SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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 March 31, 2003
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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
EMCOR Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-2125338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 Merritt Seven Corporate Park
Norwalk, Connecticut 06851-1060
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(Address of principal executive offices) (Zip Code)
(203) 849-7800
- --------------------------------
(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 __
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on
April 21, 2003: 14,987,047 shares.
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
as of March 31, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Operations -
three months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income -
three months ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 Controls and Procedures 23
PART II - Other Information
Item 1 Legal Proceedings 23
Item 6 Exhibits and Reports on Form 8-K 24
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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March 31, December 31,
2003 2002
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 55,875 $ 93,103
Accounts receivable, net 927,320 964,968
Costs and estimated earnings in excess
of billings on uncompleted contracts 270,805 235,809
Inventories 11,720 12,271
Prepaid expenses and other 31,983 28,784
---------- ----------
Total current assets 1,297,703 1,334,935
Investments, notes and other long-term
receivables 25,800 24,642
Property, plant and equipment, net 69,818 70,750
Goodwill 293,408 290,412
Identifiable intangible assets, net 12,970 13,845
Other assets 20,743 23,907
---------- ----------
Total assets $1,720,442 $1,758,491
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
(Unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line $ 144,945 $ 112,000
Current maturities of long-term debt and capital
lease obligations 22,400 22,276
Accounts payable 350,562 409,562
Billings in excess of costs and estimated
earnings on uncompleted contracts 370,041 363,092
Accrued payroll and benefits 124,385 159,416
Other accrued expenses and liabilities 121,785 113,529
---------- ----------
Total current liabilities 1,134,118 1,179,875
Long-term debt and capital lease obligations 740 905
Other long-term obligations 89,734 87,841
---------- ----------
Total liabilities 1,224,592 1,268,621
---------- ----------
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, 16,117,032 and 16,050,862 shares
issued, respectively 161 161
Capital surplus 314,180 312,393
Accumulated other comprehensive loss (4,226) (5,148)
Retained earnings 202,556 199,300
Treasury stock, at cost 1,130,985 and
1,131,985 shares, respectively (16,821) (16,836)
---------- ----------
Total stockholders' equity 495,850 489,870
---------- ----------
Total liabilities and stockholders' equity $1,720,442 $1,758,491
========== ==========
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 March 31, 2003 2002
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Revenues $1,061,030 $810,299
Cost of sales 944,261 720,913
---------- --------
Gross profit 116,769 89,386
Selling, general and administrative expenses 109,175 76,855
---------- --------
Operating income 7,594 12,531
Interest (expense) income, net (1,802) 417
---------- --------
Income before income taxes 5,792 12,948
Income tax provision 2,536 5,697
---------- --------
Net income $ 3,256 $ 7,251
========== ========
Basic earnings per share $ 0.22 $ 0.49
========== ========
Diluted earnings per share $ 0.21 $ 0.47
========== ========
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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Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 3,256 $ 7,251
Depreciation and amortization 5,824 3,377
Amortization of identifiable intangibles 875 --
Other non-cash expenses 3,270 1,617
Changes in operating assets and liabilities,
excluding the effect of business acquired (74,551) 41,266
--------- ---------
Net cash (used in) provided by operating activities (61,326) 53,511
--------- ---------
Cash flows from investing activities:
Payments for acquisitions of businesses, net of
cash acquired, and related earn-out agreements (2,997) (152,825)
Proceeds from sale of assets 330 280
Purchase of property, plant and equipment (5,349) (4,157)
Net (disbursements) proceeds related to other
investments (1,158) 6,264
--------- ---------
Net cash used in investing activities (9,174) (150,438)
--------- ---------
Cash flows from financing activities:
Proceeds from working capital credit lines 536,045 50,000
Repayments of working capital credit lines (503,100) --
Net repayments for long-term debt (278) (651)
Net borrowings (repayments) for capital lease
obligations 237 (30)
Net proceeds from exercise of stock options 368 359
--------- ---------
Net cash provided by financing activities 33,272 49,678
--------- ---------
Decrease in cash and cash equivalents (37,228) (47,249)
Cash and cash equivalents at beginning of year 93,103 189,766
--------- ---------
Cash and cash equivalents at end of period $ 55,875 $ 142,517
========= =========
Supplemental cash flow information:
Cash paid for:
Interest $ 1,627 $ 72
Income taxes $ 5,183 $ 2,966
Non-cash financing activities:
Debt assumed in acquisition $ -- $ 22,115
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, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836)
Net income 7,251 -- -- -- 7,251 -- $7,251
Foreign currency translation
adjustments (747) -- -- (747) -- -- (747)
------
Comprehensive income -- -- -- -- -- -- $6,504
======
Common stock issued under
stock option plans 359 0 359 -- -- --
Value of Restricted Stock
Units (2) 2,836 -- 2,836 -- -- --
-------- ---- -------- ------- -------- --------
Balance, March 31, 2002 $431,632 $159 $310,831 $(6,171) $143,649 $(16,836)
======== ==== ======== ======= ======== ========
Balance, January 1, 2003 $489,870 $161 $312,393 $(5,148) $199,300 $(16,836)
Net income 3,256 -- -- -- 3,256 -- $3,256
Foreign currency translation
adjustments 922 -- -- 922 -- -- 922
------
Comprehensive income -- -- -- -- -- -- $4,178
======
Common stock issued under
stock option plans 368 0 353 -- -- 15
Value of Restricted Stock
Units (3) 1,434 -- 1,434 -- -- --
-------- ---- -------- ------- -------- --------
Balance, March 31, 2003 $495,850 $161 $314,180 $(4,226) $202,556 $(16,821)
======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments and minimum
pension liability adjustments.
(2) Shares of common stock will be issued in respect of restricted stock units
granted pursuant to EMCOR's Executive Stock Bonus Plan. This amount
represents the value of restricted stock units at the date of grant plus
the related compensation expense in the current year due to an increase in
market value of the underlying common stock. As of October 2002, the terms
of the Executive Stock Bonus Plan were changed resulting in prospective
fixed plan accounting for both existing and new grants.
(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.
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 generally accepted accounting principles 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 month
period ended March 31, 2003 are not necessarily indicative of the results to be
expected for the year ending December 31, 2003.
On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. (the "Seller") a
group of companies (the "Acquired Comfort Companies"). On December 19, 2002,
EMCOR acquired all the capital stock of Consolidated Engineering Services, Inc.
("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two
additional companies during 2002. The purchase prices of the acquisitions are
subject to finalization based on certain contingencies provided for in the
purchase agreements. These acquisitions were accounted for by the purchase
method, and the purchase prices have been allocated to the assets acquired and
liabilities assumed, based upon the estimated fair values of these assets and
liabilities at the date of acquisition.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
NOTE B New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (the "FASB") issued
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the
"Interpretation"). FIN 45 clarifies the requirements of FASB Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 may require, that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of the Interpretation
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The Interpretation's provisions for initial recognition
and measurement should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The guarantor's previous accounting for guarantees that were issued
before the date of FIN 45's initial application may not be revised or restated
to reflect the effect of the recognition and measurement provisions of the
Interpretation. EMCOR has determined that the adoption of FIN 45 will only
impact disclosures and that its accounting for guarantees is not impacted as of
March 31, 2003.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.SFAS 148 is effective for fiscal years beginning after
December 15, 2002 and was adopted by EMCOR for all periods presentd herein.
NOTE B New Accounting Pronouncements - (Continued)
EMCOR did not change to the fair value based method of accounting for
stock-based employee compensation; therefore, adoption of SFAS 148 will only
impact disclosures, not the financial results, of EMCOR.
NOTE C Earnings Per Share
Calculation of Basic and Diluted Earnings per share
The following tables summarize EMCOR's calculation of Basic and Diluted Earnings
per Share ("EPS") for the three month periods ended March 31, 2003 and 2002:
Three months ended
March 31, 2003
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------
Basic EPS
Income available to common
stockholders $3,256,000 14,925,551 $0.22
=====
Effect of Dilutive Securities
Options -- 516,030
---------- ----------
Diluted EPS $3,256,000 15,441,581 $0.21
========== ========== =====
Three months ended
March 31, 2002
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------
Basic EPS
Income available to common
stockholders $7,251,000 14,828,537 $0.49
=====
Effect of Dilutive Securities:
Options -- 582,203
---------- ----------
Diluted EPS $7,251,000 15,410,740 $0.47
========== ========== =====
There were 189,403 and zero anti-dilutive stock options that were required to be
excluded from the calculation of diluted EPS for the three month periods ended
March 31, 2003 and 2002, respectively.
NOTE D Valuation of Stock Option Grants
At March 31, 2003, EMCOR had six stock-based compensation plans and programs.
EMCOR applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized in the
accompanying Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 in respect of stock options granted during
those periods inasmuch as EMCOR grants stock options at fair market value. Had
compensation cost for these options been determined consistent with SFAS 123 and
SFAS 148, EMCOR's net income, basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS") would have been reduced from the "as reported
amounts" below to the "pro forma amounts" below for the three months ended March
31 (in thousands, except per share amounts):
2003 2002
---- ----
Net income:
As reported $3,256 $7,251
Less: Total stock-based compensation expense determined
under fair value based method, net of related tax effects 312 2,127
------ ------
Pro Forma $2,944 $5,124
====== ======
Basic EPS:
As reported $ 0.22 $ 0.49
Pro Forma $ 0.20 $ 0.35
Diluted EPS:
As reported $ 0.21 $ 0.47
Pro Forma $ 0.19 $ 0.33
Common Stock
As of March 31, 2003 and December 31, 2002, 14,986,047 and 14,918,877 shares of
EMCOR common stock were outstanding, respectively.
NOTE E Long-Term Debt
Long-term debt in the accompanying Condensed Consolidated Balance Sheets
consisted of the following amounts (in thousands):
March 31, December 31,
2003 2002
--------- ------------
Notes Payable at 10.0%, due 2003 $21,815 $21,815
Capitalized lease obligations 590 351
Other 735 1,015
------- -------
23,140 23,181
Less: current maturities 22,400 22,276
------- -------
$ 740 $ 905
======= =======
The Notes Payable of $21.8 million at March 31, 2003 and December 31, 2002 are
notes made by the Seller to former owners of certain Acquired Comfort Companies,
which notes were assumed by EMCOR in connection with the acquisition of the
Acquired Comfort Companies. The Notes Payable accrue interest at 10.0% per annum
and final payment is due in April 2003.
NOTE F Segment Information
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: United States electrical construction and facilities
services (systems for generation and distribution of electrical power; lighting
systems; low voltage systems such as fire alarm, security, communications and
process control systems; and voice and data systems), United States mechanical
construction and facilities services (systems for heating, ventilation, air
conditioning, refrigeration and clean room process ventilation systems; and
plumbing process and high-purity piping systems), United States facilities and
other services, Canada construction and facilities services, United Kingdom
construction and facilities services, and Other international construction and
facilities services. The segment "United States facilities and other services"
principally consists of those operations which primarily provide services needed
to support the operation of customers' facilities, which services are not
related to customers' construction programs, and other complementary services.
The Canada, United Kingdom and Other international segments perform electrical
construction, mechanical construction and facilities services. "Other
international construction and facilities services" represents EMCOR's
operations outside of the United States, Canada, and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
The following tables present information about industry segments and geographic
areas. The tables also present pro forma revenues and operating income as if the
2002 acquisitions had occurred at the beginning of fiscal 2002. The unaudited
pro forma revenues and operating income are not necessarily indicative of future
operating results (in thousands):
For the three months ended March 31,
As Reported Pro Forma
--------------------- ----------
2003 2002 2002
---------- -------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 253,874 $287,698 $ 289,549
United States mechanical construction and facilities services 416,503 307,216 413,137
United States facilities and other services 168,412 51,798 139,454
---------- -------- ----------
Total United States operations 838,789 646,712 842,140
Canada construction and facilities services 93,062 54,519 54,519
United Kingdom construction and facilities services 129,179 109,068 109,068
Other international construction and facilities services -- -- --
---------- -------- ----------
Total worldwide operations $1,061,030 $810,299 $1,005,727
========== ======== ==========
For the three months ended March 31,
As Reported Pro Forma
--------------------- ----------
2003 2002 2002
---------- -------- ----------
Total revenues:
United States electrical construction and facilities services $ 263,899 $290,299 $ 292,150
United States mechanical construction and facilities services 416,961 309,993 415,914
United States facilities and other services 169,092 52,266 139,922
Less intersegment revenues (11,163) (5,846) (5,846)
---------- -------- ----------
Total United States operations 838,789 646,712 842,140
Canada construction and facilities services 93,062 54,519 54,519
United Kingdom construction and facilities services 129,179 109,068 109,068
Other international construction and facilities services -- -- --
---------- -------- ----------
Total worldwide operations $1,061,030 $810,299 $1,005,727
========== ======== ==========
NOTE F Segment Information - (Continued)
For the three months ended March 31,
As Reported Pro Forma
--------------------- ----------
2003 2002 2002
------- ------- -------
Operating income (loss):
United States electrical construction and facilities services $12,955 $16,252 $16,532
United States mechanical construction and facilities services 4,344 6,490 7,613
United States facilities and other services 2,172 (795) 3,305
------- ------- -------
Total United States operations 19,471 21,947 27,450
Canada construction and facilities services 621 (458) (458)
United Kingdom construction and facilities services (4,468) (1,010) (1,010)
Other international construction and facilities services 150 (289) (289)
Corporate administration (8,180) (7,659) (7,659)
------- ------- -------
Total worldwide operations 7,594 12,531 18,034
Other corporate items:
Interest expense (1,997) (517) (2,053)
Interest income 195 934 936
------- ------- -------
Income before income taxes $ 5,792 $12,948 $16,917
======= ======= =======
March 31, Dec. 31,
2003 2002
---------- ----------
Total assets:
United States electrical construction and facilities services $ 302,459 $ 308,752
United States mechanical construction and facilities services 803,342 810,498
United States facilities and other services 282,154 292,218
---------- ----------
Total United States operations 1,387,955 1,411,468
Canada construction and facilities services 85,401 77,727
United Kingdom construction and facilities services 189,059 191,563
Other international construction and facilities services 4,096 5,071
Corporate administration 53,931 72,662
---------- ----------
Total worldwide operations $1,720,442 $1,758,491
========== ==========
NOTE G Pro Forma Results of Operations
The following tables present pro forma results of operations including all
companies acquired during 2002. The results of operations presented assume the
acquisitions had occurred at the beginning of fiscal 2002. The 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):
NOTE G Pro Forma Results of Operations - (Continued)
Adjustments to Arrive at Pro Forma Results of Operations
--------------------------------------------------------
For the three months ended
March 31, 2002
---------------------------------------------------------------------------------
Acquired
EMCOR Comfort Other
as Reported Companies(1) CES (2) Acquisitions(2) Pro Forma
----------- ------------ ------- --------------- ----------
Revenues $810,299 $94,084 $94,307 $7,037 $1,005,727
Operating income $ 12,531 $ (40) $ 4,383 $1,160 $ 18,034
Interest income (expense), net $ 417 $ 162 $(1,698) $ 2 $ (1,117)
Income before income taxes $ 12,948 $ 122 $ 2,685 $1,162 $ 16,917
Net income $ 7,251 $ 68 $ 1,504 $ 651 $ 9,474
Basic earnings per share $ 0.49 $ 0.01 $ 0.10 $ 0.04 $ 0.64
Diluted earnings per share $ 0.47 $ 0.00 $ 0.10 $ 0.04 $ 0.61
The pro forma results of operations, for segment information, is included in
Note F Segment Information.
(1) Adjustments to arrive at pro forma results of operations for the three
months ended March 31, 2002 represent results of operations from January 1,
2002 through the acquisition date of March 1, 2002.
(2) Adjustments to arrive at pro forma results of operations for the three
months ended March 31, 2002 represent results of operations from January 1,
2002 through March 31, 2002.
NOTE H Legal Proceedings
See Part II - Other Information, Item 1 - Legal Proceedings.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Highlights
EMCOR Group, Inc.'s ("EMCOR") revenues for the three months ended March 31, 2003
and 2002 were $1,061.0 million and $810.3 million, respectively. Net income for
the three months ended March 31, 2003 was $3.3 million compared to net income of
$7.3 million for the three months ended March 31, 2002. Diluted Earnings Per
Share ("Diluted EPS") were $0.21 per share for the three months ended March 31,
2003 compared to Diluted EPS of $0.47 per share in the year earlier period.
On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. (the "Seller") a
group of companies (the "Acquired Comfort Companies"). On December 19, 2002,
EMCOR acquired all the capital stock of Consolidated Engineering Services, Inc.
("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two
additional companies during 2002. The purchase prices of the acquisitions are
subject to finalization based on certain contingencies provided for in the
purchase agreements. These acquisitions were accounted for by the purchase
method, and the purchase prices have been allocated to the assets acquired and
liabilities assumed, based upon the estimated fair values of these assets and
liabilities at the date of acquisition.
Operating Segments
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: United States electrical construction and facilities
services (systems for generation and distribution of electrical power; lighting
systems; low voltage systems such as fire alarm, security, communications and
process control systems; and voice and data systems), United States mechanical
construction and facilities services (systems for heating, ventilation, air
conditioning, refrigeration and clean room process ventilation systems; and
plumbing process and high-purity piping systems), United States facilities and
other services, Canada construction and facilities services, United Kingdom
construction and facilities services, and Other international construction and
facilities services. The segment "United States facilities and other services"
principally consists of those operations which primarily provide services needed
to support the operation of customers' facilities, which services are not
related to customers' construction programs, and other complementary services.
The Canada, United Kingdom and Other international segments perform electrical
construction, mechanical construction and facilities services. "Other
international construction and facilities services" represents EMCOR's
operations outside of the United States, Canada, and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
Results of Operations
The results presented reflect certain reclassifications of prior period amounts
to conform to current year presentation.
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 March 31,
------------------------------------
% of % of
2003 Total 2002 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 253,874 24% $287,698 36%
United States mechanical construction and facilities services 416,503 39% 307,216 38%
United States facilities and other services 168,412 16% 51,798 6%
---------- --------
Total United States operations 838,789 79% 646,712 80%
Canada construction and facilities services 93,062 9% 54,519 7%
United Kingdom construction and facilities services 129,179 12% 109,068 13%
Other international construction and facilities services -- -- -- --
---------- --------
Total worldwide operations $1,061,030 100% $810,299 100%
========== ========
EMCOR's revenues increased $250.7 million for the three months ended March 31,
2003 compared to the first quarter of 2002, due to $200.6 million of revenues
attributable to companies acquired in 2002. The balance was attributable to
EMCOR's previously owned subsidiaries. Excluding the impact of acquisitions, the
revenues increase was principally due to an increase in the number of
longer-term public transportation and infrastructure construction jobs and
increases in site-based facilities services maintenance contracts. Revenues from
electrical construction operations and private sector fast-track and development
projects decreased for the three months ended March 31, 2003 compared to the
three months ended March 31, 2002.
Revenues of United States electrical construction and facilities services
business units for the three months ended March 31, 2003 were $253.9 million
compared to $287.7 million for the three months ended March 31, 2002. The
revenues decrease of $33.8 million for the three months ended March 31, 2003
compared to the same period in 2002 was due to completion of certain fast-track
jobs active during the prior year quarter and a reduction in discretionary
spending in the commercial and industrial markets, partially offset by an
increase in revenues from transportation infrastructure programs performed by
EMCOR's previously owned subsidiaries.
Revenues of United States mechanical construction and facilities services
business units for the three months ended March 31, 2003 were $416.5 million
compared to $307.2 million for the three months ended March 31, 2002. The
revenues increase of $109.3 million was primarily attributable to revenues from
companies acquired in 2002 of $89.9 million and from longer-term infrastructure
and energy generation construction projects performed by EMCOR's previously
owned subsidiaries.
United States facilities and other services revenues for the three months ended
March 31, 2003 were $168.4 million compared to $51.8 million for the same three
months in 2002. The $116.6 million increase in revenues for the three month
period was primarily attributable to revenues of $108.8 million from companies
acquired in 2002 and to an increase in on-site building maintenance services
provided to customers of EMCOR's previously owned subsidiaries.
Revenues of Canada construction and facilities services for the three months
ended March 31, 2003 were $93.1 million compared to $54.5 million for the three
months ended March 31, 2002. The increase in revenues for the three months ended
March 31, 2003 was primarily attributable to the work on certain new longer-term
construction projects.
Revenues of United Kingdom construction and facilities services business units
for the three months ended March 31, 2003 were $129.2 million compared to $109.1
million for the three months ended March 31, 2002. The increase in revenues was
principally attributable to the start-up of recently awarded contracts in the
transportation construction and facilities services markets.
Other international construction and facilities services activities consists of
EMCOR's operations primarily in the Middle East and South Africa. All of the
current projects in these markets are being performed by joint ventures;
accordingly, the results of these joint venture operations are accounted for
under the equity method of accounting because EMCOR has less than majority
ownership, therefore revenues attributable to such joint ventures are not
reflected as revenues in the consolidated financial statements. EMCOR continues
to pursue new business selectively in these markets and Continental Europe;
however, the availability of opportunities has been significantly reduced as a
result of local economic factors.
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 March 31,
------------------------------------
2003 2002
---- ----
Cost of sales $944,261 $720,913
Gross profit $116,769 $ 89,386
Gross profit, as a percentage of revenues 11.0% 11.0%
Gross profit (revenues less cost of sales) increased $27.4 million for the three
months ended March 31, 2003 to $116.8 million compared to $89.4 million for the
three months ended March 31, 2002. As a percentage of revenues, gross profit was
11.0% for the three months ended March 31, 2003 and 2002. The dollar increase in
gross profit was primarily due to gross profit of $31.8 million earned by the
companies acquired in 2002; this increase was partially offset by a decrease in
gross profits of $4.4 million attributable to previously owned subsidiaries, and
was primarily due to the losses from construction activity in the United Kingdom
as well as decreased gross profits from mechanical construction operations of
EMCOR's Midwestern subsidiaries.
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 March 31,
------------------------------------
2003 2002
---- ----
Selling, general and administrative expenses $109,175 $76,855
Selling, general and administrative expenses,
as a percentage of revenues 10.3% 9.5%
Selling, general and administrative expenses for the three months ended March
31, 2003 increased $32.3 million to $109.2 million compared to $76.9 million for
the three months ended March 31, 2002. Selling, general and administrative
expenses as a percentage of revenues were 10.3% for the three months ended March
31, 2003, compared to 9.5% for the three months ended March 31, 2002. For the
three month period ended March 31, 2003, the increase in selling, general and
administrative expense both in dollars and as a percentage of revenues compared
to the prior year was primarily attributable to $30.8 million of expenses for
the companies acquired in 2002 (which included costs of integration) as well as
the amortization expense of identifiable intangible assets associated with these
acquisitions of $0.9 million for the three months ended March 31, 2003.
Additionally, there was an increase in corporate selling, general and
administrative expenses related to the management and integration of the
companies acquired; partially offset by a reduction in selling, general and
administrative expenses of certain companies in response to changing market
conditions.
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 March 31,
------------------------------------
% of % of
Segment Segment
2003 Revenues 2002 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $12,955 5.1% $16,252 5.6%
United States mechanical construction and facilities services 4,344 1.0% 6,490 2.1%
United States facilities and other services 2,172 1.3% (795)
------- -------
Total United States operations 19,471 2.3% 21,947 3.4%
Canada construction and facilities services 621 0.7% (458)
United Kingdom construction and facilities services (4,468) (1,010)
Other international construction and facilities services 150 (289)
Corporate administration (8,180) (7,659)
------- -------
Total worldwide operations 7,594 0.7% 12,531 1.5%
Other corporate items:
Interest expense (1,997) (517)
Interest income 195 934
------- -------
Income before income taxes $ 5,792 $12,948
======= =======
EMCOR had operating income of $7.6 million for the three months ended March 31,
2003 compared with operating income of $12.5 million for the three months ended
March 31, 2002. The decrease of $4.9 million in operating income for the three
months ended March 31, 2003 as compared to the same period in 2002 was due
primarily to operating losses in the United Kingdom as well as a reduction in
operating income from the Midwestern United States mechanical construction
operations and the United States electrical construction operations, partially
offset by increased operating income from the United States facilities and other
services markets.
United States electrical construction and facilities services operating income
for the three months ended March 31, 2003 was $13.0 million or 5.1% of revenues,
compared to $16.3 million or 5.6% of revenues for the three months ended March
31, 2002. The $3.3 million decrease in operating income for the three months
ended March 31, 2003 compared to the same period in 2002 was primarily the
result of completion of certain private-sector fast-track jobs in the same
period in the prior year and a reduction in discretionary spending in the
commercial and industrial markets, which decrease was partially offset by
increases related to certain transportation infrastructure projects.
United States mechanical construction and facilities services operating income
for the three months ended March 31, 2003 was $4.3 million or 1.0% of revenues,
compared to $6.5 million or 2.1% of revenues for the three months ended March
31, 2002. The $2.1 million decrease in operating income was primarily
attributable to certain Midwestern construction operations.
United States facilities and other services operating income was $2.2 million
for the three months ended March 31, 2003 compared to an operating loss of $0.8
million for the three months ended March 31, 2002. The increase in operating
income was attributable to operating income earned by companies acquired in 2002
of $2.0 million and to operating income earned from site-based facilities
management contracts performed by previously owned subsidiaries in this segment.
Canada construction and facilities services operating income was $0.6 million
for the three months ended March 31, 2003, compared to an operating loss of $0.5
million for the three months ended March 31, 2002. The increase in operating
income in the current period was primarily due to operating income earned on new
longer-term construction projects.
United Kingdom construction and facilities services operating losses for the
three months ended March 31, 2003 and 2002 were $4.5 million and $1.0 million,
respectively. The increase in operating loss for the three months ended March
31, 2003 compared to the first quarter of 2002 was attributable to unfavorable
settlements and close-outs on certain projects in the three months ended March
31, 2003 offsetting operating income earned on increased revenues in the
construction and facilities services markets.
Other international construction and facilities services operating income was
$0.2 million for the three months ended March 31, 2003 compared to an operating
loss of $0.3 million for three months ended March 31, 2002. EMCOR continues to
pursue new business selectively in the Middle East and South Africa as well as
Continental Europe; however, the availability of opportunities has been
significantly reduced as a result of local economic factors.
General corporate expense for the three months ended March 31, 2003 was $8.2
million compared to $7.7 million for the three months ended March 31, 2002. The
increase in general corporate expenses was primarily due to the increase in
operation support activities related to the management and integration of more
than 30 acquired companies during 2002.
Interest expense for the three months ended March 31, 2003 and 2002 was $2.0
million and $0.5 million, respectively. The increase in interest expense was
primarily due to $156.0 million of borrowings under the working capital credit
line for the acquisition of CES on December 19, 2002. Interest income decreased
$0.7 million for the three months ended March 31, 2003 compared to the same
three months in 2002 due to lower cash on hand in the current quarter related to
cash used to pay for a portion of the CES acquisition price in December 2002 and
cash used in operating activities.
The income tax provision decreased to $2.5 million for the three months ended
March 31, 2003, versus $5.7 million for the same period in 2002. The decrease in
this provision was primarily due to decreased income before taxes for the three
months ended March 31, 2003, compared to the three months ended March 31, 2002.
The effective income tax rate was approximately 44% for the three months ended
March 31, 2003 and 2002.
EMCOR's contract backlog was $3.1 billion at March 31, 2003 and $2.9 billion at
December 31, 2002. The $0.2 billion increase in backlog was primarily due to an
increase in backlog for the United States mechanical and electrical segments.
EMCOR's contract backlog at March 31, 2003 was $3.1 billion compared to $2.5
billion at March 31, 2002. The increase was primarily attributable to backlog of
$0.4 billion for projects awarded in the United States, the United Kingdom and
Canada plus a net increase of $0.2 billion from the CES companies.
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 three months ended
March 31,
--------------------------
2003 2002
---- ----
Net cash (used in) provided by operating activities $(61,326) $ 53,511
Net cash used in investing activities $ (9,174) $(150,438)
Net cash provided by financing activities $ 33,272 $ 49,678
EMCOR's consolidated cash balance decreased by approximately $37.2 million from
$93.1 million at December 31, 2002 to $55.9 million at March 31, 2003. Net cash
used in operating activities of $61.3 million for the three months ended March
31, 2003 was a $114.8 million decrease from the net cash provided by operating
activities of $53.5 million in the same period last year. The increase in net
cash used in operating activities was primarily attributable to a net increase
in working capital requirements related to a decrease in accounts payable and
contracts in progress, partially offset by a decrease in accounts receivable.
Net cash used in investing activities of $9.2 million decreased by $141.2
million compared to $150.4 million in the same period last year. The decrease in
cash used in investing activities was due primarily to payments of $152.8
million for the acquisition of the Acquired Comfort Companies in the first
quarter of 2002 and a decrease in EMCOR's investments, notes and other long-term
receivables in the first quarter of 2002 compared to an increase in this account
in the first quarter of 2003. Net cash provided by financing activities of $33.3
million was a $16.4 million decrease from the net cash provided by financing
activities of $49.7 million for the three months ended March 31, 2002. The
decrease in net cash provided by financing activities was attributable to a
reduction in borrowings under working capital credit lines, offset by a
reduction in net repayments of long-term debt and capital lease payments.
Payments Due by Period
----------------------
Less
Contractual than 1-3 4-5 After
Obligations Total 1 year years years 5 years
- ---------------------------------------- ----- ------ ----- ----- -------
Notes payable $ 21.8 $ 21.8 $ -- $ -- $ --
Other long-term debt 0.7 0.3 0.2 0.2 --
Capital lease obligations 0.6 0.2 0.2 0.2 --
Operating leases 141.9 38.6 55.1 25.9 22.3
Open purchase obligations (1) 465.4 368.2 90.3 6.9 --
Other long-term obligations (2) 89.7 -- 89.7 -- --
------ ------ ------ ----- -----
Total Contractual Obligations $720.1 $429.1 $235.5 $33.2 $22.3
====== ====== ====== ===== =====
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) $144.9 $ -- $ -- $144.9 $ --
Letters of credit 42.9 13.2 0.6 1.3 27.8
Guarantees 25.0 -- -- -- 25.0
------ ----- ---- ------ -----
Total Commercial Commitments $212.8 $13.2 $0.6 $146.2 $52.8
====== ===== ==== ====== =====
(1) Represent open purchase orders for material and subcontracting costs
related to the Company'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) Represent 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. The revolving credit facility expires in September 2007.
As of March 31, 2003, EMCOR's total borrowing capacity under its revolving
credit facility was $275.0 million. EMCOR had approximately $42.9 million of
letters of credit outstanding under the revolving credit facility as of that
date. The amounts outstanding under the revolving credit facility as of March
31, 2003 and December 31, 2002 were $144.9 million and $112.0 million,
respectively.
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 of commercial 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.
There are $22.4 million in current maturities of EMCOR's long-term debt and
capital lease obligations as of March 31, 2003, of which $21.8 million relates
to notes payable to former owners of the Acquired Comfort Companies which were
assumed in connection with the acquisition. These notes accrue interest at an
annual rate of 10% and final payment is due in April 2003.
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 EMCOR employees, bonds are sometimes provided to secure such
obligations for wages and benefits payable to or for such employees. As of March
31, 2003 and December 31, 2002, sureties had issued bonds for the account of
EMCOR in the aggregate amount of approximately $1.3 billion. To the extent such
bonds were for the benefit of customers (as distinct from labor unions), they
related to approximately 700 construction projects. The bonds are issued by
EMCOR's sureties in return for a premium which can vary 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 a 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 order to manage
through these uncertainties, EMCOR currently has the capacity to borrow funds,
if necessary, to meet short-term requirements. 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 flows than the construction market. The
acquisition of CES in December 2002, which is primarily focused on the
facilities services market, is part of EMCOR's plan to grow its 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 2003 period, construction contracts trended away from short-cycle
contracts toward larger longer-term infrastructure and public sector contracts.
Performance of longer duration contracts usually requires higher upfront cash
requirements until billings can occur in accordance with contractual provisions.
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 $99.2
million and $127.3 million as of March 31, 2003 and December 31, 2002,
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. For example, in September 2002, EMCOR was able to
increase its capacity to borrow under credit facilities from $150.0 million to
$275.0 million. 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 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 market.
EMCOR believes that current cash balances and borrowing capacity available under
existing lines of credit 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 $60.0 million. If EMCOR was
required to pay damages in one or more such proceedings, such payments could
have a material adverse effect on its cash flow and/or earnings.
Certain Insurance Matters
As of March 31, 2003 and December 31, 2002, EMCOR was utilizing approximately
$28.3 million and $24.5 million, respectively, of letters of credit obtained
under its revolving credit facility as collateral for its insurance obligations.
Application of Critical Accounting Policies
The condensed consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. EMCOR's significant accounting policies are described
in Note B -- Summary of Significant Accounting Policies of the notes to
consolidated financial statements included in Item 8 of the annual report on
Form 10-K for the year ended December 31, 2002. There was no initial adoption of
any accounting policies during the three months ended March 31, 2003 other than
those listed under "New Accounting Pronouncements" below. EMCOR believes that
some of the more critical judgment areas in the application of accounting
policies that affect its financial condition and results of operations are
estimates and judgments pertaining to (a) revenue recognition from (i) long term
construction contracts for which the percentage 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)
intangible assets.
Revenue Recognition for Long-term Construction Contracts and Services Contracts
EMCOR believes its most critical accounting policy is revenue recognition from
long-term construction 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,
Statement of Position No. 81-1, "Accounting for Performance of Construction --
Type and Certain Production -- Type Contracts" and, accordingly, the method used
for revenue recognition within EMCOR's industry. Percentage-of-completion for
each contract is measured principally by the ratio 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 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 its
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 contracts. Such amounts are recoverable from customers 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 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 contract costs. Such amounts are recorded at estimated net realizable
value and take into account factors that may affect the ability to bill and
collect amounts billed. Due to uncertainties inherent within estimates employed
to apply percentage-of-completion accounting, estimates may 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.
In addition to revenue recognition for long-term construction contracts, EMCOR
recognizes revenues from services contracts as these services are performed in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). There are two basic types of services
contracts: 1) fixed price services contracts which are signed in advance for
maintenance, repair and retrofit work over periods typically ranging from one to
three years (for which there may be EMCOR employees on the customer's site full
time) and 2) services contracts not signed in advance for similar maintenance,
repair and retrofit work on an as needed basis. Fixed price services contracts
are generally performed evenly 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 101. Expenses related to all service
contracts are recognized as services are provided.
Accounts Receivable
EMCOR is required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the realization of
receivables, which assessment factors include the creditworthiness of the
customer, EMCOR's prior collection history with the customer and related aging
of the past due balances. At March 31, 2003 and December 31, 2002, accounts
receivable of $927.3 million and $965.0 million, respectively, included
allowances of $42.4 million and $40.6 million, respectively. Specific accounts
receivable are evaluated when EMCOR believes a customer may not be able to meet
its financial obligations due to a deterioration of its financial condition,
credit ratings or bankruptcy. The allowance requirements are based on the best
facts available and are re-evaluated and adjusted as additional information is
received.
Insurance Liabilities
EMCOR has deductibles for certain workers' compensation, auto liability, general
liability and property claims, has self-insured retentions for certain other
casualty claims, and is self-insured for employee-related health care claims.
Losses are recorded based upon estimates of the liability for claims incurred
and an estimate of 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 its liabilities for these obligations are adequate. However, such
obligations are difficult to assess and estimate due to numerous 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 actual experience differs from the
assumptions and estimates used for recording the liabilities, adjustments may be
required and would be recorded in the period that the experience becomes known.
Income Taxes
EMCOR has net deferred tax assets primarily resulting from deductible temporary
differences, 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 March 31, 2003 and December 31,
2002, the total valuation allowance on net deferred tax assets was approximately
$2.1 million.
Intangible Assets
As of March 31, 2003, EMCOR had goodwill and net identifiable intangible assets
of $293.4 million and $13.0 million, respectively, in connection with the
acquisition of certain 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. Certain of these forecasts reflect assumptions regarding the
ability to successfully integrate acquired companies. Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142") requires goodwill to be tested for impairment under certain circumstances,
and written down when impaired, rather than being amortized as previous
standards required. Furthermore, SFAS 142 requires identifiable intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. Changes in strategy and/or market
conditions may result in adjustments to recorded intangible asset balances. As
of March 31, 2003, no indicators of impairment of its goodwill or identifiable
intangible assets existed in accordance with the provisions of SFAS 142.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (the "FASB") issued
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the
"Interpretation"). FIN 45 clarifies the requirements of FASB Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 may require, that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of the Interpretations
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The Interpretation's provisions for initial recognition
and measurement should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The guarantor's previous accounting for guarantees that were issued
before the date of FIN 45's initial application may not be revised or restated
to reflect the effect of the recognition and measurement provisions of the
Interpretation. EMCOR has determined that the adoption of FIN 45 will only
impact disclosures and that its accounting for guarantees is not impacted as of
March 31, 2003.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 was effective for fiscal years beginning
after December 15, 2002 and was adopted by EMCOR for all periods presented.
EMCOR did not change to the fair value based method of accounting for
stock-based employee compensation; and therefore, adoption of SFAS 148 will only
impact disclosures, not the financial results, of EMCOR.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR has not used derivative financial instruments for any purpose during the
three months ended March 31, 2003 and 2002, including trading or speculating on
changes in interest rates, or commodity prices of materials used in its
business.
EMCOR is exposed to market risk for changes in interest rates for borrowings
under its revolving credit facility. Borrowings under the credit facility bear
interest at variable rates, and the fair value of this borrowing is not
significantly affected by changes in market interest rates. As of March 31,
2003, there was $144.9 million of borrowings outstanding under the revolving
credit facility, and these borrowings bear interest at (1) a rate which is the
prime commercial lending rate announced by Harris Trust and Savings Bank from
time to time (4.25% at March 31, 2003) plus 0% to 1.0%, based on certain
financial tests or (2) at a LIBOR rate (1.28% at March 31, 2003) plus 1.5% to
2.5% based on certain financial tests. Based on the borrowings outstanding of
$144.9 million, if interest rates were to increase by 1.0%, the net of tax
interest expense would increase $0.9 million in the next twelve months.
Conversely, if interest rates were to decrease by 1.0%, interest expense would
decrease by $0.9 million in the next 12 months. The revolving credit facility
expires in September 2007. There is no guarantee that EMCOR will be able to
renew the agreement at its expiration.
EMCOR is also exposed to market risk and its 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 customers' ability
to settle these obligations is negatively impacted by economic conditions. EMCOR
continually monitors the creditworthiness of its customers and maintains
on-going discussions with customers regarding contract status with respect to
change orders and billing terms. Therefore, EMCOR believes it takes appropriate
action to manage market and other risks, but there is no assurance that it 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, "Application of Critical Accounting Policies" in the Management's
Discussion and Analysis of Results of Operations and Financial Condition.
Amounts invested in EMCOR's foreign operations are translated into U. S. dollars
at the exchange rates in effect at the end of the period. The resulting
translation adjustments are recorded as accumulated other comprehensive income
(loss), a component of stockholders' equity, in the condensed consolidated
balance sheets. EMCOR believes the exposure to the effects that fluctuating
foreign currencies may have on the consolidated results of operations is limited
because the foreign operations primarily invoice customers and collect
obligations in their respective local currencies. Additionally, expenses
revenues associated with these transactions are generally contracted and paid
for in their same local currencies.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on an evaluation of EMCOR's disclosure controls and procedures
conducted within 90 days of the date of filing this Form 10-Q, the Chairman
of the Board and Chief Executive Officer of EMCOR, Frank T. MacInnis, and
the Chief Financial Officer of EMCOR, Leicle E. Chesser, have concluded
that EMCOR's 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.
(b) There were no significant changes in the internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Except for the arbitration proceedings referred to below, there have been no new
developments during the quarter ended March 31, 2003 regarding legal proceedings
reported in EMCOR's Annual Report on Form 10-K for the year ended December 31,
2002.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim in
arbitration against EMCOR's United Kingdom subsidiary, Drake & Scull Engineering
Limited ("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 mechanical and electrical engineering
services for the project. Mowlem's claim is for Sterling 38.5 million
(approximately $60.9 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 allegedly attributable to D&S in
connection with a settlement agreement Mowlem entered into with the Ministry of
Defence. EMCOR believes it has good and meritorious defenses to the Mowlem
claim, and D&S intends to file a counterclaim for certain design, labor and
delay and disruption costs incurred by D&S in connection with its subcontract
with Mowlem.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Incorporated by Reference to,
Exhibit No Description or Page Number
---------- ----------- -----------------------------
11 Computation of Basic Note C of the Notes
EPS and Diluted EPS to the Condensed Consolidated
for the three months Financial Statements.
ended March 31, 2003
and 2002
3(a-1) Restated Certificate of Exhibit 3(a-1) to Form 10-K
Incorporation of EMCOR
filed December 15, 1994
3(a-2) Amendment dated November 28, Exhibit 3(a-2) to EMCOR's
1995 to the Restated Annual Report on Form 10-K
Certificate of Incorporation for the year ended December
of EMCOR 31, 1995
3(a-3) Amendment dated February 12, Exhibit 3(a-3) to EMCOR's
1998 to the Restated Annual Report on Form 10-K
Certificate of Incorporation for the year ended December
31, 1997
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
4.1(a) U.S. $275,000,000 Credit Exhibit 4.1(a) to EMCOR's
Agreement by and among EMCOR Report on 8-K dated October
Group, Inc. and certain of 4, 2002
its Subsidiaries and Harris
Trust and Savings Bank
individually and as Agent and
the Lenders which are or
become parties thereto dated
as of September 26, 2002 (the
"Credit Agreement")
4.1(b) Amendment and Waiver letter Exhibit 4.1(b) on EMCOR's
dated December 10, 2002 to Annual Report on Form 10-K
the Credit Agreement* for the year ended December
31. 2002
99.1 Additional Exhibit - Page
Certification Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 by the Chief Executive
Officer
99.2 Additional Exhibit - Page
Certification Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 by the Chief Financial
Officer
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2003.
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.
Date: April 24, 2003 EMCOR GROUP, INC.
-----------------
(Registrant)
By: /s/FRANK T. MACINNIS
-----------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
/s/LEICLE E. CHESSER
-----------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
/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: April 24, 2003 /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: April 24, 2003 /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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Frank
T. MacInnis, 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: April 24, 2003 /s/ FRANK T. MACINNIS
------------------------
Frank T. MacInnis
Chief Executive Officer
A signed original of this written statement required in Section 906 has been
provided to EMCOR Group, Inc. and will be retained by EMCOR Group, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Leicle
E. Chesser, 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: April 24, 2003 /s/ LEICLE E. CHESSER
------------------------
Leicle E. Chesser
Chief Financial Officer
A signed original of this written statement required in Section 906 has been
provided to EMCOR Group, Inc. and will be retained by EMCOR Group, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.