared to $17.2 million or 5.7% of revenues for the three months ended
September 30, 2001. Operating income for the three months ended September 30,
2002 compared to the same period in 2001 was favorably impacted by increased
activity from transportation infrastructure and power plant construction
projects on the west and east coasts and increased operating income from various
commercial and industrial activities in the San Diego, Las Vegas, Washington,
D.C. and Denver markets offset, in part, by a reduction in "fast-track" work
across the other markets in this segment. Operating income for the nine months
ended September 30, 2002 was $52.8 million, or 6.1% of revenues, compared to
$48.1 million, or 4.8% of revenues, for the nine months ended September 30,
2001. The increase in operating income and operating income as a percentage of
revenues for the nine month period was due to the same reasons cited for the
increase in the three month period in addition to the successful completion and
settlement of several contracts.
United States mechanical construction and facilities services operating income
for the three months ended September 30, 2002 was $16.2 million, or 3.5% of
revenues, compared to $15.0 million, or 4.7% of revenues, for the three months
ended September 30, 2001. Operating income for the nine months ended September
30, 2002 was $42.7 million or 3.5% of revenues compared to $31.7 million or 3.5%
of revenues for the nine months ended September 30, 2001. The $1.1 million and
$11.0 million increases in operating income for the three and nine months
periods, respectively, were primarily attributable to (i) results of operations
of the acquired Comfort companies, (ii) operating income associated with power
plant construction activity on the west and east coasts, and (iii) improved
results of EMCOR's Poole & Kent subsidiary operations which had losses in the
prior year. The prior year Poole & Kent losses had been primarily attributable
to its operations in the North and South Carolina markets, which operations have
since ceased bidding new work. The increases were partially offset by less
operating income attributable to fewer fast-track contracts in the current year
than the prior year.
United States other services operating income was $2.5 million compared to
operating losses of $0.4 million for the three months ended September 30, 2002
and 2001, respectively. For the nine months ended September 30, 2002 and 2001,
operating income was $1.3 million and operating losses were $3.7 million,
respectively. The increase in operating profit for both the three and nine month
periods was primarily attributable to an increase in gross profit associated
with new facilities services contracts and a decrease in selling, general and
administrative expenses as these operations became more established and thus
required less overhead spending related to the development of new business.
Canada construction and facilities services operating income was $1.3 million
and $0.4 million for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002, operating income was
$1.5 million compared to operating income of $1.3 million for the same period in
the prior year. The $0.9 million increase in operating income for the three
months ended September 30, 2002 was due to an increase in construction
activities for work on long-term contracts. The increase in operating income for
the nine months ended September 30, 2002 when compared to the prior year was
primarily due to increased work on long-term contracts that result in profit
recognition over a longer time period, partially offset by a reduction in the
number of fast-track type contracts.
United Kingdom construction and facilities services operating income for the
three months ended September 30, 2002 was $0.4 million compared to operating
income of $0.7 million in the same period of the prior year. For the nine months
ended September 30, 2002, operating income was $0.09 million compared to
operating income of $3.2 million for the same period in the prior year. The
decrease in operating income for both the three months and nine months ended
September 30, 2002 compared to the same periods in 2001 was attributable to the
type and location of jobs in the periods ended September 30, 2002. The
facilities services business continues to realize increased revenues and
operating income while the construction activities have slowed since last year.
Other international construction and facilities services operating income was
$0.14 million for the three months ended September 30, 2002 compared to an
operating income of $0.08 million for three months ended September 30, 2001.
Operating income for the nine months ended September 30, 2002 increased by $1.6
million compared to the same period in the prior year. EMCOR continues to pursue
new business selectively in the Middle East, South African 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 the three months ended September 30, 2002 were
$6.5 million compared to $6.8 million for the three months ended September 30,
2001. For the nine months ended September 30, 2002, general corporate expenses
were $23.1 million compared to $20.9 million for the same period in the prior
year. The increase in general corporate expenses for the nine month period was
primarily due to the expansion of operations support activities such as
information technology infrastructure, human resources and communications in
order to meet the level of service expected by our clients, plus certain costs
associated with the integration of the acquired Comfort companies during the
first six months of 2002.
Interest expense for the three months ended September 30, 2002 and 2001 was $1.4
million and $0.4 million, respectively. Interest expense for the nine months
ended September 30, 2002 and 2001 was $2.8 million and $4.4 million,
respectively. Interest income decreased $1.1 million and $2.8 million for the
three and nine months ended September 30, 2002, respectively, compared to the
same periods in 2001, due to reduced cash on hand because of $169.8 million of
cash used to fund acquisitions and earn-out payments in the current year. The
decreased interest expense in the 2002 nine month period, when compared to the
same nine month period in 2001, was primarily due to the conversion of $115.0
million of EMCOR's 5.75% Convertible Subordinated Notes, net of related deferred
financing costs, into approximately 4.2 million shares of EMCOR common stock in
May and June of 2001.
The income tax provision increased to $15.3 million for the three months ended
September 30, 2002 versus $12.0 million for the same period in 2001. For the
nine months ended September 30, 2002, the income tax provision was $32.7 million
versus $25.8 million for the nine months ended September 30, 2001. The increase
in this provision was primarily due to increased income before taxes.
EMCOR's contract backlog was $2.8 billion at September 30, 2002 and $2.4 billion
at December 31, 2001. The increase in backlog was primarily due to the acquired
Comfort companies.
EMCOR's contract backlog at September 30, 2002 was $2.8 billion compared to $2.1
billion at September 30, 2001. The increase was primarily attributable to the
acquired Comfort companies' backlog of $0.3 billion plus a net increase of $0.3
billion for projects awarded in the United States, the United Kingdom and
Canada.
Liquidity and Capital Resources
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities (in thousands):
For the nine months
ended September 30,
-------------------
2002 2001
---- ----
Net cash provided by operating activities $ 90,113 $ 53,685
Net cash used in investing activities $(191,376) $(18,122)
Net cash provided by financing activities $ 350 $ 1,484
EMCOR's consolidated cash balance decreased by approximately $100.9 million from
$189.8 million at December 31, 2001 to $88.9 million at September 30, 2002
primarily due to the use of cash for the acquisition of the Comfort companies,
partially offset by net cash provided by operating activities. Net cash provided
by operating activities of $90.1 million for the nine months ended September 30,
2002 represented a $36.4 million increase from the net cash provided by
operating activities of $53.7 million in the same period last year. The increase
in net cash provided by operating activities was primarily attributable to
increased net income and a net decrease in the working capital accounts. Net
cash used in investing activities of $191.4 million for the nine months ended
September 30, 2002 increased by $173.3 million compared to $18.1 million of net
cash used in investing activities in the same period last year. The increase was
due primarily to payments for the acquired Comfort companies of $160.1 million
and earn-out payments for prior acquisitions of $9.7 million, in addition to an
increase in EMCOR's investments, notes and other long-term receivables primarily
related to a $14.0 million equity contribution by EMCOR to the venture with
Baltimore Gas and Electric that is discussed below. The increase in net cash
provided by financing activities was attributable to proceeds from the exercise
of stock options offset by a reduction due to net repayments of long-term debt
and capital lease payments.
On September 26, 2002, EMCOR entered into a new $275 million five year revolving
credit agreement. The new agreement replaces EMCOR's $150.0 million 3 year
credit facility that would have expired June 2003. EMCOR had approximately $30.7
million of letters of credit outstanding under the revolving credit facility as
of September 30, 2002. There were no revolving loans outstanding as of September
30, 2002 and December 31, 2001 under its revolving credit facility.
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 cooling.
Each of the venturers is jointly and severally liable for the venture's $25.0
million borrowing due December 2031. During September 2002 each partner
contributed equity to the venture, of which EMCOR's contribution was $14.0
million.
EMCOR believes that current cash balances and the borrowing capacity available
under its line of credit, 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.
The primary source of liquidity for EMCOR has been, and is expected to continue
to be, cash generated by operating activities. EMCOR also maintains a revolving
credit facility, referred to above, that may be utilized, among other things, to
meet short-term liquidity needs in the event that net cash generated by
operating activities is insufficient or to enable EMCOR to participate in joint
ventures or to make acquisitions that may require access to cash on short
notice.
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 on its current credit rating and financial condition,
EMCOR can reasonably expect to be able to issue medium and long-term debt
instruments and/or equity. 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 government
economic policy. In order to provide protection against demand cycles in private
sector construction services, EMCOR has increased its participation, and its
backlog of contracts, in the public sector and in the facilities services
sector.
New Accounting Pronouncements
The FASB has issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 establishes a single accounting model based on the framework
established in Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS
144 provides accounting guidance for long-lived assets to be disposed of by
sale, and resolves significant implementation issues related to SFAS 121. This
statement also supercedes the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the
disposal of a segment of a business. The adoption of SFAS 144, which was
effective January 1, 2002, did not have a material impact on EMCOR's results of
operations, financial position or cash flows.
Critical Accounting Policies
EMCOR's significant accounting policies are described in Note B to the
consolidated financial statements included in the Annual Report on Form 10-K for
the year ended December 31, 2001. EMCOR believes its most critical accounting
policy is revenue recognition from long-term contracts for which EMCOR uses 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
and, accordingly, the method used for revenue recognition within EMCOR's
industry. Percentage-of-completion is measured principally by the percentage of
costs incurred to date for each contract to the estimated total costs for each
contract at completion. Certain of EMCOR's 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.
Provisions for 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 within the consolidated balance sheets.
Costs and estimated earnings in excess of billings on uncompleted contracts
reflected on the consolidated balance sheets arise when revenues have been
recognized but the amounts cannot be billed under the terms of the contracts.
Such amounts are recoverable from customers based on various measures of
performance, including achievement of certain milestones, completion of
specified units or completion of the contract. Costs and estimated earnings in
excess of billings on uncompleted contracts also includes amounts EMCOR seeks 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 contracts costs. Such amounts are recorded at estimated net
realizable value. Due to uncertainties inherent within estimates employed to
apply percentage-of-completion accounting, it is possible that estimates will be
revised as project work progresses. Application of percentage-of-completion
accounting requires that the impact of those revised estimates be reported in
the consolidated financial statements prospectively.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995, particularly
statements regarding market opportunities, market share growth, competitive
growth, gross profit, and selling, general and administrative expenses. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in any such forward-looking
statements. Such risk and uncertainties include, but are not limited to adverse
changes in general economic conditions, including changes in the specific
markets for EMCOR's services, adverse business conditions, decreased or lack of
growth in the mechanical and electrical construction and facilities services
industries, increased competition, pricing pressures, risks associated with
foreign operations and other factors.
ITEM 4 CONTROLS AND PROCEDURES
Based on an evaluation of the disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-Q, the Chairman of
the Board and Chief Executive Officer, Frank T. MacInnis, and the Executive Vice
President and Chief Financial Officer, Leicle E. Chesser, have concluded that
the disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) promulgated under the Securities Exchange Act of 1934 are effective.
There were no significant changes in the internal controls or in other factors
that could significantly affect those controls subsequent to the date of our
most recent evaluation thereof.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In August 2002, the Company's subsidiary Heritage Air Systems, Inc. ("Heritage")
was added as one of twenty-one defendants named in a civil action pending in the
United States District Court for the Eastern District of New York by a
competitor under the Sherman Act, 15 U.S.C. ss.ss. 1 and 2, the Clayton Act 15
U.S.C. ss.ss. 15 and 26, The Labor Management Relations Act, 29 U.S.C. ss. 187
(a), and New York state law. Plaintiff, Cool Wind Ventilation Corp., alleges a
conspiracy in restraint of trade and a monopoly in the sheet metal duct industry
in New York City and Long Island. Specifically, the plaintiff alleges that the
defendants Sheet Metal Workers International Association Local No. 28 ("Local
28"), certain other trade unions, contractors, including Heritage, building
owners and building managers violated federal antitrust and federal labor laws
by entering into agreements whereby Local 28 would engage in, and to threaten to
engage in, localized and widespread picketing and work stoppages at job sites
where plaintiff or other non-Local 28 contractors were working in order to
compel mechanical contractors to stop or change the way they did business with
plaintiff and other non-Local 28 contractors. As a result of the alleged
conspiracy, plaintiff alleges that it and others were prevented from competing
in the most lucrative area of the sheet metal ductwork industry. Plaintiff
claims judgment for treble the damages it believes it sustained and which it
estimates to be no less than $50 million. Heritage has yet to answer the
complaint, but, when it does, it will deny the allegations of wrongdoing.
There have been no other new developments during the quarter ended September 30,
2002 regarding other legal proceedings reported in EMCOR's Annual Report on Form
10-K for the year ended December 31, 2001.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Incorporated by Reference to,
Exhibit No Description or Page Number
---------- ----------- -----------------------------
4.5 U.S. $275,000,000 Credit Agreement Incorporated herein by reference
by and among EMCOR Group, Inc. to Exhibit 4 of EMCOR's current
and Certain of its Subsidiaries and report on Form 8-K, dated as of
Harris Trust and Savings Bank October 4, 2002
individually and as Agent and the
Lenders which are or become parties
thereto dated as of September 26, 2002
11 Computation of Basic Note C of the Notes
EPS and Diluted EPS to the Condensed Consolidated
for the three and nine months Financial Statements
ended September 30, 2002
and 2001
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
Incorporated by Reference to,
Exhibit No Description or Page Number
---------- ----------- -----------------------------
99.1 Certification Pursuant to Section 906 Page 30
of the Sarbanes - Oxley Act of 2002 by
the Chairman of the Board of Directors
and Chief Executive Officer
99.2 Certification Pursuant to Section 906 Page 31
of the Sarbanes - Oxley Act of 2002 by
the Executive Vice President and Chief
Financial Officer
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 2002, or prior to filing of this report:
(1) Current Report on Form 8-K, dated as of October 4, 2002 - Credit
Agreement by and among EMCOR Group, Inc. and Certain of its
Subsidiaries and Harris Trust and Savings Bank, dated September
26, 2002; and
(2) Current Report on Form 8-K, dated as of August 8, 2002 -
Regulation of Financial Disclosure, dated August 8, 2002.
SIGNATURES
Pursuant to the requirements 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: October 23, 2002 By: /s/FRANK T. MACINNIS
------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
Date: October 23, 2002 By: /s/LEICLE E. CHESSER
------------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
Date: October 23, 2002 By: /s/ MARK A. POMPA
------------------------------------
Mark A. Pompa
Vice President and
Controller
CERTIFICATION
I, Frank T. MacInnis, Chairman of the Board and Chief Executive Officer of EMCOR
Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 23, 2002 /s/ FRANK T. MACINNIS
-----------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
CERTIFICATION
I, Leicle E. Chesser, Executive Vice President and Chief Financial Officer of
EMCOR Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 23, 2002 /s/ LEICLE E. CHESSER
----------------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Frank T. MacInnis, Chairman of the Board of Directors and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: October 23, 2002 /s/ FRANK T. MACINNIS
-----------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Leicle E. Chesser, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: October 23, 2002 /s/ LEICLE E. CHESSER
---------------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer