May 27, 2005
Mr. John Cash
Accounting Branch Chief
Mail Stop 0510
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: EMCOR Group, Inc.
Form 10-K for the year ended December 31, 2004
File No. 1-8267
Reference is made to your letter dated April 19, 2005 regarding the Form 10-K
(the "Form 10-K") of EMCOR Group, Inc. (the "Company") for the year ended
December 31, 2004.
I have set forth below the Company's response to the comments contained in your
letter and all appropriate requested supplemental information. The numbered
captioned paragraphs below correspond to the same numbered captioned comments in
your letter.
Note G, Income Taxes, Page 38
1. As noted in our response dated April 12, 2005, EMCOR recorded accruals to
address certain specific income tax exposures associated with tax returns
filed for the years ended December 31, 1999 and 2000. The tax exposures
resulting from tax positions taken on those income tax returns relate to
specific tax issues that existed and were reserved for prior to 1999. The
following paragraphs discuss the primary issues for which the Company
recorded tax reserves.
The Company claimed worthless stock deductions on tax returns filed between
1995 and 1999 relating to the write-off of the Company's tax basis in a
number of subsidiary companies. The Company claimed such deductions in
accordance with Internal Revenue Code Section 165 (g) (3). However, the
Company concluded at the time that there was inherent uncertainty and
subjectivity associated with the valuation of the underlying equity
supporting the worthless stock deductions. Such inherent uncertainty and
subjectivity associated with the valuation of the underlying equity
required the Company to establish tax reserves based upon management's
assessment that a probable exposure existed in accordance with SFAS No. 5
"Accounting for Contingencies" ("SFAS No. 5").
In addition, during the same time period, the Company provided tax reserves
related to uncertainty as to utilization of certain net operating loss
("NOL") carry-forwards. During 1994, the Company was in Chapter 11
bankruptcy proceedings. The Company utilized Section 382 of the Internal
Revenue Code, which section allowed it to include the losses of the
consolidated group in its NOL carry-forwards. A different interpretation of
the required calculation of losses would result in a reduction in the
amount of the NOL carry-forwards. The Company concluded that a tax reserve
should be established for the probable exposure that existed in accordance
with SFAS No. 5 for this issue.
The utilization of the NOL carryforwards in the 1999, 2000 and 2001 tax
returns to offset taxable income generated in such years subjects the
Company to Internal Revenue Service audit and disallowance for the periods
in which such losses were generated . Accordingly, the expiration of the
statute of limitations for the 1999 and 2000 tax returns triggered the 2004
reversals of related tax reserves as such exposures were no longer
considered probable.
As of December 31, 2003, the Company had income tax reserves of $47
million. During the first quarter of 2004, the Company reversed $9.6
million of previously established federal income tax reserves due to the
expiration of a statute of limitation. Such statute of limitation expired
as of March 31, 2004, requiring the release of the previously established
tax reserves during the first quarter of 2004. The reversal of these
reserves was disclosed in the Company's first quarter Form 10-Q for the
three months ended March 31, 2004 in both Management's Discussion and
Analysis and the Notes to the Consolidated Financial Statements.
Similarly, during the 2004 third quarter, the Company reversed an
additional $12.5 million of income tax reserves into income. The statute of
limitations for Internal Revenue Service review with regard to the
Company's filed 2000 federal income tax return expired on September 15,
2004. As such, these tax reserves were no longer required and were reversed
during the quarter ended September 30, 2004. The reversal of these reserves
was disclosed in the Company's third quarter Form 10-Q for the three and
nine month periods ended September 30, 2004 in both Management's Discussion
and Analysis and the Notes to the Consolidated Financial Statements.
Further, the reversal of the total $22.1 million of income tax reserves was
disclosed in the Company's Form 10-K for the year ended December 31, 2004
in both the Management's Discussion and Analysis and the Notes to the
Consolidated Financial Statements.
The majority of the $22.1 million of tax reserves ($18 million) referred to
in the preceding paragraphs was included in the accrued expenses account in
the Company's consolidated balance sheet prior to being reversed in 2004.
The remaining $4.1 million of tax reserves was included in deferred income
taxes prior to being reversed in 2004. The movement between 2003 and 2004
in the Company's overall net deferred income tax account included in its
consolidated balance sheet (and overall reduction in the net deferred
income tax asset) primarily resulted from recording a valuation allowance
at the Company's United Kingdom subsidiary. As a result of operating losses
sustained at the United Kingdom subsidiary during the years 2003 and 2004,
the Company determined that it was more likely than not that such tax
assets would not be realized. As such, a valuation allowance was recorded
with respect to the deferred income tax assets in the United Kingdom for
the year ended December 31, 2004. Disclosure related to the establishment
of the valuation allowance was included in the Company's 2004 Form 10-K in
both Management's Discussion and Analysis and in the Notes to the
Consolidated Financial Statements.
2. As of December 31, 2004, the Company had $24.9 million of income tax
reserves. Of these income tax reserves, $21.5 million has been specifically
allocated to address the Company's exposure in its 2001 tax return relating
to the same deductions and losses discussed above and such amount was
included in deferred income taxes. The balance relates to other federal and
state income tax exposures. On a prospective basis, the Company will
disclose the amount of any income tax reserves and where such reserves have
been recorded. The Company will apply such disclosure in the Notes to the
Consolidated Financial Statements filed on Form 10-K for the year ending
December 31, 2005. In the future, if the Company is required to recognize
additional tax reserves in accordance with SFAS No. 5, disclosure will be
provided with regard to the initial recognition of such tax reserves.
The Company acknowledges that: The Company is responsible for the adequacy and
accuracy of the disclosure in the filings, staff comments or changes to
disclosures in response to staff comments do not foreclose the commission from
taking any action with respect to the filing, and the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission or any
person under the laws of the United States.
If you have any further questions, Please contact the undersigned at (203
849-7999.
Regards,
Mark A. Pompa
Senior Vice President
Chief Accounting Officer and Treasurer
cc.
Leicle E. Chesser, Executive Vice President and Chief Financial Officer
Sheldon I. Cammaker, Executive Vice President & General Counsel
Bernard J. McDonald, Ernst & Young LLP