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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the
FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-2315
EMCOR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
301 Merritt Seven Corporate Park 06851-1060
Norwalk, Connecticut (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 849-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any as an amendment
to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's voting common equity held by
non-affiliates of the registrant on June 30, 2003, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$741,000,000 based on that day's closing price.
Number of shares of the registrant's common stock outstanding as of the
close of business on February 19, 2004: 15,035,193 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which document will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates, are incorporated by
reference into Items 10 through 14 of Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business
General ....................................................................................... 1
The Business .................................................................................. 2
Mechanical and Electrical Construction Services and Facilities Services ....................... 2
Competition ................................................................................... 4
Employees ..................................................................................... 4
Backlog ....................................................................................... 4
Item 2. Properties .................................................................................... 5
Item 3. Legal Proceedings. ............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 9
Executive Officers of the Registrant .......................................................... 10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................................................ 11
Item 6. Selected Financial Data ....................................................................... 13
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ......... 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................................... 23
Item 8. Financial Statements and Supplementary Data ................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 53
Item 9A. Controls and Procedures ....................................................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 54
Item 11. Executive Compensation ........................................................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions ................................................ 54
Item 14. Principal Accounting Fees and Services ........................................................ 54
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 55
PART I
ITEM 1. BUSINESS
The Internet website address of EMCOR Group, Inc. ("EMCOR" or the "Company")
is http://www.emcorgroup.com. The Company's annual report on Form 10-K,
quarterly reports on Forms 10-Q and current reports on Forms 8-K (and any
amendments to those reports) are available free of charge on or through its
Internet website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
GENERAL
EMCOR is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2003, EMCOR had revenues of approximately $4.53 billion. EMCOR
provides services to a broad range of commercial, industrial, utility, and
institutional customers through approximately 70 principal operating
subsidiaries, joint ventures and a majority-owned interest in a limited
liability company in the United States. EMCOR has offices in 38 states and the
District of Columbia in the United States, eight provinces in Canada and 15
primary locations in the United Kingdom. In the United Arab Emirates and South
Africa, EMCOR carries on business through joint ventures. EMCOR's executive
offices are located at 301 Merritt Seven Corporate Park, Norwalk, Connecticut
06851-1060, and its telephone number at those offices is (203) 849-7800.
EMCOR specializes in providing construction services relating to mechanical
and electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services."
EMCOR designs, integrates, installs, starts up, operates and maintains
various electrical and mechanical systems, including:
o Systems for generation and distribution of electrical power;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications and
process control systems;
o Voice and data communications systems;
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems; and
o Plumbing, process and high-purity piping systems.
EMCOR's facilities services businesses, which support the operation of a
customer's facilities, include:
o Site-based operations and maintenance;
o Mobile maintenance and services;
o Facilities management;
o Remote monitoring;
o Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development and management for energy systems.
These facilities services are provided to a wide range of commercial,
industrial, utility and institutional facilities, including those at which EMCOR
provided construction services and others at which services were provided by
others. EMCOR's varied facilities services are frequently combined to provide
integrated service packages which include operations and maintenance, mobile
services and facility improvement programs.
EMCOR provides construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. It also provides these services indirectly by acting
as a subcontractor to general contractors, systems suppliers and other
subcontractors. Worldwide, EMCOR employs approximately 26,000 people.
EMCOR's revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of
EMCOR's 2003 revenues, approximately 80% were generated in the United States and
approximately 20% were generated internationally. In 2003, approximately 50% of
revenues were derived from new construction projects, 28% were derived from
renovation and retrofit of customer's existing facilities and 22% were derived
from facilities services operations.
1
THE BUSINESS
The broad scope of EMCOR's operations are more particularly described below.
For information regarding the revenues, operating income and total assets of
each of EMCOR's segments with respect to each of the last three fiscal years,
and EMCOR's revenues and assets attributable to the United States, Canada, the
United Kingdom and all other foreign countries, see Note M to EMCOR's financial
statements included herein.
MECHANICAL AND ELECTRICAL CONSTRUCTION SERVICES AND FACILITIES SERVICES
EMCOR believes that the mechanical and electrical construction services and
facilities services business is highly fragmented, consisting of thousands of
small companies across the United States and around the world. Because EMCOR has
total assets, annual revenues, net worth, access to bank credit and surety
bonding, and expertise significantly greater than most of its competitors, EMCOR
believes it has a significant competitive advantage. The mechanical and
electrical construction services industry has a higher growth rate than the
overall non-residential construction industry, due principally to the ever
increasing content and complexity of mechanical and electrical systems in all
types of projects. This increasing content and complexity is, in part, a result
of the expanded use of computers and more technologically advanced voice and
data communications, lighting, and environmental control systems in all types of
facilities. For these reasons, buildings of all types consume more electricity
per square foot than in the past and thus need more extensive electrical
distribution systems. In addition, advanced voice and data communication systems
require more sophisticated power supplies and extensive low voltage and
fiber-optic communications cabling. Moreover, the need for greater environmental
controls within a building, such as the heightened need for climate control to
maintain extensive computer systems at optimal temperatures, and the growing
demand for environmental control in individual spaces, have created expanded
opportunities for the mechanical and electrical construction services and
facilities services business.
Mechanical and electrical construction services primarily involve the design,
integration, installation and start-up of: (1) systems for the generation and
distribution of electrical power, including power cables, conduits, distribution
panels, transformers, generators, uninterruptible power supply systems and
related switch gear and controls; (2) lighting systems, including fixtures and
controls; (3) low-voltage systems, including fire alarm, security, and process
control systems; (4) voice and data communications systems, including
fiber-optic and low-voltage copper cabling; (5) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; and (6)
plumbing, process and high-purity piping systems.
Mechanical and electrical construction services generally fall into one of
two categories: (1) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (2) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR's United States mechanical and electrical construction services
operations accounted for about 61% of its 2003 revenues, of which revenues
approximately 67% was related to new construction and approximately 33% was
related to renovation and retrofit projects. EMCOR provides mechanical and
electrical construction services for both large and small installation and
renovation projects. Its largest projects include those (1) for institutional
use (such as water and wastewater treatment facilities, hospitals, correctional
facilities, schools and research laboratories); (2) for industrial use (such as
pharmaceutical plants, steel, pulp and paper mills, chemical, automotive and
semiconductor manufacturing facilities, and oil refineries); (3) for
transportation projects (such as highways, airports and transit systems); (4)
for commercial use (such as office buildings, data centers, hotels, casinos,
convention centers, sports stadiums, shopping malls and resorts); and (5) for
power generation and energy management projects. EMCOR's largest projects, which
typically range in size from $10.0 million up to and occasionally exceeding
$50.0 million and are usually multi-year projects, represented about 30% of
EMCOR's construction services revenues in 2003.
EMCOR's projects of less than $10.0 million accounted for approximately 70%
of 2003 construction services revenues. These projects are typically completed
in less than one year. They usually involve mechanical and electrical
construction services when an end-user or owner undertakes construction or
modification of a facility to accommodate a specific use. These projects
frequently require mechanical and electrical systems to meet special needs such
as critical systems power supply, special environmental controls and high-purity
air systems, sophisticated electrical and mechanical systems for data centers,
including those associated with internet service providers and electronic
commerce, trading floors in financial services businesses, new production lines
in manufacturing plants, and office arrangements in existing office buildings.
They are not usually dependent upon the new construction market. Demand for
these projects and types of services is often prompted by the expiration of
leases, changes in technology or changes in the customer's plant or office
layout in the normal course of a customer's business.
EMCOR performs its services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term complex projects that require
significant technical and management skills and the financial strength to obtain
bid and performance bonds, which are often a condition to bidding for and
winning these projects.
2
EMCOR also installs and maintains lighting for streets, highways, bridges and
tunnels, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactures and installs sheet metal air
handling systems for both its own mechanical construction operations and for
unrelated mechanical contractors. EMCOR also maintains welding and pipe
fabrication shops in support of some of its own mechanical operations.
In the early 1990's, the market for facilities services grew rapidly in the
United Kingdom as a result of government initiatives. EMCOR's United Kingdom
subsidiary expanded its traditional technical service business in response to
these opportunities and established a dedicated unit to focus on the facilities
services business. This unit currently provides a full range of facilities
services to public and private sector customers under multi-year agreements,
including the maintenance of British Airways' facilities at Heathrow and Gatwick
Airports, GlaxoSmithKline Research Laboratories, and the Jubilee Line Extension
of the London Underground. In the United Kingdom, EMCOR also provides facilities
services at several BAE Systems manufacturing plants. In addition, the United
Kingdom operations provide on-call and mobile service support on a task-order or
contract basis, small renovation project work, and installation and maintenance
services for data communications and security systems.
In 1997, EMCOR established a subsidiary to expand its facilities services
operations in North America patterned on its United Kingdom business. This unit
has built on EMCOR's traditional mechanical and electrical services operations,
facilities services activities at its mechanical and electrical contracting
subsidiaries, and EMCOR's client relationships, as well as acquisitions, to
expand the scope of services currently offered and to develop packages of
services for customers on a regional, national and global basis.
As a consequence, EMCOR's United States facilities services unit ("EFS")
offers a broad range of facilities services, including maintenance and service
of mechanical and electrical systems, which EMCOR has historically provided to
customers following completion of construction projects, and site-based
operations and maintenance, mobile maintenance and service, facilities
management, remote monitoring, installation and support for building systems,
technical consulting and diagnostic services, small modification and retrofit
projects, and program development and management for energy systems.
EMCOR's facilities services are provided to a wide range of commercial,
industrial and institutional facilities, including both those for which EMCOR
provided construction services and those for which construction services were
provided by others. Facilities services are frequently bundled to provide
integrated service packages and are provided on a mobile basis or by customer
site-based EMCOR employees.
These facilities services, which generated approximately 22% of 2003
revenues, are provided to owners, operators, tenants and managers of all types
of facilities both on a contract basis for a specified period of time and on an
individual task order basis.
EMCOR has experienced an expansion in the demand for its facilities services
which it believes is driven by customers' decisions to focus on their own core
competencies, the increasing technical complexity of their facilities and their
mechanical, electrical, voice and data and other systems, and the need for
increased reliability, especially in mechanical and electrical systems. These
trends have led to outsourcing and privatization programs whereby customers in
both the private and public sectors seek to contract out those activities that
support but are not directly associated with the customer's core business. EFS
clients include Fortune 100 companies in information technology,
telecommunications, pharmaceuticals, financial services, publishing and
manufacturing.
Illustrative of the outsourcing of companies' facilities services is a
three-year agreement, expiring June 2005, with Bank One under which EMCOR
provides facilities services for approximately 2,200 Bank One facilities
encompassing 34.0 million square feet of space in 30 states; its four and
one-half year agreement with LAM Research, expiring December 2006 under which
EMCOR provides such services to approximately 1 million square feet of
laboratory and office space; its three-year agreement with Mattson Technology,
Inc., expiring December 2005 under which EMCOR provides integrated services to
approximately 800,000 square feet of commercial space; its three and one-half
year agreement with Fidelity Investments expiring June 2004 under which EMCOR
provides integrated services to approximately 2.5 million square feet of data
center space; and its agreements with Hewlett-Packard Company expiring in March
and July 2006 under which EMCOR provides integrated services to approximately
20.0 million square feet of commercial space. In April 2000, EMCOR and CB
Richard Ellis Inc., a nationwide real estate management company, created a
limited liability company, in which EMCOR has a majority interest and
principally provides operations and maintenance services to over 10,000
commercial facilities comprising approximately 30.0 million square feet of
space. In November 2003, EMCOR acquired the Facility Management Services
division of Siemens Building Technologies, Inc., including contracts to provide
facilities services to several operating units of Siemens Corporation
encompassing 5.0 million square feet of corporate, manufacturing and research
space.
In December 2002, EMCOR acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business, which generated in 2003 revenues in
excess of $422.2 million, and which provided services to approximately 9,800
facilities with an aggregate of approximately 277.0 million square feet of
space. In Washington D.C., CES is the second largest facilities services
provider to the federal government behind the General Services Administration
and currently provides services to such preeminent buildings as the National
Archives and the Ronald Reagan Building, the second largest government facility
after the Pentagon. It currently provides its services in 28 states throughout
the Northeast, Midwest, Mid-Atlantic and Southeast. As part of its operations,
CES is responsible for (i) the oversight of all or most of a business'
facilities operations, including operation and maintenance, (ii) the oversight
of logistical processes, (iii) tenant services and management, (iv) servicing
upgrade and retrofit of HVAC, electrical, plumbing, and industrial piping and
sheet metal systems in existing facilities and (v) diagnostic and solution
engineering for building systems and their components.
3
The deregulation of, and increased competition in, the utility industry,
along with government mandates calling for reduced energy consumption by
governmental entities, have led to renewed focus on energy costs and
conservation measures. These measures typically include energy assessments and
engineering studies, retrofit construction to implement energy savings measures,
and the implementation of energy savings measures to ensure continued
performance. Various subsidiaries of EMCOR participate in energy savings
programs, such as an energy conservation project for Washington Mutual, Inc.,
which evolved from the facilities services provided by EMCOR to Washington
Mutual, Inc. EMCOR believes it has the ability to be a single source provider of
construction and facilities services required for energy assessment and for
design, installation, and operations and maintenance of energy savings measures.
EMCOR believes mechanical and electrical construction services and facilities
services activities are complementary, permitting it to offer customers a
comprehensive package of services. The ability to offer both construction and
facilities services should enhance EMCOR's competitive position with customers.
Furthermore, EMCOR's facilities services operations tend to be less cyclical
than its construction operations because facilities services are more responsive
to the needs of an industry's operational requirements rather than its
construction requirements.
COMPETITION
EMCOR believes that the mechanical and electrical construction services
business is highly fragmented and competitive. A majority of EMCOR's revenues
are derived from projects requiring competitive bids; however, an invitation to
bid is often conditioned upon prior experience, technical capability and
financial strength. EMCOR competes with national, regional and local companies,
many of which are small, owner-operated entities that operate in a limited
geographic area. However, there are a few public companies focused on providing
mechanical and electrical construction services. EMCOR is one of the largest
providers of mechanical and electrical construction services in the United
States, Canada, the United Kingdom and in the world. Competitive factors in the
mechanical and electrical construction services business include: (1) the
availability of qualified and/or licensed personnel; (2) reputation for
integrity and quality; (3) safety record; (4) cost structure; (5) relationships
with customers; (6) geographic diversity; (7) the ability to control project
costs; (8) experience in specialized markets; (9) the ability to obtain surety
bonding; (10) adequate working capital; and (11) access to bank credit.
While the facilities services business is also highly fragmented, a number of
large corporations such as Johnson Controls, Inc., Fluor Corp., Unicco Service
Company, Trammel Crow and Jones Lang LaSalle are engaged in this field. EMCOR's
facilities services operations were expanded both through organic growth and
acquisitions.
EMPLOYEES
EMCOR presently employs approximately 26,000 people, approximately 71% of
whom are represented by various unions pursuant to more than 430 collective
bargaining agreements between EMCOR's individual subsidiaries and local unions.
EMCOR believes that its employee relations are generally good. None of these
collective bargaining agreements are national or regional in scope.
BACKLOG
EMCOR had contract backlog as of December 31, 2003 of approximately $3.0
billion, compared with backlog of approximately $2.9 billion as of December 31,
2002. Backlog is not a term recognized under accounting principles generally
accepted in the United States; however, it is a common measurement used in
EMCOR's industry. Backlog includes the unrecognized revenue to completion on the
total value of existing construction contracts plus unrecognized revenue on
existing facilities services contracts to be derived during the immediately
succeeding 12 months. Backlog increased by $0.1 billion as of December 31, 2003
compared to December 31, 2002. Backlog attributable to United States
construction and facilities services and backlog attributable to Canada and
United Kingdom construction and facilities services each increased by
approximately $0.05 billion as of December 31, 2003 when compared to December
31, 2002. For the year ended December 31, 2003, EMCOR had approximately $4.53
billion in revenues compared to approximately $3.97 billion in revenues for the
year ended December 31, 2002.
4
ITEM 2. PROPERTIES
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities, both leased and owned, and identifies
the business segment that is the principal user of each such facility.
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven Corporate Park
Norwalk, Connecticut ..................... 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona (a) ..................... 9,704 3/30/06
1200 North Sickles Drive
Tempe, Arizona (b) ....................... 29,000 Owned
1000 N. Kraemer Place
Anaheim, California (b) .................. 24,384 8/14/12
4540 Easton Drive
Bakersfield, California (c) .............. 11,368 3/31/04
3208 Landco Drive
Bakersfield, California (c) .............. 49,875 6/30/07
555 Anton Boulevard
Costa Mesa, California (a) ............... 17,058 5/31/08
1168 Fesler Street
El Cajun, California (b) ................. 48,360 8/31/10
24041 Amador Street
Hayward, California (b) .................. 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) .................. 34,800 6/30/04
5 Vanderbilt
Irvine, California (a) ................... 18,000 7/31/04
4462 Corporate Center Drive
Los Alamitos, California (c) ............. 57,863 7/31/06
825 Howe Road
Martinez, California (c) ................. 109,800 12/31/07
8670 Younger Creek Drive
Sacramento, California (a) ............... 51,984 6/15/08
4464 Alvarado Canyon Road
San Diego, California (b) ................ 40,000 10/31/07
9505 and 9525 Chesapeake Drive
San Diego, California (c) ................ 25,124 12/31/06
414 Brannan Street
San Francisco, California (c) ............ 18,964 3/31/05
4405 and 4420 Race Street
Denver, Colorado (b) ..................... 17,704 9/30/11
345 Sheridan Boulevard
Lakewood, Colorado (c) ................... 63,000 Owned
367 and 377 Research Parkway
Meriden, Connecticut (b) ................. 27,700 7/31/04
1781 N.W. North River Drive
Miami, Florida (b) ....................... 11,285 Owned
5
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
2501 S.W. 160th Street
Miramar, Florida (c) ....................... 15,877 7/31/08
3145 Northwoods Parkway
Norcross, Georgia (c) ...................... 25,808 1/31/06
400 Lake Ridge Drive
Smyrna, Georgia (a) ........................ 30,000 9/30/12
801 Asbury Drive
Buffalo Grove, Illinois (a) ................ 10,650 11/09/04
2160 North Asland Avenue
Chicago, Illinois (b) ...................... 67,000 6/30/05
2100 South York Road
Oak Brook, Illinois (c) .................... 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) .................. 40,000 6/09/05
1406 Cardinal Court
Urbana, Illinois (b) ....................... 33,750 10/01/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) .................... 136,695 10/31/08
2655 Garfield Road
Highland, Indiana (c) ...................... 45,816 6/30/06
5124-5128 W. 79th Street
Indianapolis, Indiana (b) .................. 12,600 9/30/06
2600 N. Ninth Street Road
Lafayette, Indiana (b) ..................... 13,798 10/31/08
3100 Brinkerhoff Road
Kansas City, Kansas (b) .................... 42,836 11/30/05
3125 Brinkerhoff Road
Kansas City, Kansas (b) .................... 22,676 Owned
631 Pecan Circle
Manhattan, Kansas (b) ...................... 22,750 8/31/08
2118 W. Harry
Wichita, Kansas (b) ........................ 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky (c) .................... 20,600 1/07/09
4530 Hollins Ferry Road
Baltimore, Maryland (b) .................... 26,792 Owned
645 A-F & 647 A & B Lofstrand Lane
Rockville, Maryland (a) .................... 10,600 2/28/05
643 Lofstrand Lane
Rockville, Maryland (a) .................... 15,000 2/28/05
306 Northern Avenue
Boston, Massachusetts (a) .................. 15,275 6/30/05
200 Old Colony Way
Boston, Massachusetts (b) .................. 11,500 3/31/05
70-70D Hawes Way
Stoughton, Massachusetts (b) ............... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts (a) (b) ........... 36,000 6/10/13
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
1743 Maplelawn
Troy, Michigan (c) .......................... 22,000 4/30/06
6060 Hix Road
Westland, Michigan (b) ...................... 23,000 12/31/08
6325 South Valley Boulevard
Las Vegas, Nevada (b) ....................... 23,190 12/31/08
3555 W. Oquendo Road
Las Vegas, Nevada (c) ....................... 90,000 11/30/08
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ............... 45,400 1/14/06
348 New Country Road
Secaucus, New Jersey (b) .................... 37,905 12/31/07
26 West Street
Brooklyn, New York (b) ...................... 15,000 Owned
301 and 305 Suburban Avenue
Deer Park, New York (b) ..................... 33,535 3/31/05
24-37 46th Street
Long Island City, New York (a) .............. 10,000 1/31/07
111-01 and 109-15 14th Avenue
Long Island City, New York (c) .............. 82,000 2/28/11
516 West 34th Street
New York, New York (c) ...................... 25,000 6/30/12
253 West 35th Street
New York, New York (c) ...................... 7,000 8/31/09
Two Penn Plaza
New York, New York (a) ...................... 57,200 2/01/06
704 Clinton Avenue South
Rochester, New York (a) ..................... 25,000 7/31/04
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio (a) ........................ 25,500 9/27/06
3976 Southern Avenue
Cincinnati, Ohio (a) ........................ 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) .......................... 25,500 10/31/07
2904 S.W. 1st Avenue
Portland, Oregon (c) ........................ 12,500 3/31/04
700 Gracern Road
Columbia, South Carolina (a) ................ 11,850 2/28/07
7520 Bartlett Corp. Avenue, East
Bartlett, Tennessee (c) ..................... 9,000 12/31/05
4067 New Getwell Road
Memphis, Tennessee (b) ...................... 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas (c) .......................... 18,028 1/31/07
5550 Airline Drive
Houston, Texas (b) .......................... 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) .......................... 26,676 12/31/09
7
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
1574 South West Temple
Salt Lake City, Utah (c) ...................... 120,904 12/31/06
320 23rd Street
Arlington, Virginia (a) ....................... 43,058 3/05/10
109-D Executive Drive
Dulles, Virginia (c) .......................... 19,000 8/31/04
22930 Shaw Road
Dulles, Virginia (c) .......................... 32,616 7/31/06
3280 Formex Road
Richmond, Virginia (a) ........................ 30,640 7/31/08
8657 South 190th Street
Kent, Washington (a) .......................... 46,125 6/30/08
6950 Gisholt Drive
Madison, Wisconsin (b) ........................ 32,000 5/30/09
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom (d) ..... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom (d)... 24,300 12/24/06
2116 Logan Avenue
Winnipeg, Manitoba, Canada (e) ................ 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada (e) ............... 16,100 Owned
EMCOR believes that all of its property, plant and equipment are well
maintained, in good operating condition and suitable for the purposes for which
they are used.
See Note K -- Commitments and Contingencies of the notes to consolidated
financial statements for additional information regarding lease costs. EMCOR
utilizes substantially all of its leased or owned facilities and believes there
will be no difficulty either in negotiating the renewal of its real property
leases as they expire or in finding alternative space, if necessary.
- ----------------
(a) Principally used by a company engaged in the "United States facilities
services" segment.
(b) Principally used by a company engaged in the "United States mechanical
construction and facilities services" segment.
(c) Principally used by a company engaged in the "United States electrical
construction and facilities services" segment.
(d) Principally used by a company engaged in the "United Kingdom construction
and facilities services" segment.
(e) Principally used by a company engaged in the "Canada construction and
facilities services" segment.
8
ITEM 3. LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
In December 2001, the Company's Canadian subsidiary Comstock Canada Limited
("Comstock") commenced an action against Atomic Energy of Canada Limited
("AECL") in the Ontario Superior Court of Justice claiming approximately Cdn.
$6.0 million (approximately $4.6 million) in connection with Comstock's work on
two medical isotope nuclear reactors and associated works at AECL's facility at
Chalk River, Ontario. Comstock's claim was for holdback, unpaid change requests,
loss of productivity and extended duration costs. AECL filed an amended defense
denying Comstock's claim and counterclaimed against Comstock for Cdn. $47.0
million (approximately $36.3 million) claiming fraud and substantial
deficiencies in Comstock's performance of work which are alleged to have
resulted in the need to replace much of Comstock's work and installed materials
and the need to redesign and reinstall various components of the reactor
systems. In December 2003, the matter was settled. The settlement provided for a
payment of a portion of Comstock's claim by AECL and did not require payment of
any damages by Comstock.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim
in arbitration against EMCOR's United Kingdom subsidiary, EMCOR Drake & Scull
Group plc ("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 (pound)39.5 million
(approximately $70.5 million), which includes costs allegedly incurred by Mowlem
in connection with rectification of the alleged defects, overhead, legal fees,
delay and disruption costs related to such defects, and interest on such
amounts. The claim also includes amounts in respect of liabilities that Mowlem
accepted in connection with a settlement agreement it entered into with the
Ministry of Defence and which it claims are attributable to D&S. D&S believes it
has good and meritorious defenses to the Mowlem claim. D&S has denied liability
and has asserted a counterclaim for approximately (pound)11.6 million
(approximately $20.7 million) for certain design, labor and delay and disruption
costs incurred by D&S in connection with its subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the proceedings and claims in which EMCOR is involved range from
a few thousand dollars to over $70.0 million, the outcome of which cannot be
predicted, adverse results could have a material adverse effect on EMCOR's
financial position and/or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 57; Chairman of the Board and Chief Executive Officer
of the Company since April 1994. Mr. MacInnis was elected to the additional
position of President on February 26, 2004. He served as President of the
Company from April 1994 to April 1997. From April 1990 to April 1994, Mr.
MacInnis served as President and Chief Executive Officer, and from August 1990
to April 1994 as Chairman of the Board, of Comstock Group, Inc., a nationwide
electrical contracting company. From 1986 to April 1990, Mr. MacInnis was Senior
Vice President and Chief Financial Officer of Comstock Group, Inc. In addition,
from 1986 to April 1994, Mr. MacInnis was also President of Spie Group Inc.,
which had interests in Comstock Group, Inc., Spie Construction Inc., a Canadian
pipeline construction company, and Spie Horizontal Drilling Inc., a U.S. company
engaged in underground drilling for the installation of pipelines and
communications cable.
SHELDON I. CAMMAKER, Age 64; Executive Vice President and General Counsel of
the Company since September 1987 and Secretary of the Company since May 1997.
Prior to September 1987, Mr. Cammaker was a senior partner of the New York City
law firm of Botein, Hays, & Sklar.
LEICLE E. CHESSER, Age 57; Executive Vice President and Chief Financial
Officer of the Company since May 1994. From April 1990 to May 1994, Mr. Chesser
served as Executive Vice President and Chief Financial Officer of Comstock
Group, Inc., and from 1986 to May 1994, Mr. Chesser was also Executive Vice
President and Chief Financial Officer of Spie Group, Inc.
R. KEVIN MATZ, Age 45; Senior Vice President - Shared Services of the Company
since June 2003. From April 1996 to June 2003 Mr. Matz served as Vice President
and Treasurer of the Company and Staff Vice President - Financial Services of
the Company from March 1993 to April 1996. From March 1991 to March 1993, Mr.
Matz was Treasurer of Sprague Technologies Inc., a manufacturer of electronic
components.
MARK A. POMPA, Age 39; Senior Vice President - Chief Accounting Officer and
Treasurer of the Company since June 2003. From September 1994 to June 2003 Mr.
Pompa was Vice President and Controller of the Company.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION.EMCOR's common stock trades on the New York Stock Exchange
under the symbol "EME".
The following table sets forth high and low sales prices for the common stock
for the periods indicated as reported by the New York Stock Exchange:
2003 HIGH LOW
--- ---- ---
First Quarter ....................... $55.20 $43.40
Second Quarter ...................... $54.30 $45.61
Third Quarter ....................... $50.40 $39.79
Fourth Quarter ...................... $45.14 $33.00
2002 HIGH LOW
--- ---- ---
First Quarter ....................... $59.71 $43.87
Second Quarter ...................... $64.35 $51.91
Third Quarter ....................... $60.80 $45.20
Fourth Quarter ...................... $58.15 $44.71
HOLDERS.As of February 19, 2004, there were 126 stockholders of record and,
as of that date, EMCOR estimates there were approximately 10,400 beneficial
owners holding stock in nominee or "street" name.
DIVIDENDS.EMCOR did not pay dividends on its common stock during 2003 or
2002, and it does not anticipate that it will pay dividends on its common stock
in the foreseeable future. EMCOR's working capital credit facility limits the
payment of dividends on its common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes equity compensation plans that were approved by
stockholders and equity compensation plans that were not approved by
stockholders as of December 31, 2003:
Equity Compensation Plan Information
A B C
-------------------------- -------------------------- --------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN A)
- -------------------------- -------------------------- -------------------------- --------------------------
Equity Compensation
Plans Approved by
Stockholders 725,129 $17.57 581,866(2)
Equity Compensation
Plans Not Approved
by Stockholders 1,055,074(1) $34.21 89,394(3)
--------- -------
Total 1,780,203 $27.43 671,260
========= =======
- --------------
(1) 54,167 shares relate to options which are held by employees (other than
executive officers) of the Company (the "Employee Options"), 868,135 shares
relate to options which are held by executive officers of the Company (the
"Executive Options"), 14,000 shares relate to options which are held by
Directors of the Company (the "Director Options"), and 130,606 shares relate
to restricted common stock units ("RSUs") outstanding under the Executive
Stock Bonus Plan described below under the "Executive Stock Bonus Plan."
(2) Includes 118,191 shares reserved for issuance under the 1997 Non-Employee
Directors' Non-Qualified Stock Option Plan, 11,000 shares reserved for
issuance under the 1995 Non-Employee Directors' Non-Qualified Stock Option
Plan, 90,000 shares reserved for issuance under the 2003 Non-Employee
Directors' Stock Option Plan, and 320,000 shares reserved for issuance under
the 2003 Management Stock Incentive Plan.
(3) Represent shares reserved for issuance under the Executive Stock Bonus Plan.
Does not include options to purchase 192,398 shares of common stock granted
in January 2004 to executive officers pursuant to their respective
employment agreements described below under "Executive Options."
11
EMPLOYEE OPTIONS
The Employee Options referred to in note (1) to the immediately preceding
table under Equity Compensation Plan Information (the "Table") vest over three
years in equal annual installments, commencing with the first anniversary of the
date of grant of the Employee Options. The Board of Directors granted such
Employee Options to certain key employees of the Company based upon the
performance of such employees. Such Employee Options have an exercise price per
share equal to the fair market value of a share of common stock on their
respective grant dates and have a term of ten years from the grant date.
EXECUTIVE OPTIONS
410,000 of the Executive Options referred to in note (1) to the Table were
granted to six executive officers in connection with their respective prior
employment agreements with the Company dated as of January 1, 1998, as amended
(the "Prior Employment Agreements"). Pursuant to the terms of such Prior
Employment Agreements, each such executive officer received a fixed number of
Executive Options on the first business day of 1999, 2000 and 2001 with
respective exercise prices of $16.19, $17.56 and $25.44 per share; in addition,
Mr. MacInnis, Chairman of the Board and Chief Executive Officer of the Company,
received an additional grant under his Prior Employment Agreement of an option
to purchase 200,000 shares with an exercise price of $19.75 per share. Such
Executive Options vested on the first anniversary of the grant date, other than
the option granted to Mr. MacInnis for 200,000 shares which vested in four equal
installments based upon the common stock reaching target stock prices of $25,
$30, $35 and $40.
An additional 458,135 Executive Options referred to in note (1) to the Table
were granted to six executive officers in connection with their respective
current employment agreements with the Company dated January 1, 2002 (the
"Current Employment Agreements"). Of these options, executive officers were
granted (i) an aggregate amount of 171,100 of such Executive Options on December
14, 2001 (exercisable in full upon grant) with an exercise price of $41.70 per
share, (ii) an aggregate amount of 145,700 of such Executive Options on January
2, 2002 with an exercise price of $46.35 per share and (iii) an aggregate amount
of 141,335 of such Executive Options on January 2, 2003 with an exercise price
of $54.73.
Pursuant to the terms of the Current Employment Agreements, on the first
business day of 2004, the executive officers were granted options to purchase an
aggregate of 192,398 shares of Company common stock with an exercise price of
$43.83 per share. These options are not included in the Table.
Other than those Executive Options granted on December 14, 2001, referred to
above, the Executive Options granted vest one-fourth on the grant date,
one-fourth on the first anniversary of the grant date, one-fourth on the second
anniversary of the grant date and one-fourth on the last business day of the
calendar year immediately preceding the third anniversary of the grant date.
Each of the Executive Options granted have a term of ten years from their
respective grant dates and an exercise price per share equal to the fair market
value of a share of common stock on their respective grant dates.
DIRECTOR OPTIONS
During 2002, each non-employee director of the Company received 2,000
Director Options and in 2003 Mr. Larry J. Bump, upon his election to the Board,
received 2,000 Director Options. These options were in addition to the 3,000
options to purchase common stock granted to each non-employee director under the
Company's 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, which
plan has been approved by the Company's stockholders. The price at which such
Director Options are exercisable is equal to the fair market value per share of
common stock on the grant date. The exercise price per share of the Director
Options is $55.49 per share, except those granted to Mr. Yonker, upon his
election to the Board on October 25, 2002, which have an exercise price of
$51.75 per share, and those granted to Mr. Bump, upon his election to the Board
on February 27, 2003, which have an exercise price of $48.15 per share. All of
these options vested in full on the grant date and have a term of ten years from
the grant date.
EXECUTIVE STOCK BONUS PLAN
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by the
Board of Directors in October 2000 and amended December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of units ("RSUs")
that will subsequently be converted into common stock at a 15% discount from the
fair market value of common stock as of the date the annual bonus is determined.
The units are to be converted into shares of common stock and delivered to the
executive officer on the earliest of (i) the first business day following the
day upon which the Company releases to the public generally its results in
respect of the fourth quarter of the third calendar year following the year in
respect of which the RSUs were granted ("Release Date"), (ii) the executive
officer's termination of employment for any reason or (iii) immediately prior to
a "change of control" (as defined in the Stock Bonus Plan). In addition,
pursuant to the Stock Bonus Plan, each executive officer is permitted at his
election to cause all or part of his annual bonus not automatically credited to
him in the form of RSUs under the Stock Bonus Plan to be credited to him in the
form of units ("Voluntary Units") that will subsequently be converted into
common stock at a 15% discount from the fair market value of common stock as of
the date the annual bonus is determined. An election to accept Voluntary Units
under the Stock Bonus Plan must be made at least six months prior to the end of
the calendar year in respect of which the bonus will be payable. These Voluntary
Units are to be converted into shares of common stock and delivered to the
executive officer on the earliest of (i) the date elected by the executive
officer but in no event earlier than the Release Date, (ii) the executive
officer's termination of employment or (iii) immediately prior to a "change of
control."
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from audited financial
statements and should be read in conjunction with the consolidated financial
statements, the related notes thereto and the report of independent auditors and
the report of independent public accountants thereon included elsewhere in this
and in previously filed annual reports on Form 10-K of EMCOR.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Revenues ............................................ $4,534,646 $3,968,051 $3,419,854 $3,460,204 $2,893,962
Gross profit ........................................ 482,454 482,634 391,823 357,817 295,907
Operating income .................................... 45,152 114,425 88,682 78,925 58,091
Net income .......................................... $ 20,621 $ 62,902 $ 50,012 $ 40,089 $ 27,821
========== ========== ========== ========== ==========
Basic earnings per share ............................ $ 1.38 $ 4.23 $ 3.86 $ 3.84 $ 2.86
========== ========== ========== ========== ==========
Diluted earnings per share .......................... $ 1.33 $ 4.07 $ 3.40 $ 2.95 $ 2.21
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ............................ $ 521,356 $ 489,870 $ 421,933 $ 233,503 $ 170,249
Total assets ........................................ $1,795,247 $1,758,491 $1,349,664 $1,261,864 $1,052,246
Goodwill ............................................ $ 277,994 $ 290,412 $ 56,011 $ 67,625 $ 68,009
Notes payable ....................................... $ -- $ 21,815 $ 573 $ -- $ 1,150
Borrowings under working capital credit lines ....... $ 139,400 $ 112,000 $ -- $ -- $ --
Other long-term debt, including current maturities .. $ 589 $ 1,015 $ 973 $ 116,056 $ 116,534
Capital lease obligations ........................... $ 339 $ 351 $ 249 $ 573 $ 554
- ---------------
(a) No cash dividends on EMCOR's common stock have been paid during the past
five years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The results of operations for each of the three years ended December 31,
2003, 2002 and 2001 have been impacted by a number of significant trends and
events. Results of operations for 2003 compared to 2002 have been positively
impacted by the acquisition of the capital stock of Consolidated Engineering
Services, Inc. ("CES") from Archstone-Smith operating trust and others on
December 19, 2002, and an increase in revenues and income generated by United
States facilities services operations and United States transportation
infrastructure work. However, the 2003 results compared to 2002 were negatively
impacted by: (1) poor performance in the United Kingdom construction operations;
(2) increased competition for, and a related decrease in gross profit margin on,
commercial and industrial work in the United States inasmuch as there has been a
continuing decline in commercial and industrial work in the United States
resulting from the economic recession; (3) reduced private sector spending on
small and discretionary projects and repairs and maintenance work resulting from
the economic recession; (4) an increase in the percentage of work relating to
public sector construction that typically has lower gross profit margins than
private sector work; (5) lower than historical gross profit margins on several
United States projects as a result of poor contract performance; and (6) reduced
labor productivity due to the uncertain job market. (The foregoing factors
affecting the United States subsidiaries are hereafter referred to collectively
as the "2003 Unfavorable United States Market Conditions").
The 2002 results of operations compared to 2001 were positively impacted by
the acquisition on March 1, 2002 of a group of companies (the "Acquired Comfort
Companies") from Comfort Systems USA, Inc. ("Comfort") and increased revenues
and income from transportation infrastructure work and facilities services
contracts. The results of operations for 2002 compared to 2001 were negatively
impacted, as described above with respect to 2003, by (1) the economic
recession; (2) the beginning of a negative trend in the performance on EMCOR's
United Kingdom construction projects; (3) a reduction in "fast-track" projects
(i.e. those projects with timetables more accelerated than typical contracts for
similar projects) for telecom work and other work in the United States; and (4)
a shift to public sector work in the United States which typically results in
revenues being recognized over a longer period of time.
13
EMCOR's management recognizes that some of the business challenges it faces
are endemic to the construction and facilities services industry. However, EMCOR
has made or has under consideration certain strategic changes with respect to
its geographic markets and sectors served, including a shift in focus toward
more private sector commercial work even if that causes a temporary reduction in
revenues until such construction spending increases significantly. Actions
already taken include the replacement of the senior management of the United
Kingdom operations and reductions in selling, general and administrative
expenses in all segments. Such selling, general and administrative expense
reductions are expected to continue in 2004. EMCOR expects the demand for HVAC
repair and maintenance services to increase starting in the second quarter of
2004, and EMCOR will continue to follow its long-term strategy of increasing
revenues from multi-year facilities services contracts. EMCOR's management
believes it has positioned the company to benefit from its strategy; however,
there is no guarantee that these strategies will result in significantly
improved results if economic conditions affecting EMCOR and the construction
industry generally do not improve.
HIGHLIGHTS
Revenues for the year ended December 31, 2003 were $4.53 billion, compared to
$3.97 billion and $3.42 billion for the years ended December 31, 2002 and 2001,
respectively. Net income was $20.6 million for 2003 compared to $62.9 million
for 2002 and $50.0 million for 2001. Diluted earnings per share on net income
were $1.33 per share for 2003 compared to $4.07 per share for 2002 and $3.40 per
share for 2001.
The Consolidated Results of Operations for EMCOR for the year ended December
31, 2002 include the results of operations of the Acquired Comfort Companies and
CES from their respective dates of acquisition. EMCOR acquired two additional
companies during each of the years 2003 and 2002. See Note C - Acquisitions of
Businesses of the notes to consolidated financial statements for additional
discussion of these transactions.
OPERATING SEGMENTS
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: (a) United States electrical construction and facilities
services (involving 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); (b)
United States mechanical construction and facilities services (involving systems
for heating, ventilation, air conditioning, refrigeration, and clean-room
ventilation systems, and plumbing, process and high-purity piping systems); (c)
United States facilities services; (d) Canada construction and facilities
services; (e) United Kingdom construction and facilities services; and (f) Other
international construction and facilities services. The segment "United States
facilities services" principally consists of those operations which provide a
portfolio of services needed to support the operation and maintenance of
customers' facilities (mobile operation and maintenance services, site-based
operation and maintenance services, facility planning and consulting services
and energy management programs) which services are not related to customers'
construction programs. The Canada, United Kingdom and Other international
segments perform electrical construction, mechanical construction and facilities
services. "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).
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The 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 this Form 10-K. There
was no initial adoption of any accounting policies during 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 the financial condition and results of operations are the impact of
changes in the estimates and judgments pertaining to (a) revenue recognition
from (i) long term construction contracts for which the percentage of 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 FROM 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 to
perform each contract to the estimated total costs to perform such contract at
completion. Certain of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to perform such
contract at completion. Provisions for the entirety of estimated losses on
14
uncompleted contracts are made in the period in which such losses are
determined. Application of percentage-of-completion accounting results in the
recognition of costs and estimated earnings in excess of billings on uncompleted
contracts in EMCOR's consolidated balance sheets. Costs and estimated earnings
in excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers 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. As of December 31, 2003 and 2002,
costs and estimated earnings in excess of billings on uncompleted contracts
included unbilled revenues for unapproved change orders of approximately $43.0
million and $35.9 million, respectively, and for claims of approximately $56.4
million and $53.3 million, respectively. In addition, accounts receivable as of
December 31, 2003 and 2002 include claims and contractually billed amounts
related to such contracts of approximately $63.1 million and $45.1 million,
respectively. Generally, contractually billed amounts will not be paid by the
customer to EMCOR until final resolution of related claims. Due to uncertainties
inherent in estimates employed in applying percentage-of-completion accounting,
estimates may be revised as project work progresses. Application of
percentage-of-completion accounting requires that the impact of revised
estimates be reported prospectively in the consolidated financial statements.
In addition to revenue recognition for long-term construction contracts,
EMCOR recognizes revenues from services contracts as such contracts are
performed in accordance with Staff Accounting Bulletin No. 104, "Revenue
Recognition, revised and updated" ("SAB 104"). There are two basic types of
services contracts: (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 a customer's
site full time) and (2) services contracts which may or may not be signed in
advance for similar maintenance, repair and retrofit work on an as needed basis
(frequently referred to as time and material work). Fixed price 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 104. Expenses related to all
services contracts are recognized as incurred.
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. The provisions for bad debts during 2003, 2002, and
2001 amounted to approximately $11.2 million, $3.4 million and $2.9 million,
respectively. The increased provision of $7.8 million for 2003 compared to 2002
primarily relates to the potential non-payment of a customer account receivable
of approximately $5.8 million due to the publicly reported financial
difficulties of the customer. At December 31, 2003 and 2002, accounts receivable
of $1,009.2 million and $965.0 million, respectively, included allowances of
$43.7 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 or credit ratings
or its bankruptcy. The allowance requirements are based on the best facts
available and are re-evaluated and adjusted on a regular basis and as additional
information is received.
INSURANCE LIABILITIES
EMCOR 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 December 31, 2003
and 2002, the total valuation allowance on net deferred tax assets was
approximately $2.0 million and $2.1 million, respectively.
INTANGIBLE ASSETS
As of December 31, 2003, EMCOR had goodwill and net identifiable intangible
assets (primarily the market value of its backlog, customer relationships and
trademarks and tradenames) of $278.0 million and $22.2 million, respectively,
arising out of the acquisition of companies. The determination of related
estimated useful lives for identifiable intangible assets and whether those
assets are impaired involves significant judgments based upon short and
long-term projections of future performance. These forecasts reflect assumptions
regarding the ability to successfully integrate acquired companies. Statement of
Financial Accounting Standards No. 142, "Goodwill and
15
Other Intangible Assets" ("SFAS 142") requires goodwill to be tested for
impairment, on at least an annual basis, and be written down when impaired,
rather than 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 December 31, 2003, no indicators of impairment
of its goodwill or identifiable intangible assets resulted from EMCOR's annual
impairment review, which was performed in accordance with the provisions of SFAS
142. See Note B - Summary of Significant Accounting Policies of the notes to
consolidated financial statements for additional discussion of the provisions of
SFAS 142.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The reportable segments reflect, in all years presented, reclassifications of
certain business units among the segments due to changes in EMCOR's internal
reporting structure.
REVENUES
As described below in more detail, revenues for the year ended December 31,
2003 increased 14.3% to $4.53 billion compared to $3.97 billion for 2002. The
$566.6 million increase in revenues for 2003 when compared to 2002 was primarily
due to revenues of $508.4 million from companies acquired in 2003 and 2002 and
to increased revenues in the United States electrical construction and
facilities services and United States facilities services segments (excluding
acquisitions) of $85.1 million and $19.7 million, respectively. The increases in
revenues were partially offset by decreased revenues for the United States
mechanical construction and facilities services segment (excluding
acquisitions). Revenues for 2002 of $3.97 billion represented a 16.0% increase
over revenues of $3.42 billion for 2001. This $548.2 million increase in
revenues for 2002 compared to 2001 was primarily due to revenues of $502.6
million from companies acquired in 2002 and to increased revenues related to
site-based facilities services contracts and power generation projects.
Partially offsetting these increases was a reduction, when compared to 2001, of
revenues related to fast-track telecom and other commercial contracts, as well
as a shift to longer-term projects which typically result in revenue being
recognized over a longer period of time.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages of total revenues for the years ended December 31, 2003,
2002 and 2001 (in millions, except for percentages):
% OF % OF % OF
2003 TOTAL 2002 TOTAL 2001 TOTAL
-------- ----- -------- ----- -------- -----
Revenues:
United States electrical construction and facilities services ...... $1,239.5 27% $1,152.4 29% $1,334.7 39%
United States mechanical construction and facilities services ...... 1,715.8 38% 1,715.4 43% 1,202.1 35%
United States facilities services .................................. 661.2 15% 250.0 6% 209.7 6%
-------- -------- --------
Total United States operations ..................................... 3,616.5 80% 3,117.8 79% 2,746.5 80%
Canada construction and facilities services ........................ 346.8 8% 316.3 8% 198.2 6%
United Kingdom construction and facilities services ................ 571.3 12% 533.9 13% 463.6 14%
Other international construction and facilities services ........... -- -- -- -- 11.6 --
-------- -------- --------
Total worldwide operations ......................................... $4,534.6 100% $3,968.0 100% $3,419.9 100%
======== ======== ========
Revenues for EMCOR's United States electrical construction and facilities
services segment for 2003 increased by $87.1 million compared to 2002. The
increase in revenues was primarily due to an increase in transportation
infrastructure and energy generation work, partially offset by a significant
decline in private sector commercial work, which include offices, manufacturing
facilities and hotels. Compared to 2002, the New York City area market in 2003
experienced the largest reduction in revenues from commercial work; however,
this decline in revenues was offset by increased public sector work in the
Washington D.C area market, increased transportation infrastructure work in the
Denver area and increased power generation and transportation infrastructure
work in California. The $182.3 million decrease in 2002 revenues attributable to
this segment compared to 2001 was primarily due to a reduction during 2002 in
fast-track telecom and other commercial work. During 2002, transportation
infrastructure work increased and power generation work remained steady compared
to the prior year.
United States mechanical construction and facilities services revenues
increased $0.4 million for 2003 compared to 2002. Revenues for 2003 compared to
2002 increased in the education and institutional sectors, partially offset by
significantly decreased commercial office, manufacturing and power generation
work. In 2003, EMCOR's mid-western markets were particularly negatively impacted
by a reduction in outage upgrade and replacement work at manufacturing
facilities. In addition, revenues were negatively impacted by declines in small
and discretionary projects and repairs and maintenance work caused largely by
the cooler than normal summer weather conditions in parts of the United States.
The $513.3 million increase in revenues for 2002 compared to 2001 was primarily
attributable to $475.2 million of revenues from the Acquired Comfort Companies
and increased revenues from power generation work in the northern California
market. These increases were partially offset by decreased revenues as a result
of the performance of fewer fast-track contracts, particularly in the telecom
sector.
16
United States facilities services revenues, which include those operations
that principally provide consulting and maintenance services, increased by
$411.2 million for 2003 compared to 2002. The increase in revenues was primarily
due to revenues of $387.5 million attributable to the CES acquisition and an
increase in site-based facilities services contracts, partially offset by a
decline in certain small and discretionary projects due to increased competition
resulting in fewer projects awarded to EMCOR. Additionally, a reduction in
demand for mobile services, which services had been adversely affected by cooler
than normal summer weather conditions in parts of the United States, contributed
to a decrease in 2003 revenues. Revenues for 2002 increased by $40.3 million
compared to 2001. This increase in revenues was primarily attributable to
business development activities resulting in an increase in the number of
site-based facilities services contracts and, to a lesser extent, to the
acquisition of CES, partially offset by a decline in telecommunications related
work.
Revenues of Canada construction and facilities services increased by $30.5
million for 2003 as compared to 2002. The increase in revenues for 2003 was
primarily attributable to an increase of $36.7 million caused by a change in the
rate of exchange for Canadian dollars to United States dollars due to
strengthening of the Canadian dollar. But for the exchange rates, revenues would
have decreased due to a temporary scale-back in work on certain long-term power
generation projects attributable to customer's project scheduling. The $118.1
million increase in revenues for 2002 compared to 2001 was primarily
attributable to the performance of work on certain long-term contracts.
United Kingdom construction and facilities services revenues increased $37.4
million for 2003 compared to 2002 principally due to an increase of $47.5
million caused by a change in the rate of exchange for British pounds to United
States dollars due to strengthening of the British pound. As was the case in
Canada, but for exchange rates, revenues would have declined because of
execution of a planned reduction in bidding for certain types of institutional
and government-sponsored construction projects. The $70.3 million increase in
2002 revenues compared to 2001 revenues was principally due to growth in the
facilities services market, offsetting a decline in the overall construction
market. The decline in the overall construction market principally resulted in
fewer attractive bid opportunities in 2002, which caused EMCOR to be more
selective in submitting project bids.
Other international construction and facilities services revenues primarily
consist of EMCOR's operations in the Middle East, South Africa and Europe.
Revenues from those operations were zero for 2003, zero for 2002 and $11.6
million for 2001. All of the 2003 and 2002 projects in these markets were
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, is not subject to a majority of the
risk of loss from the joint venture's activities and is not entitled to receive
a majority of the joint venture's residual returns or both. 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 subsidiaries, and therefore, revenues were recorded.
EMCOR continues to pursue new business selectively in these markets; however,
the availability of opportunities has been significantly reduced as a result of
local economic factors, particularly in the Middle East.
COST OF SALES AND GROSS PROFIT
The following table presents EMCOR's cost of sales, gross profit, and gross
profit as a percentage of revenues for the years ended December 31, 2003, 2002
and 2001 (in millions, except for percentages):
2003 2002 2001
-------- -------- --------
Cost of sales ................................. $4,052.2 $3,485.4 $3,028.0
Gross profit .................................. $ 482.5 $ 482.6 $ 391.8
Gross profit as a percentage of revenues ...... 10.6% 12.2% 11.5%
Gross profit decreased $0.1 million for 2003 compared to 2002. Gross profit
as a percentage of revenues was 10.6% for 2003 compared with 12.2% for 2002.
Gross profit as a percentage of revenues decreased primarily due to poor
performance in the United Kingdom construction market and the 2003 Unfavorable
United States Market Conditions previously discussed in the Overview above; this
decline was offset in part by $93.7 million of gross profit attributable to the
companies acquired and their generally higher gross profit as a percentage of
revenues than other EMCOR subsidiaries. Gross profit increased $90.8 million for
2002 compared with 2001, and gross profit as a percentage of revenues increased
to 12.2% for 2002 compared to 11.5% for 2001. The increase in gross profit was
primarily due to gross profit of $81.2 million earned by companies acquired in
2002. An increase in gross profit of $9.6 million in 2002 compared to 2001,
which was attributable to EMCOR's other subsidiaries, 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. The increase in 2002 when compared to 2001 in gross profit
as a percentage of revenues was principally attributable to the Acquired Comfort
Companies and their generally higher gross profit as a percentage of revenues
than other EMCOR subsidiaries and, to a lesser extent, improvements in gross
profit in EMCOR's other subsidiaries due to favorable job close-outs.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents EMCOR's selling, general and administrative
expenses, and selling, general and administrative expenses as a percentage of
revenues, for the years ended December 31, 2003, 2002 and 2001 (in millions,
except for percentages):
2003 2002 2001
------ ------ ------
Selling, general and administrative expenses ................................... $437.3 $368.2 $303.1
Selling, general and administrative expenses as a percentage of revenues ....... 9.6% 9.3% 8.9%
Selling, general and administrative expenses increased $69.1 million between
2003 and 2002. As a percentage of revenues, total selling, general and
administrative expenses increased to 9.6% in 2003 as compared to 9.3% in 2002.
For 2003, selling, general and administrative expenses included amortization
expense of $2.8 million attributable to identifiable intangible assets
associated with acquisitions compared to $0.8 million for 2002. Selling, general
and administrative expenses (excluding companies acquired in 2003 and 2002 and
related amortization expense) were approximately $302.8 million (8.4% of
revenues) for 2003 compared to $307.5 million (8.9% of revenues) for 2002, which
decrease in selling, general and administrative expenses was attributable to a
managed reduction of both variable expenses (including reduced incentive
compensation related to less favorable financial performance and reduction in
personnel) and fixed expenses (such as building occupancy costs). Selling,
general and administrative expenses increased $65.1 million in 2002 compared to
2001. As a percentage of revenues, total selling, general and administrative
expenses increased to 9.3% in 2002 as compared to 8.9% in 2001. The increase in
expenses and increase in expenses as a percentage of revenues during 2002 as
compared to 2001 was primarily due to $61.0 million of expenses attributable to
companies acquired in 2002 and increased variable selling, general and
administrative expenses of certain other EMCOR subsidiaries (primarily incentive
compensation related to more favorable financial performance), which increased
expenses were partially offset by a $5.5 million reduction in goodwill
amortization expense as goodwill is no longer required to be amortized per SFAS
142. Goodwill amortization expense for the year ended December 31, 2003, 2002
and 2001 was zero, zero and $5.5 million, respectively.
OPERATING INCOME
The following table presents EMCOR's operating income, and operating income
as a percentage of segment revenues, for the years ended December 31, 2003, 2002
and 2001 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2003 REVENUES 2002 REVENUES 2001 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services .. $ 57.8 4.7% $ 78.9 6.8% $ 75.3 5.6%
United States mechanical construction and facilities services .. 25.1 1.5% 59.3 3.5% 41.4 3.4%
United States facilities services .............................. 17.0 2.6% 4.3 1.7% (7.2) --
------ ------ ------
Total United States operations ................................. 99.9 2.8% 142.5 4.6% 109.5 4.0%
Canada construction and facilities services .................... 2.0 0.6% 3.3 1.0% 2.3 1.2%
United Kingdom construction and facilities services ............ (22.4) -- 0.0 -- 7.2 1.6%
Other international construction and facilities services ....... 0.3 -- (0.1) -- (1.2) --
Corporate administration ....................................... (34.7) -- (31.3) -- (29.1) --
------ ------ ------
Total worldwide operations ..................................... 45.1 1.0% 114.4 2.9% 88.7 2.6%
Other corporate items:
Interest expense ............................................... (8.9) (4.1) (4.8)
Interest income ................................................ 0.7 2.0 5.6
------ ------ ------
Income before taxes .............................................. $ 36.9 $112.3 $ 89.5
====== ====== ======
As described below in more detail, operating income decreased by $69.3
million to $45.1 million for 2003 compared to $114.4 million for 2002. This
decrease in 2003 was primarily attributable to the 2003 Unfavorable United
States Market Conditions previously discussed in the Overview above, and
operating losses from the United Kingdom construction and facilities services
segment. Operating income was favorably impacted by $4.5 million, $2.3 million
and $0.5 million reductions of insurance liabilities previously established for
insurance exposures as a consequence of effective risk management and safety
programs. Operating income increased by $25.7 million to $114.4 million for 2002
compared to $88.7 million for 2001. This increase in 2002 was primarily
attributable to $19.7 million of operating income from acquisitions, increased
transportation infrastructure and power generation construction work and the
successful completion and settlement of several contracts.
Operating income decreased for the United States electrical construction and
facilities services operations for 2003 compared to 2002. The decrease in
operating income for 2003 of $21.1 million as compared to 2002, and the related
decrease as a percentage of revenues, was primarily attributable to the 2003
Unfavorable United States Market Conditions previously discussed in the Overview
above. This decrease was partially offset by profitable performance of
transportation infrastructure and certain power generation work. In 2003, the
New York City area market was particularly adversely impacted by a significant
decline in commercial work and by unprofitable performance of power generation
work. Conversely, the Washington, D.C. area market provided a consistent
profitable revenue base, the
18
Denver area benefited from increased income from transportation infrastructure
work and operations in California benefited from increased income from power
generation, transportation infrastructure work and project close-outs. In
addition, selling, general and administrative expenses (excluding companies
acquired) decreased by approximately $19.1 million in this segment for 2003
compared to 2002. This decrease was mostly related to a reduction in incentive
compensation, which related to less favorable financial performance and
reduction in personnel, and a reduction in other variable expenses. Operating
income for 2002 for the United States electrical construction and facilities
services operations increased $3.6 million, or 4.8%, from 2001 levels. The
increase in operating income, and operating income as a percentage of revenues,
for 2002 versus 2001 was primarily attributable to increased transportation
infrastructure work and continuing power generation construction work on the
west coast, the successful completion and settlement of several contracts, and
increased operating income attributable to various commercial and industrial
projects in the San Diego, Las Vegas, Washington D.C. and Denver markets, offset
in part, by a reduction in fast-track data center construction work across other
markets.
United States mechanical construction and facilities services operating
income decreased $34.2 million for 2003 compared to 2002. This decrease in
operating income and decrease as a percentage of revenues was primarily due to
the 2003 Unfavorable United States Market Conditions previously discussed in the
Overview above. The mid-western markets were negatively impacted by a
significant reduction in work on manufacturing facilities, the western markets
were negatively impacted by reduced income from power generation work and parts
of the United States markets were negatively impacted by reduced repairs and
maintenance work caused largely by the cooler than normal summer weather
conditions. This decrease in operating income was partially offset by increased
income from water and wastewater treatment facilities projects for 2003 compared
to 2002. In addition, selling, general and administrative expenses decreased by
approximately $11.5 million in this segment for 2003 compared to 2002. This
decrease was mostly related to a reduction in incentive compensation related to
less favorable financial performance and reduction in personnel and reduction in
other variable expenses. Operating income for 2002 compared to 2001 increased
$17.9 million, and as a percentage of revenues increased to 3.5% from 3.4%,
primarily due to (i) operating income of $ 18.7 million from the Acquired
Comfort Companies, (ii) operating income associated with power generation
construction work in the northern California market and (iii) improved results
at the Poole & Kent subsidiary operations which had losses in 2001. The
increases were partially offset by reduced operating income attributable to
fewer fast-track projects in the 2002 than 2001.
United States facilities services operating income increased by $12.7 million
for 2003 compared with 2002. The increase in operating income was primarily
attributable to income of $13.5 million from the CES acquisition and an increase
in the number of site-based facilities services contracts resulting from
business development activities. The increase was partially offset by reduced
income from certain small and discretionary projects due to increased
competition and from mobile services, which services were adversely affected by
cooler than normal summer weather conditions in parts of the United States.
Operating income of $4.3 million in this segment for 2002 compared to operating
losses of $7.2 million for 2001 increased by $11.5 million primarily due to new
facilities services contracts and a decrease in selling, general and
administrative expenses as the facilities services operations became more
established and required less spending related to the development of new
business.
Canada construction and facilities services operating income decreased by
$1.3 million in 2003 compared to 2002. This decrease was principally due to (a)
increased hospital and school construction projects and less manufacturing
outage work, since hospital and school construction projects generally had lower
gross profits than the manufacturing outage work performed in 2002, (b)
decreased profit from several longer-term power generation projects compared
with the prior year and (c) $0.2 million of an increase in operating income
relating to the change in exchange rates due to strengthening of the Canadian
dollar. For 2002 compared to 2001, operating income increased by $1.0 million
principally due to increased work on longer-term contracts that result in profit
recognition over an extended time period, partially offset by a reduction in the
number of fast-track type contracts.
United Kingdom construction and facilities services operating income
decreased by $22.4 million to a reported operating loss in 2003 compared to
2002. The operating loss was primarily attributable to: (1) net unfavorable
settlements and closeouts of certain construction projects completed during the
year, (2) increased bad debt expense of $5.8 million in 2003 primarily related
to the potential non-payment of a large customer account receivable due to
publicly reported financial difficulties, (3) reorganization expenses of
approximately $2.0 million related to employee severance expenses and the
closing of several offices and (4) $1.5 million relating to the change in
exchange rates due to strengthening of the British pound. For 2002, operating
income decreased by $7.2 million as compared to 2001. This decrease was
primarily attributable to unfavorable settlements and closeouts of certain
construction projects completed during the year.
Other international construction and facilities services operating income was
$0.3 million for 2003 compared to operating losses of $0.1 million and $1.2
million in 2002 and 2001, respectively. EMCOR continues to pursue new business
selectively in the Middle Eastern, 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 2003 increased by $3.4 million from 2002
levels, and increased in 2002 by $2.2 million from 2001 levels. The increase in
general corporate expenses for 2003 compared with 2002 was primarily related to
an increase in personnel required to support the business growth related to
acquisitions and increased marketing expenses associated with EMCOR's brand
awareness campaign, which promotes the EMCOR brand on the national and local
level in the United States and targets non-traditional buyers of EMCOR services
such as chief executive and chief financial officers of companies. The increase
for 2002 compared with 2001 was due to the expansion of operations support
activities such as information technology infrastructure, human resources and
marketing.
19
Interest expense increased by $4.8 million for 2003 compared to 2002 due to
increased borrowing under EMCOR's revolving credit facility. Interest expense
decreased by $0.7 million in 2002 compared to 2001 principally due to the
conversion of $115.0 million of EMCOR's 5.75% Convertible Subordinated Notes
into approximately 4.2 million shares of EMCOR common stock in the second
quarter of 2001.
Interest income decreased by $1.3 million in 2003 compared to 2002 due to
repayment of increased borrowings for working capital under the revolving credit
facility. Interest income decreased by $3.6 million in 2002 compared with 2001,
which decrease was due to a reduction in cash on hand in 2002 related to cash
used for acquisitions and repayment of borrowings related to the acquisitions
and to lower interest rates earned.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2003 and 2002 (in millions):
2003 2002
------ -------
Net cash provided by operating activities ............ $ 1.3 $ 154.7
Net cash used in investing activities ................ $(23.3) $(364.8)
Net cash provided by financing activities ............ $ 7.1 $ 113.4
The Company's consolidated cash balance decreased by $14.8 million from $93.1
million at December 31, 2002 to $78.3 million at December 31, 2003. Net cash
provided by operating activities for 2003 was $1.3 million, a decrease of $153.4
million from net cash provided by operating activities of $154.7 million for
2002. The decrease in cash provided by operating activities in 2003 compared to
2002 was due to decreased net income, decreased accrued expenses, increased
accounts receivable and increased contracts in progress, net, offset by
increased accounts payable. The changes in these accounts in 2003, and the
related decrease in net cash provided by operating activities, are a result of
EMCOR's shift in work toward more public sector work and less small and
discretionary projects. The increase in public sector work, which typically
involves larger projects, lower gross profit margins and more capital than
private sector work, was the primary reason for the decrease; the decrease was
also due to reduced higher margin small and discretionary projects that requires
much less upfront cash than large construction projects. Net cash used in
investing activities in 2003 of $23.3 million consisted primarily of payments of
an aggregate of $8.9 million for acquisitions in 2003 and earn-out payments of
$2.0 million for acquisitions in prior periods, net disbursements for other
investments of $1.8 million and $17.9 million for purchases of property, plant
and equipment, offset by $5.2 million of payments received pursuant to indemnity
provisions of acquisition agreements. This activity compares to net cash used in
investing activities for 2002, which consists primarily of aggregate payments of
$334.7 million for acquisitions in 2002 and earn-out payments of $8.7 million
for acquisitions from prior periods, net disbursements for other investments of
$7.7 million and $15.6 million for the purchase of property, plant and
equipment. Net cash provided by financing activities for 2003 of $7.1 million
was primarily attributable to net borrowings under working capital credit lines
of $27.4 million and proceeds from the exercise of stock options of $2.0
million, offset by repayments of long-term debt of $22.2 million.
The following is a summary of EMCOR's material contractual obligations and
other commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- -----------------------------------------------------------------
Other long-term debt ................................. $ 0.6 $ 0.1 $ 0.2 $ 0.2 $ 0.1
Capital lease obligations ............................ 0.3 0.2 0.1 -- --
Operating leases ..................................... 145.3 37.8 55.4 30.5 21.6
Minimum funding requirement for pension plan ......... 9.7 9.7 -- -- --
Open purchase obligations (1) ........................ 655.7 545.7 110.0 -- --
Other long-term obligations (2) ...................... 96.3 -- 96.3 -- --
------ ------ ------ ----- -----
Total Contractual Obligations ........................ $907.9 $593.5 $262.0 $30.7 $21.7
====== ====== ====== ===== =====
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) ........................ $139.4 $ -- $ -- $139.4 $ --
Letters of credit .................................... 49.2 -- -- 49.2 --
Guarantees ........................................... 25.0 -- -- -- 25.0
------ ------ ------ ------ -----
Total Commercial Commitments ......................... $213.6 $ -- $ -- $188.6 $25.0
====== ====== ====== ====== =====
- -------------
(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.
20
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain direct and
indirect subsidiaries of EMCOR, is secured by substantially all of the assets of
EMCOR and most of its subsidiaries, and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to payment of dividends,
common stock repurchases, investments, acquisitions, indebtedness and capital
expenditures. A commitment fee is payable on the average daily unused amount of
the Revolving Credit Facility. The fee ranges from 0.3% to 0.5% of the unused
amount, based on certain financial tests. Loans under the Revolving Credit
Facility bear interest at (1) a rate which is the prime commercial lending rate
announced by Harris Nesbitt from time to time (4.0% at December 31, 2003) plus
0% to 1.0%, based on certain financial tests, (2) United States dollar LIBOR (at
December 31, 2003 the rate was 1.16%) plus 1.5% to 2.5%, based on certain
financial tests or (3) British pound LIBOR (at December 31, 2003 the rate was
3.91%) plus 1.5% to 2.5%, based on certain financial tests. The interest rates
in effect at December 31, 2003 were 4.25%, 2.91% and 5.66% for the prime
commercial lending rate, United States dollar LIBOR and British pound LIBOR,
respectively. Letter of credit fees issued under this facility range from 0.75%
to 2.5% of the respective face amounts of the letters of credit issued and are
charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2003 and 2002, EMCOR had approximately $49.2 million
and $39.9 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $139.4 million and $112.0 million outstanding under the Revolving
Credit Facility at December 31, 2003 and 2002, respectively.
In August 2001, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed a credit agreement with a bank providing for an overdraft facility of up
to Cdn. $0.5 million. The facility is secured by a standby letter of credit and
provides for interest at the bank's prime rate (4.5% at December 31, 2003).
There were no borrowings outstanding under this credit agreement at December 31,
2003 or 2002.
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 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.
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects which secure EMCOR payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain EMCOR employees, bonds are sometimes provided
to secure obligations for wages and benefits payable to or for such employees.
EMCOR bonding requirements typically increase as the amount of public sector
work increases. As of December 31, 2003, sureties had issued bonds for the
account of EMCOR in the aggregate amount of approximately $1.7 billion. The
bonds are issued by EMCOR's sureties in return for a premium which varies
depending on the size and type of the bonds. The largest individual bond is
approximately $170.0 million. EMCOR has agreed to indemnify the sureties for any
payments made by them in respect of bonds issued on EMCOR's behalf.
On March 18, 1998, EMCOR sold, pursuant to an underwritten public offering,
$115.0 million principal amount of 5.75% Convertible Subordinated Notes. During
the second quarter of 2001, EMCOR called its 5.75% Convertible Subordinated
Notes for redemption. As a consequence, all of the Convertible Subordinated
Notes were converted into approximately 4.2 million shares of EMCOR common
stock.
EMCOR does not have any other material financial guarantees or off-balance
sheet arrangements other than those disclosed herein.
The primary source of liquidity for EMCOR has been, and is expected to
continue to be, cash generated by operating activities. EMCOR also maintains the
Revolving Credit Facility that may be utilized, among other things, to meet
short-term liquidity needs in the event cash generated by operating activities
is insufficient or to enable EMCOR to seize opportunities to participate in
joint ventures or to make acquisitions that may require access to cash on short
notice or for any other reason. EMCOR may also increase liquidity through an
equity offering or other debt instruments. Short-term changes in macroeconomic
trends may have an effect, positively or negatively, on liquidity. In addition
to managing borrowings, EMCOR's focus on the facilities services market is
intended to provide an additional buffer against economic downturns as the
facilities services market is characterized by annual and multi-year contracts
that provide a more predictable stream of cash flow than the construction
market. The acquisition in December 2002 of CES, which is primarily focused on
the facilities services market, is part of EMCOR's plan to grow its facilities
services business. Short-term liquidity is also impacted by the type and length
of construction contracts in place. During economic downturns, such as the 2001
through 2003 period, there are typically fewer small and discretionary projects
from the private sector and companies such as EMCOR more aggressively bid more
large long-term infrastructure and public sector contracts. Performance of long
duration contracts typically require working capital until initial billing
milestones are achieved. While EMCOR strives to maintain a net over-billed
position with its customers, there can be no assurance that a net over-billed
position can be maintained. EMCOR's net over-billings, defined as the balance
sheet accounts billings in excess of costs and estimated earnings on uncompleted
contracts less cost and estimated earnings in excess of billings on uncompleted
contracts, was $95.8 million and $127.3 million as of December 31, 2003 and
2002, respectively.
21
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the Revolving Credit Facility, and the sale
of various secured or unsecured debt and/or equity interests in the public and
private markets. Based upon EMCOR's current credit ratings and financial
position, EMCOR can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, EMCOR's primary revenue risk
factor continues to be the level of demand for non-residential construction
services, which is in turn influenced by macroeconomic trends including interest
rates and governmental economic policy. In order to provide protection against
declines in demands for private sector construction services, EMCOR has
increased its participation, and its backlog of contracts, in the public sector
and in the facilities services market. In addition to the primary revenue risk
factor, EMCOR's ability to perform work at profitable levels is critical to
meeting long-term liquidity requirements.
EMCOR believes that current cash balances and borrowing capacity available
under the Revolving Credit Facility or other forms of financing available
through debt or equity offerings, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements. However,
EMCOR is a party to lawsuits and other proceedings in which other parties seek
to recover from it amounts ranging from a few thousand dollars to over $70.0
million. If EMCOR was required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on its financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2003, EMCOR utilized approximately $37.7 million of
letters of credit issued pursuant to its Revolving Credit Facility as collateral
for its insurance obligations.
NEW ACCOUNTING PRONOUNCEMENTS
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 presented herein.
EMCOR has not changed to the fair value based method of accounting for
stock-based employee compensation; therefore, adoption of SFAS 148 has impacted
disclosures, not the financial results, of EMCOR.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (revised December 2003) ("FIN 46"). FIN 46 expands
upon and strengthens existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes in
which: (1) the equity investment at risk is not sufficient to permit the entity
to finance its activities without additional subordinated financial support
provided by any parties, including the equity holders; (2) the equity investors
lack one or more of the following essential characteristics of a controlling
financial interest: (a) the direct or indirect ability to make decisions about
the entity's activities through voting rights or similar rights, (b) the
obligation to absorb the expected losses of the entity or (c) the right to
receive the expected residual returns of the entity; or (3) the equity investors
have voting rights that are not proportionate to their economic interests, and
the activities of the entity involve or are conducted on behalf of an investor
with a disproportionately small voting interest . FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. FIN
46 is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period ending after March 15, 2004 (except for special purpose
entities for which the effective date is periods ending after December 31,
2003). EMCOR has determined that the adoption of the provisions of FIN 46 has
had no effect on EMCOR's consolidated financial condition or results of
operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003. EMCOR
does not have any financial instruments that meet the provisions of SFAS 150;
therefore, EMCOR has determined that the provisions of SFAS 150 have had no
effect on EMCOR's consolidated financial position, results of operations or cash
flows.
In December 2003, the FASB issued Statement of Financial Accounting Standards
No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 replaces the disclosure
requirements in Statement of Financial Accounting Standard No 87, "Employers'
Accounting for Pensions," Statement of Financial Accounting Standard No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and Statement of Financial
22
Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." This revised statement retains the original disclosure
requirements of SFAS 132. It requires additional disclosures to those in the
original SFAS 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit plans and other defined postretirement plans. SFAS 132
is effective for interim periods and fiscal years ending after December 15,
2003. EMCOR has adopted the revised provisions of SFAS 132 effective December
31, 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR has not used derivative financial instruments for any purpose during
the years ended December 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 the Revolving Credit Facility. Borrowings under that 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 December 31,
2003, there was $139.4 million of borrowings outstanding under the facility, and
these borrowings bear interest at (1) a rate which is the prime commercial
lending rate announced by Harris Nesbitt from time to time (4.0% at December 31,
2003) plus 0% to 1.0%, based on certain financial tests or (2) United States
dollar LIBOR (at December 31, 2003 1.16%) plus 1.5% to 2.5%, based on certain
financial tests or (3) British pound LIBOR (at December 31, 2003 3.91%) plus
1.5% to 2.5%, based on certain financial tests. Based on the borrowings
outstanding of $139.4 million, if the overall interest rates were to increase by
1.0%, the net of tax interest expense would increase approximately $0.8 million
in the next twelve months. Conversely, if the overall interest rates were to
decrease by 1.0%, interest expense would decrease by approximately $0.8 million
in the next twelve months. The Revolving Credit Facility expires in September
2007. There is no guarantee that EMCOR will be able to renew the facility at its
expiration.
EMCOR is also exposed to market risk and the market's 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 pay these obligations is negatively impacted by economic
conditions. EMCOR continually monitors the credit worthiness 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 year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income (loss), a
component of stockholders' equity, in its consolidated balance sheets. EMCOR
believes the exposure to the effects that fluctuating foreign currencies may
have on its consolidated results of operations is limited because the foreign
operations primarily invoice customers and collect obligations in their
respective local currencies. Additionally, expenses associated with these
transactions are generally contracted and paid for in their same local
currencies.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995, 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 RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO ADVERSE
CHANGES IN GENERAL ECONOMIC CONDITIONS, 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 AND RISK ASSOCIATED WITH FOREIGN
OPERATIONS AND OTHER FACTORS.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
---------- ----------
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $ 78,260 $ 93,103
Accounts receivable, less allowance for doubtful accounts of $43,706
and $40,611, respectively .................................................................... 1,009,170 964,968
Costs and estimated earnings in excess of billings on uncompleted contracts ................... 249,393 235,809
Inventories ................................................................................... 9,863 12,271
Prepaid expenses and other .................................................................... 42,470 28,784
---------- ----------
Total current assets ........................................................................ 1,389,156 1,334,935
Investments, notes and other long-term receivables .............................................. 26,452 24,642
Property, plant and equipment, net .............................................................. 66,156 70,750
Goodwill ........................................................................................ 277,994 290,412
Identifiable intangible assets, less accumulated amortization of $3,573 and $755, respectively .. 22,226 13,845
Other assets .................................................................................... 13,263 23,907
---------- ----------
Total assets .................................................................................... $1,795,247 $1,758,491
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line .................................................. $ 139,400 $ 112,000
Current maturities of long-term debt and capital lease obligations ............................ 367 22,276
Accounts payable .............................................................................. 451,713 409,562
Billings in excess of costs and estimated earnings on uncompleted contracts ................... 345,207 363,092
Accrued payroll and benefits .................................................................. 131,623 159,416
Other accrued expenses and liabilities ........................................................ 110,147 113,529
---------- ----------
Total current liabilities ................................................................... 1,178,457 1,179,875
Long-term debt and capital lease obligations .................................................... 561 905
Other long-term obligations ..................................................................... 94,873 87,841
---------- ----------
Total liabilities ............................................................................... 1,273,891 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, 16,155,844 and
16,050,862 shares issued, respectively ........................................................ 162 161
Capital surplus ................................................................................. 316,729 312,393
Accumulated other comprehensive income (loss) ................................................... 1,257 (5,148)
Retained earnings ................................................................................ 219,921 199,300
Treasury stock, at cost, 1,123,651 and 1,131,985 shares, respectively ............................ (16,713) (16,836)
---------- ----------
Total stockholders' equity ....................................................................... 521,356 489,870
---------- ----------
Total liabilities and stockholders' equity ....................................................... $1,795,247 $1,758,491
========== ==========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
24
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001
---------- ---------- ----------
Revenues ................................... $4,534,646 $3,968,051 $3,419,854
Cost of sales .............................. 4,052,192 3,485,417 3,028,031
---------- ---------- ----------
Gross profit ............................... 482,454 482,634 391,823
Selling, general and administrative expenses 437,302 368,209 303,141
---------- ---------- ----------
Operating income ........................... 45,152 114,425 88,682
Interest expense ........................... (8,939) (4,096) (4,795)
Interest income ............................ 703 1,997 5,587
---------- ---------- ----------
Income before income taxes ................. 36,916 112,326 89,474
Income tax provision ....................... 16,295 49,424 39,462
---------- ---------- ----------
Net income ................................. $ 20,621 $ 62,902 $ 50,012
========== ========== ==========
Basic earnings per share ................... $ 1.38 $ 4.23 $ 3.86
========== ========== ==========
Diluted earnings per share ................. $ 1.33 $ 4.07 $ 3.40
========== ========== ==========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
25
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income ...................................................................... $ 20,621 $ 62,902 $ 50,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 21,717 15,371 12,694
Amortization of goodwill ...................................................... -- -- 5,506
Amortization of identifiable intangible assets ................................ 2,818 755 --
Provision for doubtful accounts ............................................... 11,249 3,354 2,856
Deferred income taxes ......................................................... 7,451 7,432 3,725
Non-cash expense for amortization of debt issuance costs ...................... 1,416 630 890
Non-cash expense for Restricted Stock Units ................................... -- 557 1,132
Non-cash interest expense for converted subordinated notes .................... -- -- 1,239
Provision in lieu of income taxes ............................................. -- -- 21,425
----------- ----------- -----------
65,272 91,001 99,479
Change in operating assets and liabilities excluding effect of businesses
acquired:
(Increase) decrease in accounts receivable .................................... (49,171) 28,464 48,974
Increase in inventories and contracts in progress, net ........................ (29,018) (14,174) (59,217)
Increase (decrease) in accounts payable ....................................... 40,931 32,653 (52,337)
(Decrease) increase in accrued payroll and benefits and other accrued
expenses and liabilities ................................................... (27,351) 14,860 47,836
Changes in other assets and liabilities, net .................................. 647 1,893 (3,644)
----------- ----------- -----------
Net cash provided by operating activities ....................................... 1,310 154,697 81,091
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of assets ................................................. 2,186 1,819 1,925
Purchase of property, plant and equipment ..................................... (17,940) (15,585) (17,939)
Payments for acquisitions of businesses and related earn-out agreements ....... (10,943) (343,358) (8,750)
Net disbursements from other investments ...................................... (1,810) (7,679) (6,453)
Payments received pursuant to indemnity provisions of acquisition agreements .. 5,244 -- --
----------- ----------- -----------
Net cash used in investing activities ........................................... (23,263) (364,803) (31,217)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit lines .................................... 1,445,904 248,000 --
Repayments of working capital credit lines .................................... (1,418,504) (136,000) --
Borrowings for long-term debt ................................................. -- 70 2,930
Repayments for long-term debt ................................................. (22,241) (1,100) (2,761)
Net repayments for capital lease obligations .................................. (12) (34) (26)
Net proceeds from exercise of stock options ................................... 1,963 2,507 2,064
----------- ----------- -----------
Net cash provided by financing activities ....................................... 7,110 113,443 2,207
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents ................................ (14,843) (96,663) 52,081
Cash and cash equivalents at beginning of year .................................. 93,103 189,766 137,685
----------- ----------- -----------
Cash and cash equivalents at end of year ........................................ $ 78,260 $ 93,103 $ 189,766
=========== =========== ===========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
26
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS)
TOTAL ACCUMULATED
STOCK- OTHER
HOLDERS' COMMON CAPITAL COMPREHENSIVE RETAINED TREASURY COMPREHENSIVE
EQUITY STOCK SURPLUS INCOME (LOSS) (1)EARNINGS STOCK INCOME
-------- ------ -------- ------------- ----------- -------- -------------
Balance, December 31, 2000 .......... $233,503 $117 $167,742 $(3,906) $ 86,386 $(16,836)
Net income ........................ 50,012 -- -- -- 50,012 -- $50,012
Foreign currency translation
adjustments ..................... (1,518) -- -- (1,518) -- -- (1,518)
-------
Comprehensive income .............. -- -- -- -- -- -- $48,494
=======
Provision in lieu of income
taxes ........................... 21,425 -- 21,425 -- -- --
Common stock issued under
stock option plans, net ......... 2,063 -- 2,063 -- -- --
Conversion of 5.75%
Convertible Subordinated
Notes (2) ....................... 113,874 42 113,832 -- -- --
Value of Restricted Stock Units (3) 2,574 -- 2,574 -- -- --
-------- ---- -------- ------- -------- --------
Balance, December 31, 2001 .......... 421,933 159 307,636 (5,424) 136,398 (16,836)
Net income ........................ 62,902 -- -- -- 62,902 -- $62,902
Foreign currency translation
adjustments ..................... 3,725 -- -- 3,725 -- -- 3,725
Pension plan additional
minimum liability, net of
tax benefit of $1.9 million ..... (3,449) -- -- (3,449) -- -- (3,449)
-------
Comprehensive income .............. -- -- -- -- -- -- $63,178
=======
Common stock issued under
stock option plans, net ......... 2,507 2 2,505 -- -- --
Value of Restricted Stock
Units (3) ....................... 2,252 -- 2,252 -- -- --
-------- ---- -------- ------- -------- --------
Balance, December 31, 2002 .......... 489,870 161 312,393 (5,148) 199,300 (16,836)
Net income ........................ 20,621 -- -- -- 20,621 -- $20,621
Foreign currency translation
adjustments ..................... 12,440 -- -- 12,440 -- -- 12,440
Pension plan additional
minimum liability, net of
tax benefit of $2.6 million ..... (6,035) -- -- (6,035) -- -- (6,035)
-------
Comprehensive income .............. -- -- -- -- -- -- $27,026
=======
Common stock issued under
stock option plans, net ......... 3,026 1 2,902 -- -- 123
Value of Restricted Stock
Units (3) ....................... 1,434 -- 1,434 -- -- --
-------- ---- -------- ------- -------- --------
Balance, December 31, 2003 .......... $521,356 $162 $316,729 $ 1,257 $219,921 $(16,713)
======== ==== ======== ======= ======== ========
- ------------
(1) Represents cumulative foreign currency translation and net of tax minimum
pension liability adjustments of $10.7 million and $(9.5) million
respectively, as of December 31, 2003. Represents cumulative foreign
currency translation and net of tax minimum pension liability adjustments of
$(1.7) million and $(3.4) million respectively, as of December 31, 2002.
(2) Represents conversion of $115.0 million 5.75% 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 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 restricted stock unit plan were changed resulting in fixed
plan accounting after the grant date from the date of this change for both
existing and new grants.
The accompanying notes to consolidated financial statements are
an integral part of these statements.
27
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS
EMCOR Group, Inc., a Delaware corporation, and subsidiaries (collectively
"EMCOR") is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. EMCOR specializes in providing services relating to mechanical and
electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services." EMCOR
designs, integrates, installs, starts up, operates and maintains various
electrical and mechanical systems, including: (1) systems for the generation and
distribution of electrical power; (2) lighting systems; (3) low-voltage systems,
such as fire alarm, security, communication and process control systems; (4)
voice and data communications systems; (5) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; and (6)
plumbing, process and high-purity piping systems. EMCOR provides mechanical and
electrical construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. It also provides these services indirectly by acting
as a subcontractor to general contractors, systems suppliers and other
subcontractors. Mechanical and electrical construction services generally fall
into one of two categories: (1) large installation projects with contracts often
in the multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (2) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR's facilities services, which are needed to support the operation of a
customer's facilities, include site-based operations and maintenance, mobile
maintenance and service, facilities management, remote monitoring, small
modification and retrofit projects, technical consulting and diagnostic
services, installation and support for building systems, and program development
and management for energy systems. These services are provided to a wide range
of commercial, industrial, utility and institutional facilities including those
at which EMCOR provided construction services and others at which construction
services were provided by other contractors.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EMCOR and its
majority-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated. All investments over which EMCOR exercises significant
influence, but does not control (a 20% to 50% ownership interest), are accounted
for using the equity method of accounting.
The results of operations for the year ended December 31, 2002 include, from
the respective dates of acquisition, the results of a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc.
("Comfort") on March 1, 2002 and the results of Consolidated Engineering
Services, Inc. ("CES") acquired on December 19, 2002. The results of operations
of other acquisitions, which are not material, have been included in the results
of operations from the date of acquisition by EMCOR.
PRINCIPLES OF PREPARATION
The preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States, requires EMCOR to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications of prior years data have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
presentation.
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of EMCOR'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. Revenues from services contracts are
recognized as services are provided. There are two basic types of services
contracts: (1) fixed price facilities services contracts which are signed in
advance for maintenance, repair and retrofit work over periods typically ranging
from one to three years (for which there may be EMCOR employees on the
customer's site full time) and (2) services contracts which may or may not be
signed in advance for similar maintenance, repair and retrofit work on an as
needed basis (frequently referred to as time and material work). Fixed price
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 Staff Accounting Bulletin No. 104,
"Revenue Recognition, revised and updated." Expenses related to all services
contracts are recognized as incurred.
28
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Provisions for estimated losses on uncompleted long-term contracts are made
in the period in which such losses are determined. In the case of customer
change orders for uncompleted long-term construction contracts, estimated
recoveries are included for work performed in forecasting ultimate profitability
on certain contracts. Due to uncertainties inherent in the estimation process,
it is reasonably possible that completion costs, including those arising from
contract penalty provisions and final contract settlements, will be revised in
the near-term. Such revisions to costs and income are recognized in the period
in which the revisions are determined.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed under
the terms of the contracts. Such amounts are recoverable from customers upon
various measures of performance, including achievement of certain milestones,
completion of specified units or completion of the contract. Also included in
costs and estimated earnings on uncompleted contracts are amounts EMCOR 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
scope or price, or other customer-related causes of unanticipated additional
contract costs (claims and unapproved change orders). These amounts are recorded
at their estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the construction costs incurred
in connection with these amounts. Claims and unapproved change orders made by
EMCOR involve negotiation and, in certain cases, litigation. In the event
litigation costs are incurred by EMCOR in connection with claims or unapproved
change orders, such litigation costs are expensed as incurred; although, EMCOR
may seek to recover these costs. EMCOR believes that it has established legal
bases for pursuing recovery of its recorded unapproved change orders and claims,
and it is management's intention to pursue and litigate such claims, if
necessary, until a decision or settlement is reached. Unapproved change orders
and claims also involve the use of estimates, and it is reasonably possible that
revisions to the estimated recoverable amounts of recorded claims may be made in
the near-term. If EMCOR does not successfully resolve these matters, a net
expense (recorded as a reduction in revenues), may be required, in addition to
amounts that have been previously provided for. Claims against EMCOR are
recognized when a loss is considered probable and amounts are reasonably
determinable.
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2003 and 2002 were as follows (in thousands):
2003 2002
---------- ----------
Costs incurred on uncompleted contracts ............................................ $7,942,997 $7,022,638
Estimated earnings ................................................................. 499,556 604,732
---------- ----------
8,442,553 7,627,370
Less: billings to date ............................................................. 8,538,367 7,754,653
---------- ----------
$ (95,814) $ (127,283)
========== ==========
Such amounts were included in the accompanying Consolidated Balance Sheets at
December 31, 2003 and 2002 under the following captions (in thousands):
2003 2002
---------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts ........ $ 249,393 $ 235,809
Billings in excess of costs and estimated earnings on uncompleted contracts ........ (345,207) (363,092)
---------- ----------
$ (95,814) $ (127,283)
========== ==========
As of December 31, 2003 and 2002, costs and estimated earnings in excess of
billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $43.0 million and $35.9 million, respectively,
and for claims of approximately $56.4 million and $53.3 million, respectively.
In addition, accounts receivable as of December 31, 2003 and 2002 include claims
and contractually billed amounts related to such contracts of approximately
$63.1 million and $45.1 million, respectively. Generally, contractually billed
amounts will not be paid by the customer to EMCOR until final resolution of
related claims. Included in the claims amount is approximately $31.2 million and
$38.7 million as of December 31, 2003 and 2002, respectively, related to
projects of EMCOR's Poole & Kent subsidiary, which had commenced prior to
EMCOR's acquisition of Poole & Kent in 1999.
29
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CLASSIFICATION OF CONTRACT AMOUNTS
In accordance with industry practice, EMCOR classifies as current all assets
and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year,
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Accounts receivable at December 31, 2003 and 2002
included $189.5 million and $172.1 million, respectively, of retainage billed
under terms of the contracts. EMCOR estimates that approximately 88% of
retainage recorded at December 31, 2003 will be collected during 2004.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, EMCOR considers all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. EMCOR maintains a centralized cash management program whereby
its excess cash balances are invested in high quality, short-term money market
instruments, which are considered cash equivalents. At times, cash balances in
EMCOR's bank accounts may exceed federally insured limits.
INVENTORIES
Inventories, which consist primarily of construction materials, are stated at
the lower of cost or market. Cost is determined principally using the average
cost method. Inventories decreased by $2.4 million to $9.9 million at December
31, 2003 compared to $12.3 million at December 31, 2002.
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables at December 31, 2003 were
$26.5 million compared to $24.6 million at December 31, 2002, and primarily
consist of investments in joint ventures accounted for using the equity method
of accounting. Included as investments, notes and other long-term receivables
were investments of $18.9 million and $19.4 million as of December 31, 2003 and
2002, respectively, relating to a venture with Baltimore Gas & Electric. This
joint venture designs, constructs, owns, operates, leases and maintains
facilities to produce chilled water for use in air conditioning commercial
properties.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation, including
amortization of assets under capital leases, is recorded principally using the
straight-line method over estimated useful lives ranging from 2 to 40 years. As
events and circumstances indicate, EMCOR reviews the carrying amount of
property, plant and equipment for impairment. In performing this review for
recoverability, long-lived assets are assessed for possible impairment by
comparing their carrying values to their undiscounted net pre-tax cash flows
expected to result from the use of the asset. Impaired assets are written down
to their fair values, generally determined based on their estimated future
discounted cash flows. Through December 31, 2003, no adjustment for the
impairment of property, plant and equipment carrying value has been required.
Property, plant and equipment in the accompanying Consolidated Balance Sheets
consisted of the following amounts as of December 31, 2003 and 2002 (in
thousands):
2003 2002
-------- --------
Machinery and equipment ............................................................................ $ 78,609 $ 72,698
Furniture and fixtures ............................................................................. 40,425 36,527
Land, buildings and leasehold improvements ......................................................... 41,586 38,475
-------- --------
160,620 147,700
Accumulated depreciation and amortization .......................................................... (94,464) (76,950)
-------- --------
$ 66,156 $ 70,750
======== ========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2003 and 2002 was approximately $278.0 million and
$290.4 million, respectively, and reflects the excess of cost over fair market
value of net identifiable assets of companies acquired.
30
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
EMCOR has adopted the following accounting standards issued by the Financial
Accounting Standards Board ("FASB"): Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("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,
which was adopted as of January 1, 2002, requires goodwill to be tested for
impairment at least annually. SFAS 142 requires that goodwill be allocated to
the reporting units. The fair value of the reporting unit is compared to the
carrying amount on an annual basis to determine if there is a potential
impairment. If the fair value of the reporting unit is less than its carrying
value, an impairment loss is recorded to the extent that the fair value of the
goodwill within the reporting unit is less than the carrying value. The fair
value for goodwill is determined based on discounted estimated future cash
flows. Furthermore, SFAS 142 requires identifiable intangible assets other than
goodwill to be tested for impairment and be amortized over their useful lives
unless these lives are determined to be indefinite.
The following table presents EMCOR's adjusted net income attributable to
common stock, basic earnings per share and diluted earnings per share assuming
the add back of amortization of goodwill for the year ended December 31, 2001
(in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------
BASIC DILUTED
------------------------ -------------------------
INCOME INCOME
AVAILABLE TO AVAILABLE TO
COMMON EARNINGS COMMON EARNINGS
STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE
------------ --------- ------------ ---------
Reported net income attributed to EMCOR common stock .................... $50,012 $3.86 $51,747 $3.40
Add back amortization of goodwill, net of income tax .................... 3,083 0.24 3,083 0.20
------- ----- ------- -----
Adjusted net income attributed to EMCOR common stock .................... $53,095 $4.10 $54,830 $3.60
======= ===== ======= =====
The changes in the carrying amount of goodwill during the year ended December
31, 2003 were as follows (in thousands):
2003
--------
Balance at beginning of period ...................................................................... $290,412
Reclassification to identified intangible assets .................................................... (11,199)
Payments received pursuant to indemnity provisions of purchase agreements ........................... (5,244)
Goodwill recorded for acquisition of businesses ..................................................... 3,464
Earn-out payments on prior year acquisitions ........................................................ 1,971
Other items, net .................................................................................... (1,410)
---------
Balance at end of period ............................................................................ $277,994
=========
There are no material remaining contingent payments related to acquisitions as
of December 31, 2003.
31
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Identifiable intangible assets are comprised of $12.4 million in market value of
customer backlog, $7.0 million in market value of customer relationships and
$6.4 million in market value of trademarks and tradenames acquired as a result
of acquisitions in 2002. The $12.4 million attributable to backlog and $7.0
million attributable to customer relationships are being amortized on a
straight-line method over periods from one to seven years. The $6.4 million
attributable to trademarks and tradenames is not being amortized as trademarks
and tradenames have indefinite lives, but are subject to an annual review for
impairment in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). See Note C - Acquisitions of Businesses for additional information. The
following table presents the estimated future amortization expense of
identifiable intangible assets (in thousands):
2004 ............................................................. $ 3,444
2005 ............................................................. 3,092
2006 ............................................................. 2,740
2007 ............................................................. 2,740
Thereafter ....................................................... 3,810
-------
$15,826
=======
INSURANCE LIABILITIES
EMCOR's insurance liabilities are determined actuarially based on claims
filed and an estimate of claims incurred but not yet reported. At December 31,
2003 and 2002, the estimated current portion of undiscounted insurance
liabilities of $16.0 million and $9.1 million, respectively, were included in
"Other accrued expenses and liabilities" in the accompanying Consolidated
Balance Sheets. The estimated non-current portion of the undiscounted insurance
liabilities were included in "Other long-term obligations" and at December 31,
2003 and 2002 were $74.6 million and $73.5 million, respectively. EMCOR's
insurance liabilities for workers' compensation, auto liability, general
liability and property and casualty claims increased $8.0 million, $9.0 million
and $2.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively, primarily due to increased premiums and estimated liabilities
related to the increase in revenues for the corresponding years. These increases
are net of $4.5 million, $2.3 million and $0.5 million reductions of insurance
liabilities previously established for insurance exposures as a consequence of
effective risk management and safety programs for the years ended December 31,
2003, 2002 and 2001, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of EMCOR's financial instruments, which include accounts
receivable and other financing commitments, approximate their fair values due
primarily to their short-term maturities.
During 2001, EMCOR called for redemption of its $115.0 million 5.75%
convertible subordinated notes. As a consequence, all of the convertible
subordinated notes were converted into approximately 4.2 million shares of EMCOR
common stock.
FOREIGN OPERATIONS
The financial statements and transactions of EMCOR's foreign subsidiaries are
maintained in their functional currency and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Translation adjustments have been recorded as Accumulated
other comprehensive income (loss), a separate component of Stockholders' equity.
INCOME TAXES
EMCOR accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach which
requires the recognition of deferred tax assets and deferred tax liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce net deferred tax assets to
the amount expected to be realized.
DERIVATIVES AND HEDGING ACTIVITIES
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are recognized in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income as a component of Accumulated
other comprehensive income (loss).
As of December 31, 2003, 2002 and 2001, EMCOR did not have any derivative
instruments.
32
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
VALUATION OF STOCK OPTION GRANTS
At December 31, 2003, EMCOR has stock-based compensation plans and programs,
which are described more fully in Note I - Stock Options and Stock Plans. 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 Consolidated Statements of Operations for the years ended December
31, 2003, 2002 and 2001 in respect of stock options granted during those years
inasmuch as EMCOR grants stock options at fair market value. Had compensation
cost for these options been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), EMCOR's net income, basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS") would have been reduced from the following
"as reported amounts" to the following "pro forma amounts" (in thousands, except
per share amounts):
2003 2002 2001
------- ------- -------
Net income:
As reported ....................................................................... $20,621 $62,902 $50,012
Less: Total stock-based compensation expense determined under fair
value based method, (described in Note I), net of related tax effects ........... 1,199 2,690 4,772
------- ------- -------
Pro forma ......................................................................... $19,422 $60,212 $45,240
======= ======= =======
Basic EPS:
As reported ....................................................................... $ 1.38 $ 4.23 $ 3.86
Pro forma ......................................................................... $ 1.30 $ 4.05 $ 3.49
Diluted EPS:
As reported ....................................................................... $ 1.33 $ 4.07 $ 3.40
Pro forma ......................................................................... $ 1.26 $ 3.90 $ 3.08
NEW ACCOUNTING PRONOUNCEMENTS
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 presented herein.
EMCOR has not changed to the fair value based method of accounting for
stock-based employee compensation; therefore, adoption of SFAS 148 has impacted
disclosures, not the financial results, of EMCOR.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (revised December 2003) ("FIN 46"). FIN 46 expands
upon and strengthens existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. A variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes in
which: (1) the equity investment at risk is not sufficient to permit the entity
to finance its activities without additional subordinated financial support
provided by any parties, including the equity holders; (2) the equity investors
lack one or more of the following essential characteristics of a controlling
financial interest: (a) the direct or indirect ability to make decisions about
the entity's activities through voting rights or similar rights, (b) the
obligation to absorb the expected losses of the entity or (c) the right to
receive the expected residual returns of the entity; or (3) the equity investors
have voting rights that are not proportionate to their economic interests, and
the activities of the entity involve or are conducted on behalf of an investor
with a disproportionately small voting interest. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. FIN
46 is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period ending after March 15, 2004 (except for special purpose
entities for which the effective rate is periods ending after December 15,
2003). EMCOR has determined that the adoption of the provisions of FIN 46 has
had no effect on EMCOR's consolidated financial condition or results of
operations.
33
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003. EMCOR
does not have any financial instruments that meet the provisions of SFAS 150;
therefore, EMCOR has determined that the provisions of SFAS 150 have had no
effect on EMCOR's consolidated financial position, results of operations or cash
flows.
In December 2003, the FASB issued Statement of Financial Accounting Standards
No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 replaces the disclosure
requirements in Statement of Financial Accounting Standard No 87, "Employers'
Accounting for Pensions," Statement of Financial Accounting Standard No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and Statement of Financial
Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." This revised statement retains the original disclosure
requirements of SFAS 132. It requires additional disclosures to those in the
original SFAS 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit plans and other defined post-retirement plans. SFAS 132
is effective for interim periods and fiscal years ending after December 15,
2003. EMCOR has adopted the revised provisions of SFAS 132 effective December
31, 2003.
NOTE C -- ACQUISITIONS OF BUSINESSES
On March 1, 2002, EMCOR acquired the Acquired Comfort Companies. Accordingly,
the Consolidated Results of Operations for EMCOR for the year ended December 31,
2002 include the results of operations for the Acquired Comfort Companies since
March 1, 2002. The purchase price paid for the Acquired Comfort Companies was
$186.25 million and was comprised of $164.15 million in cash and $22.1 million
by assumption of Comfort's notes payable to former owners of certain of the
Acquired Comfort Companies. In 2002, pursuant to the terms of the acquisition
agreement, an additional $7.1 million of cash purchase price was paid by EMCOR
to Comfort subsequent to the acquisition date due to an increase in net assets
of the Acquired Comfort Companies between the closing date and an agreed upon
pre-closing date. The acquisition was funded with $121.25 million of EMCOR's
funds and $50.0 million from borrowings under EMCOR's revolving credit facility.
The Acquired Comfort Companies, which are based predominantly in the United
States midwest and New Jersey, are active in the installation and maintenance of
mechanical systems and the design and installation of process and fire
protection systems. Services are provided to a wide variety of industries,
including the food processing, pharmaceutical and manufacturing/distribution
sectors. During 2003, EMCOR reduced goodwill by $8.4 million upon receipt of
$5.2 million in settlement of Comfort's obligations to EMCOR under the indemnity
provisions of the acquisition agreement and of $3.2 million of other purchase
price adjustments primarily related to deferred income taxes.
On December 19, 2002, EMCOR acquired CES. CES primarily provides a broad
array of facilities services, including comprehensive facilities management,
operation and maintenance, mobile services, remote monitoring, technical
consulting and diagnostic services, and installation and support for building
systems. The purchase price paid for CES was $178.0 million, of which $156.0
million was paid from borrowings under EMCOR's revolving credit facility and
$22.0 million was paid from EMCOR's funds. During 2003, EMCOR reduced goodwill
by $9.4 million inasmuch as EMCOR attributed $11.2 million of the purchase price
to CES identifiable intangible assets offset by other final purchase price and
allocation adjustments of $1.8 million.
EMCOR acquired two additional companies during each of the years 2003 and
2002 for which EMCOR paid an aggregate of $8.0 million and $3.4 million,
respectively.
EMCOR believes the addition of the companies acquired in 2002, which are
generally in geographic markets where EMCOR did not have significant presence,
will further EMCOR's goal of market and geographic diversification, expansion of
its facilities services operations and expansion of its services offerings.
Additionally, the acquisitions create more opportunities for EMCOR companies to
collaborate on national facilities services contracts. These factors contributed
to total goodwill, representing the excess purchase price over the fair value of
amounts assigned to the net assets acquired, of $207.9 million in 2003 compared
to total preliminary goodwill of $225.8 million in 2002.
During 2003 and 2002, EMCOR paid an aggregate of $2.0 million and $8.6
million in cash, respectively, by reason of earn-out obligations in respect of
prior year acquisitions.
34
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES -- (CONTINUED)
These acquisitions were accounted for by the purchase method, and the
purchase price has been allocated to the assets acquired and liabilities
assumed, based upon the estimated fair values of these assets and liabilities at
the dates of acquisition. Goodwill was $278.0 million and $290.4 million at
December 31, 2003 and 2002, respectively. There was no goodwill amortization
expense for the years ended December 31, 2003 and 2002. See Note M - Segment
Information for goodwill by reportable segment.
The following table summarizes the final purchase price allocations related
to the aforementioned 2002 acquisitions (in thousands):
ACQUIRED COMFORT OTHER
COMPANIES CES ACQUISITIONS TOTAL
---------------- -------- ------------ --------
Current assets, including cash acquired ............................. $159,299 $ 92,155 $7,568 $259,022
Property, plant and equipment ....................................... 11,384 16,094 190 27,668
Goodwill ............................................................ 113,933 92,644 1,352 207,929
Identifiable intangible assets ...................................... 9,600 16,199 -- 25,799
Other assets ........................................................ 3,212 8,738 -- 11,950
-------- -------- ------ --------
Total assets acquired ............................................. 297,428 225,830 9,110 532,368
-------- -------- ------ --------
Current liabilities ................................................. 109,020 46,217 5,568 160,805
Long-term obligations ............................................... 288 1,613 144 2,045
-------- -------- ------ --------
Total liabilities assumed ......................................... 109,308 47,830 5,712 162,850
-------- -------- ------ --------
Net assets acquired ............................................... 188,120 178,000 3,398 369,518
Notes payable assumed ............................................. 22,115 -- -- 22,115
-------- -------- ------ --------
Cash purchase price ............................................. $166,005 $178,000 $3,398 $347,403
======== ======== ====== ========
The goodwill of $207.9 million was recorded primarily in the United States
mechanical construction and facilities services and United States facilities
services reporting units. It is expected that approximately $155.0 million of
the goodwill associated with the acquisitions 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 December 31, 2003,
$22.1 million of notes assumed in connection with the acquisition of the
Acquired Comfort Companies had been paid by EMCOR.
Of the total purchase price paid for the acquisitions, approximately $25.8
million has been allocated to identifiable intangible assets, which includes
acquired backlog, customer relationships and trademarks and tradenames. Based on
an independent valuation of the Acquired Comfort Companies, $3.2 million was
allocated to the value of the contract backlog and will be amortized on a
straight-line basis over the individual related contract terms and $6.4 million
was allocated to trademarks and tradenames and will not be amortized, but
subject to an annual impairment test in accordance with SFAS 144. Based on an
independent valuation of CES, $9.2 million was allocated to the value of
contract backlog and $7.0 million was allocated to customer relationships, and
each will be amortized on a straight-line method. The amortization periods range
from one to seven years. See also Note B - Summary of Significant Accounting
Policies for additional information.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES -- (CONTINUED)
The following tables present unaudited pro forma results of operations
including all companies acquired during 2002 as if the acquisitions had occurred
at the beginning of fiscal 2001. The unaudited pro forma results of operations
for companies acquired during 2003 have been excluded due to immateriality. The
unaudited pro forma results of operations are not necessarily indicative of the
results of operations had the acquisitions actually occurred at the beginning of
fiscal 2001, nor is it necessarily indicative of future operating results (in
thousands, except per share data):
ADJUSTMENTS TO ARRIVE AT PRO FORMA RESULTS OF OPERATIONS
--------------------------------------------------------
(UNAUDITED)
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------
ACQUIRED
EMCOR COMFORT OTHER PRO
AS REPORTED COMPANIES (1) CES (2) ACQUISITIONS (3) FORMA
----------- ------------- ----------- ---------------- -----------
Revenues .................................. $ 3,968,051 $ 94,084 $ 403,900 $ 15,284 $ 4,481,319
Operating income (loss) ................... $ 114,425 $ (40) $ 11,401 $ 1,401 $ 127,187
Interest (expense) income, net ............ $ (2,099) $ 162 $ (6,509) $ 7 $ (8,439)
Income before income taxes ................ $ 112,326 $ 122 $ 4,892 $ 1,408 $ 118,748
Net income ................................ $ 62,902 $ 68 $ 2,740 $ 788 $ 66,498
Basic earnings per share .................. $ 4.23 $ 0.01 $ 0.18 $ 0.05 $ 4.47
Diluted earnings per share ................ $ 4.07 $ 0.00 $ 0.18 $ 0.05 $ 4.30
FOR THE YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------------
ACQUIRED
EMCOR COMFORT OTHER PRO
AS REPORTED COMPANIES (1) CES (2) ACQUISITIONS (3) FORMA
----------- ------------- ----------- ---------------- -----------
Revenues ................................... $ 3,419,854 $ 659,803 $ 400,915 $ 16,809 $ 4,497,381
Operating income ........................... $ 88,682 $ 30,118 $ 17,278 $ 473 $ 136,551
Interest income (expense), net ............. $ 792 $ (1,499) $ (9,903) $ 19 $ (10,591)
Income before income taxes ................. $ 89,474 $ 28,619 $ 7,375 $ 492 $ 125,960
Net income ................................. $ 50,012 $ 16,027 $ 4,130 $ 275 $ 70,444
Basic earnings per share ................... $ 3.86 $ 1.24 $ 0.32 $ 0.02 $ 5.44
Diluted earnings per share ................. $ 3.40 $ 1.05 $ 0.27 $ 0.02 $ 4.74
The unaudited pro forma results of operations, for segment information, is
included in Note M - Segment Information.
- ------------------
(1) Adjustments to arrive at pro forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of March 1, 2002. The adjustments for the year ended
December 31, 2001 represent results from operations from January 1, 2001
through December 31, 2001.
(2) Adjustments to arrive at pro forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of December 19, 2002. The adjustments for the year ended
December 31, 2001 represent results from operations from January 1, 2001
through December 31, 2001.
(3) Adjustments to arrive at pro forma results of operations for the year ended
December, 31, 2002 represent results from January 1, 2002 through the date
of each acquisition. The adjustments for the year ended December 31, 2001
represent results for operations from January 1, 2001 through December 31,
2001.
36
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- EARNINGS PER SHARE
The following tables summarize EMCOR's calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 2003, 2002 and 2001:
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders ............................................ $20,621,000 14,986,079 $1.38
=====
EFFECT OF DILUTIVE SECURITIES:
Options ............................................................................ -- 475,619
----------- ----------
DILUTED EPS ........................................................................ $20,621,000 15,461,698 $1.33
=========== ========== =====
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders ............................................ $62,902,000 14,876,906 $4.23
=====
EFFECT OF DILUTIVE SECURITIES:
Options ............................................................................ -- 580,096
----------- ----------
DILUTED EPS ........................................................................ $62,902,000 15,457,002 $4.07
=========== ========== =====
INCOME SHARES PER SHARE
2001 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders ............................................ $50,012,000 12,948,230 $3.86
=====
EFFECT OF DILUTIVE SECURITIES:
Convertible Subordinated Notes including assumed interest savings, net of tax ...... 1,735,395 1,820,273
Options ............................................................................ -- 471,705
----------- ----------
DILUTED EPS ........................................................................ $51,747,395 15,240,208 $3.40
=========== ========== =====
The number of EMCOR's options granted, which were excluded from the
computation of Diluted EPS for the years ended December 31, 2003, 2002 and 2001
because they would be antidilutive, were 425,499, 45,000 and 210,100,
respectively.
NOTE E -- CURRENT DEBT
2002 CREDIT FACILITY
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain direct and
indirect subsidiaries of EMCOR, is secured by substantially all of the assets of
EMCOR and most of its subsidiaries, and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to payment of dividends,
common stock repurchases, investments, acquisitions, indebtedness and capital
expenditures. A commitment fee is payable on the average daily unused amount of
the Revolving Credit Facility. The fee ranges from 0.3% to 0.5% of the unused
amount, based on certain financial tests. Loans under the Revolving Credit
Facility bear interest at (1) a rate which is the prime commercial lending rate
announced by Harris Nesbitt from time to time (4.0% at December 31, 2003) plus
0% to 1.0%, based on certain financial tests, (2) United States dollar LIBOR (at
December 31, 2003 the rate was 1.16%) plus 1.5% to 2.5%, based on certain
financial tests or (3) British pound LIBOR (at December 31, 2003 the rate was
3.91%) plus 1.5% to 2.5%, based on certain financial tests. The interest rates
in effect at December 31, 2003 were 4.25%, 2.91% and 5.66% for the prime
commercial lending rate, United States dollar LIBOR and British pound LIBOR,
respectively. Letter of credit fees issued under this facility range from 0.75%
to 2.5% of the respective face amounts of the letters of credit issued and are
charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2003 and 2002, EMCOR had approximately $49.2 million
and $39.9 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $139.4 million and $112.0 million outstanding under the Revolving
Credit Facility at December 31, 2003 and 2002, respectively.
37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT -- (CONTINUED)
FOREIGN BORROWINGS
In August 2001, EMCOR's Canadian subsidiary, Comstock Canada Ltd., renewed a
credit agreement with a bank providing for an overdraft facility of up to Cdn.
$0.5 million. The facility is secured by a standby letter of credit and provides
for interest at the bank's prime rate, which was 4.5% at December 31, 2003.
There were no borrowings outstanding under this credit agreement at December 31,
2003 or 2002.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 2003 and 2002 (in thousands):
2003 2002
----- ------
Notes Payable at 10.0% due 2003 .......................................................................... $ -- $21,815
Capitalized Lease Obligations at weighted average interest rates from 2.0% to 12.5%,
payable in varying amounts through 2009 ................................................................ 339 351
Other, at weighted average interest rates of approximately 10.0%, payable in varying
amounts through 2012 ................................................................................... 589 1,015
----- -------
928 23,181
Less: current maturities ................................................................................. 367 22,276
----- -------
$ 561 $ 905
===== =======
NOTES PAYABLE
The Notes Payable of $21.8 million are notes made by Comfort to former owners
of certain Acquired Comfort Companies, which notes were assumed by EMCOR in
connection with the acquisition. The Notes Payable accrued interest at 10.0% per
annum and were paid in full in April 2003.
CAPITALIZED LEASE OBLIGATIONS
See Note K -- Commitments and Contingencies.
OTHER LONG-TERM DEBT
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. The aggregate amount of other
long-term debt maturing during the next five years is approximately $0.1 million
in each of 2004, 2005, 2006, 2007 and 2008, and $0.1 million thereafter.
CONVERTIBLE SUBORDINATED NOTES
In 1998, EMCOR sold, pursuant to an underwritten public offering, $115.0
million principal amount of 5.75% Convertible Subordinated Notes. During 2001,
EMCOR called for redemption its $115.0 million 5.75% Convertible Subordinated
Notes and, as a consequence, the Convertible Subordinated Notes were converted
into approximately 4.2 million shares of EMCOR common stock.
NOTE G -- INCOME TAXES
EMCOR files a consolidated federal income tax return including all its U.S.
subsidiaries. At December 31, 2003, EMCOR had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $2.5 million, which
expire in the year 2019. In addition, at December 31, 2003, EMCORhad NOLs for
United Kingdom income tax purposes of approximately $20.7 million, which have no
expiration date. The NOLs are subject to review by taxing authorities.
EMCOR adopted Fresh-Start Accounting in connection with EMCOR's bankruptcy
reorganization in December 1994. As a result, the tax benefit of any net
operating loss carryforwards or net deductible temporary differences, which
existed as of December 15, 1994, resulted in a charge to the tax provision
(provision in lieu of income taxes) and a credit to capital surplus. These NOLs
were substantially utilized as of December 31, 2001. The amount credited to
capital surplus was $21.4 million for the year ended December 31, 2001.
38
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
The income tax provision in the accompanying Consolidated Statements of
Operations for the years ended December 31, 2003, 2002 and 2001 consisted of the
following (in thousands):
2003 2002 2001
------- ------- -------
Current:
Federal ........................................................................... $ 3,062 $33,762 $ 5,274
State and local ................................................................... 4,987 7,686 7,049
Foreign ........................................................................... 795 544 1,989
------- ------- -------
8,844 41,992 14,312
------- ------- -------
Deferred .......................................................................... 7,451 7,432 3,725
------- ------- -------
Provision in lieu of income taxes ................................................... -- -- 21,425
------- ------- -------
$16,295 $49,424 $39,462
======= ======= =======
Factors accounting for the variation from U.S. statutory income tax rates for
the years ended December 31, 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
------- ------- -------
Federal income taxes at the statutory rate .......................................... $12,921 $39,314 $31,316
State and local income taxes, net of federal tax benefits ........................... 3,242 7,742 5,376
Foreign income taxes ............................................................... (158) 85 68
Other non-deductible expenses, including goodwill .................................. -- -- 1,423
Other .............................................................................. 290 2,283 1,279
------- ------- -------
$16,295 $49,424 $39,462
======= ======= =======
The components of the net deferred income tax asset are included in "Prepaid
expenses and other" ($23.0 million) and "Other long-term liabilities" ($4.2
million) at December 31, 2003 and "Prepaid expenses and other" ($15.9 million)
and "Other assets" ($11.6 million) at December 31, 2002 in the accompanying
Consolidated Balance Sheets. The amounts recorded for the years ended December
31, 2003 and 2002 were as follows (in thousands):
2003 2002
------- -------
Deferred income tax assets:
Net operating loss carryforwards ................................................................... $ 7,079 $ 1,014
Excess of amounts expensed for financial statement purposes over amounts deducted
for income tax purposes .......................................................................... 46,240 52,570
------- -------
Total deferred income tax assets ................................................................... 53,319 53,584
------- -------
Valuation allowance for deferred tax assets ........................................................ (1,971) (2,124)
------- -------
Net deferred income tax assets ..................................................................... 51,348 51,460
------- -------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes ........... (32,565) (24,011)
------- -------
Total deferred income tax liabilities .............................................................. (32,565) (24,011)
------- -------
Net deferred income tax asset ...................................................................... $18,783 $27,449
======= =======
Income (loss) before income taxes for the years ended December 31, 2003, 2002
and 2001 consisted of the following (in thousands):
2003 2002 2001
------- -------- -------
United States ....................................................................... $55,013 $108,733 $79,699
------- -------- -------
Foreign ............................................................................. (18,097) 3,593 9,775
------- -------- -------
$36,916 $112,326 $89,474
======= ======== =======
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiaries because of management's intent to
indefinitely reinvest such earnings. Upon distribution of these earnings in the
form of dividends or otherwise, EMCOR may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical; however, to estimate the amount
of taxes that may be payable on the eventual remittance of these earnings.
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- COMMON STOCK
As of December 31, 2003 and 2002, 15,032,193 and 14,918,877 shares of EMCOR
common stock were outstanding, respectively. Pursuant to a program authorized by
the Board of Directors, EMCOR purchased 1,131,985 shares of its common stock
prior to January 1, 2000. The aggregate amount of $16.7 million paid for those
shares has been classified as "Treasury stock, at cost" in the Consolidated
Balance Sheet at December 31, 2003. EMCOR management is authorized to expend up
to an additional $3.1 million to purchase EMCOR's common stock under this
program.
NOTE I -- STOCK OPTIONS AND STOCK PLANS
EMCOR has stock option plans and programs under which employees may receive
stock options and a stock bonus plan for executives pursuant to which the
executives receive restricted stock units. EMCOR also has stock option plans
under which non-employee directors may receive stock options. A summary of the
general terms of the grants under stock option plans and programs and stock
plans were as follows:
AUTHORIZED EXERCISE PRICE/
SHARES VESTING EXPIRATION VALUATION DATE
---------- --------------- ---------- --------------
1994 Management Stock Option Plan 1,000,000 Generally, 33 1/3% Ten years from Fair market value
(the "1994 Plan") on each anniversary grant date of common stock
of grant date on grant date
1995 Non-Employee Directors' Non- 200,000 100% on grant date Ten years from Fair market value
Qualified Stock Option Plan grant date of common stock
(the "1995 Plan") on grant date
1997 Non-Employee Directors' Non- 300,000 (1) Five years from Fair market value
Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock on grant date (3)
Option Plan")
1997 Stock Plan for Directors (the 150,000 (2) Five years from Fair market value
"1997 Directors' Stock Plan") grant date of common stock
on grant date (3)
2003 Non-Employee Directors' 120,000 100% on grant date Ten years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "2003 Directors' Stock Option Plan") on grant date
2003 Management Stock 330,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2003 Management Plan") on grant date
Executive Stock Bonus Plan 220,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value
100% on first grant date of common stock
anniversary of grant on grant date
date or 25% on grant and
25% on each anniversary
of grant date
- ------------------
(1) Until July 2000, non-employee directors could elect to receive one-third,
two-thirds or all of their retainer for a calendar year in the form of stock
options. Since then such directors have received and will receive all of
their retainer in the form of stock options. All options under this plan
become exercisable quarterly over the calendar year. In addition, each
director will receive additional stock options equal to the product of 0.5
times the amount of stock options otherwise issued.
(2) The plan terminated during 2003, and no shares were outstanding under the
plan as of December 31, 2003.
(3) Generally, the grant date is the first business day of a calendar year.
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes EMCOR's stock option and stock bonus plan
activity since December 31, 2000:
1997 DIRECTORS' STOCK
1994 PLAN 1995 PLAN OPTION PLAN
---------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Balance, December 31, 2000 ....... 681,767 $10.57 100,500 $18.76 115,537 $17.89
Granted ........................ -- -- 18,000 $42.30 31,950 $25.44
Forfeited ...................... -- -- -- -- -- --
Exercised ...................... (97,366) $14.56 (15,000) $15.09 (7,602) $17.56
------- ------- -------
Balance, December 31, 2001 ....... 584,401 $9.90 103,500 $23.39 139,885 $19.64
Granted ........................ -- -- 18,000 $54.87 16,933 $46.81
Forfeited ...................... (3,000) $19.75 -- -- -- --
Exercised ...................... (57,200) $14.46 (10,500) $6.34 (24,296) $20.00
------- ------- -------
Balance, December 31, 2002 ....... 524,201 $9.35 111,000 $30.10 132,522 $23.04
Granted ........................ -- -- 3,000 $48.15 19,962 $53.63
Forfeited ...................... -- -- -- -- (6,074) $20.00
Exercised ...................... (32,000) $10.59 (15,000) $25.66 (52,482) $17.68
------- ------- -------
Balance, December 31, 2003 ....... 492,201 $9.27 99,000 $31.32 93,928 $32.73
======= ======= =======
1997 DIRECTORS' OTHER STOCK
STOCK PLAN ESBP OPTION GRANTS
----------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ---------- ------- -------- ------- --------
Balance, December 31, 2000 ....... 330 $19.63 -- -- 407,000 $18.49
Granted ........................ -- -- 56,707 $21.62 262,100 $37.36
Forfeited ...................... -- -- -- -- -- --
Exercised ...................... -- -- -- -- (16,666) $17.28
------- ------- -------
Balance, December 31, 2001 ....... 330 $19.63 56,707 $21.62 652,434 $26.10
Granted ........................ -- -- 36,569 $46.35 157,700 $47.00
Forfeited ...................... -- -- -- -- (2,000) $16.50
Exercised ...................... -- -- -- -- (13,167) $19.52
------- ------- -------
Balance, December 31, 2002 ....... 330 $19.63 93,276 $31.32 794,967 $30.38
Granted ........................ -- -- 37,330 $39.12 143,335 $54.64
Forfeited ...................... -- -- -- -- -- --
Exercised ...................... (330) $19.63 -- -- (13,834) $19.52
------- ------- -------
Balance, December 31, 2003 ....... -- -- 130,606 $33.55 924,468 $34.30
======= ======= =======
2003 DIRECTORS'
STOCK OPTION PLAN 2003 MANAGEMENT PLAN
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
Balance, December 31, 2002 ....... -- -- -- --
Granted ........................ 30,000 $52.78 10,000 $41.61
Forfeited ...................... -- -- -- --
Exercised ...................... -- -- -- --
------- -------
Balance, December 31, 2003 ....... 30,000 $52.78 10,000 $41.61
======= =======
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
At December 31, 2003, 2002 and 2001, approximately 1,584,000, 1,635,000 and
1,271,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2003, 2002 and 2001 was
approximately $24.58, $23.00 and $18.18, respectively.
The following table summarizes information about EMCOR's stock options at
December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------- ---------------- ---------------- -------- ----------------
$4.75-$5.13 349,200 1.26 Years $4.92 349,200 $4.92
$14.31-$20.00 562,742 4.72 Years $18.76 562,742 $18.76
$21.62-$22.13 77,707 6.66 Years $21.74 77,707 $21.74
$25.44-$27.13 111,625 5.75 Years $25.67 111,625 $25.67
$39.12-$46.35 451,199 7.92 Years $43.54 361,349 $43.07
$48.15-$55.49 227,730 8.57 Years $54.23 121,731 $53.80
The weighted average fair value of options granted during 2003, 2002 and 2001
were $14.57, $47.50 and $30.02, respectively.
The pro forma effect on EMCOR's net income, Basic EPS and Diluted EPS, had
compensation costs been determined consistent with the recognition of
compensation costs provisions of SFAS 123, is presented in Note B -- Summary of
Significant Accounting Policies. The associated pro forma compensation costs
related to the provisions of SFAS 123, net of tax effects, were $1.2 million,
$2.7 million and $4.8 million for the years ending December 31, 2003, 2002 and
2001, respectively. The pro forma effect was calculated using an estimated fair
value of each option grant on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
2003, 2002 and 2001: risk-free interest rates of 1.9% to 3.3% (representing the
risk-free interest rate at the date of the grant); expected dividend yields of
zero percent; expected terms of 3.6 to 4.5 years; and expected volatility of
30.3%, 67.2% and 83.5% for options granted during 2003, 2002 and 2001,
respectively.
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS
EMCOR's United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees. The benefits under the plan are based on wages and years
of service with the subsidiary. EMCOR's policy is to fund the minimum amount
required by law.
The change in benefit obligations and plan assets for the years ended
December 31, 2003 and 2002 consisted of the following components (in thousands):
2003 2002
-------- --------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year ........................................ $136,181 $110,598
Service cost ................................................................... 4,837 7,240
Interest cost .................................................................. 8,183 7,532
Plan participants' contributions ............................................... 3,506 3,219
Actuarial gain ................................................................. (4,595) (1,186)
Benefits paid .................................................................. (3,951) (2,897)
Foreign currency exchange rate changes ......................................... 15,641 11,675
-------- --------
Benefit obligation at end of year .............................................. $159,802 $136,181
-------- --------
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year ................................. $ 91,592 $ 89,053
Actual return on plan assets ................................................... 12,407 (13,894)
Employer contributions ......................................................... 6,026 6,709
Plan participants' contributions ............................................... 3,506 3,219
Benefits paid .................................................................. (3,951) (2,897)
Foreign currency exchange rate changes ......................................... 11,682 9,402
-------- --------
Fair values of plan assets at end of year ...................................... $121,262 $ 91,592
-------- --------
Funded status .................................................................. $(38,540) $(44,589)
Unrecognized transition amount ................................................. (61) (140)
Unrecognized prior service cost ................................................ 217 290
Unrecognized losses ............................................................ 33,759 42,791
-------- --------
Net amount recognized .......................................................... $ (4,625) $ (1,648)
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued benefit liability ...................................................... $(13,484) $ (7,243)
Intangible asset ............................................................... 238 290
Accumulated other comprehensive income ......................................... 8,621 5,305
-------- --------
Net amount recognized .......................................................... $ (4,625) $ (1,648)
======== ========
The assumptions used as of December 31, 2003, 2002 and 2001 in determining
pension cost and liability shown above were as follows:
2003 2002 2001
------ ------ ------
Discount rate ..................................... 5.5% 6.0% 6.0%
Annual rate of salary provision ................... 3.1% 4.0% 4.0%
Annual rate of return on plan assets .............. 7.0% 7.0% 7.0%
For measurement purposes, the annual rates of increase in the per capita cost
of covered pension benefits assumed for 2003 and 2002 were 2.6% and 2.5%,
respectively.
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The components of net periodic pension benefit cost for the years ended
December 31, 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
------- ------- -------
Service cost ........................................................................ $ 4,837 $ 7,240 $ 5,693
Interest cost ....................................................................... 8,183 7,532 6,083
Expected return on plan assets ...................................................... (6,708) (7,144) (6,781)
Net amortization of prior service cost and actuarial loss/(gain) .................... (5) (5) 69
Amortization of unrecognized loss ................................................... 2,280 765 --
------- ------- -------
Net periodic pension benefit cost ................................................... $ 8,587 $ 8,388 $ 5,064
======= ======= =======
PLAN ASSETS
The weighted-average asset allocations and weighted-average target
allocations at December 31, 2003 are as follows:
% OF PLAN ASSETS
ASSET CATEGORY DECEMBER 31, 2003 TARGET ASSET ALLOCATION
- -------------- ----------------- -----------------------
Equity securities 64.6% 65.0%
Debt securities 33.9 35.0
Other 1.5 --
----- -----
Total 100.0% 100.0%
===== =====
Plan assets of EMCOR's United Kingdom subsidiary pension plan include
marketable equity securities in both United Kingdom and United States companies.
Debt securities consist mainly of fixed interest bonds.
The investment policies and strategies for plan assets are established to
ensure that obligations to beneficiaries of the plan are met, to achieve a
reasonable balance between risk, likely return and administration, as well as to
maintain funds at a level to meet minimum funding requirements. In order to
ensure that an appropriate investment strategy is in place, an analysis of the
Plan's assets and liabilities is completed periodically.
CASH FLOWS:
CONTRIBUTIONS
EMCOR'S United Kingdom subsidiary expects to contribute $9.7 million to its
pension plan in 2004.
ESTIMATED FUTURE BENEFIT PAYMENTS
The following estimated benefit payments, which reflect expected future
service, as appropriate, are expected to be paid in the following years (in
thousands):
PENSION BENEFITS
----------------
2004 $ 3,271
2005 3,598
2006 3,761
2007 3,925
2008 4,088
Succeeding five years 26,165
-------
Total estimated benefit payments $44,808
=======
44
The accumulated benefit obligation for the defined benefit pension plan for
the years ended December 31, 2003 and 2002 was $134.7 million and $98.8 million,
respectively.
EMCOR contributes to various union pension funds based upon wages paid to its
union employees. Such contributions approximated $134.8 million, $101.2 million
and $92.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
EMCOR has a retirement and savings plan that covers U.S. eligible non-union
employees. Contributions to this profit sharing and voluntary savings plan are
based on a percentage of the employee's base compensation. The expense
recognized for the years ended December 31, 2003, 2002 and 2001 for this plan
was $3.8 million, $3.5 million and $3.2 million, respectively.
EMCOR's United Kingdom subsidiary has a defined contribution retirement plan
that began in 2002. The expense recognized for the years ended December 31, 2003
and 2002 was $0.7 million and $0.3 million, respectively.
EMCOR's Canadian subsidiary has a defined contribution retirement plan. The
expense recognized for the years ended December 31, 2003 and 2002 was $0.4
million and $0.3 million, respectively.
NOTE K -- COMMITMENTS AND CONTINGENCIES
EMCOR and its subsidiaries lease land, buildings and equipment under various
leases. The leases frequently include renewal options and require EMCOR to pay
for utilities, taxes, insurance and maintenance expenses.
Future minimum payments, by year and in the aggregate, under capital leases,
non-cancelable operating leases and related subleases with initial or remaining
terms of one or more years at December 31, 2003, were as follows (in thousands):
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
------- --------- --------
2004 .......................................... $204 $ 37,801 $ 751
2005 .......................................... 69 31,723 598
2006 .......................................... 48 23,678 436
2007 .......................................... 28 17,353 436
2008 .......................................... 6 13,109 436
Thereafter .................................... 3 21,590 2,304
---- -------- ------
Total minimum lease payment ................... 358 $145,254 $4,961
======== ======
Amounts representing interest ................. (19)
----
Present value of net minimum lease payments ... $339
====
Rent expense for operating leases and other rental items for the years ended
December 31, 2003, 2002 and 2001 was $52.9 million, $36.5 million and $28.5
million, respectively. Rent expense for the years ended December 31, 2003, 2002
and 2001 included sublease rental income of $1.1 million, $0.8 million and $0.7
million, respectively.
EMCOR has employment agreements with its executive officers and certain key
management personnel. The employment agreements with executive officers may be
terminated by the executive or EMCOR, but if terminated by EMCOR or by its
executive officers for good reason (as defined therein), the agreements provide
for severance benefits. Certain of the agreements provide the executive officers
with certain additional rights if a change of control (as defined therein) of
EMCOR occurs.
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects, which secure EMCOR payment and
performance obligations under contracts for such projects. In addition, at the
request of labor unions representing certain EMCOR employees, bonds are
sometimes provided to secure such obligations for wages and benefits payable to
or for such employees. EMCOR bonding requirements typically increase as the
amount of public sector work increases. As of December 31, 2003, sureties had
issued bonds for the account of EMCOR in the aggregate amount of approximately
$1.7 billion. The bonds are issued by EMCOR's sureties in return for a premium,
which varies depending on the size and type of the bonds. The largest individual
bond is approximately $170.0 million. EMCOR has agreed to indemnify the sureties
for any payments made by them in respect of bonds issued on EMCOR's behalf.
45
EMCOR is subject to regulation with respect to the handling of certain
materials used in construction which are classified as hazardous or toxic by
Federal, State and local agencies. EMCOR's practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, when remediation is a required part of its contract performance, EMCOR
believes it complies with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
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 commercial properties. These guarantees are not expected to
have a material adverse 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.
NOTE L -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes for the years ended December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
------- ------- --------
Cash paid during the year for:
Interest ................................................................................ $ 7,251 $ 7,042 $ 4,195
Income taxes ............................................................................ $17,910 $45,785 $ 7,846
Non-cash financing activities:
Debt assumed in acquisition ............................................................. $ -- $22,115 $ --
5.75% Convertible Subordinated Notes due 2005, converted into common stock .............. $ -- $ -- $115,000
NOTE M -- SEGMENT INFORMATION
EMCOR has the following reportable segments: United States electrical
construction and facilities services, United States mechanical construction and
facilities services, United States facilities services, Canada construction and
facilities services, United Kingdom construction and facilities services and
Other international construction and facilities services. The segment "United
States facilities services" principally consists of those operations which
primarily provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR's operations outside of
the United States, Canada, and the United Kingdom (primarily in South Africa,
the Middle East and Western Europe) performing electrical construction,
mechanical construction and facilities services. The following tables set forth
information about industry segments and geographic areas for the years ended
December 31, 2003, 2002 and 2001. Insignificant reclassifications of certain
business units among the segments have been made for all periods presented due
to changes in EMCOR's internal reporting structure.
46
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
The tables also present unaudited pro forma revenues and operating income as
if the acquisitions had occurred at the beginning of fiscal 2001. The unaudited
pro forma revenues and operating income are not necessarily indicative of future
operating results (in millions):
PRO FORMA
-----------------------
AS REPORTED (UNAUDITED)
------------------------------------ -----------------------
2003 2002 2001 2002 2001
-------- -------- -------- -------- --------
Revenues from unrelated entities:
United States electrical construction and
facilities services ...................................... $1,239.5 $1,152.4 $1,334.7 $1,154.8 $1,347.5
United States mechanical construction and
facilities services ...................................... 1,715.8 1,715.4 1,202.1 1,846.5 1,894.2
United States facilities services .......................... 661.2 250.0 209.7 629.8 582.3
-------- -------- -------- -------- --------
Total United States operations ............................. 3,616.5 3,117.8 2,746.5 3,631.1 3,824.0
Canada construction and facilities services ................ 346.8 316.3 198.2 316.3 198.2
United Kingdom construction and facilities services ........ 571.3 533.9 463.6 533.9 463.6
Other international construction and facilities services ... -- -- 11.6 -- 11.6
-------- -------- -------- -------- --------
Total worldwide operations ................................. $4,534.6 $3,968.0 $3,419.9 $4,481.3 $4,497.4
======== ======== ======== ======== ========
Total revenues:
United States electrical construction and
facilities services ...................................... $1,264.6 $1,191.3 $1,371.2 $1,193.6 $1,384.0
United States mechanical construction and
facilities services ...................................... 1,733.3 1,719.3 1,234.9 1,850.4 1,927.1
United States facilities services .......................... 665.4 252.0 215.5 631.9 588.0
Less intersegment revenues ................................. (46.8) (44.8) (75.1) (44.8) (75.1)
-------- -------- -------- -------- --------
Total United States operations ............................. 3,616.5 3,117.8 2,746.5 3,631.1 3,824.0
Canada construction and facilities services ................ 346.8 316.3 198.2 316.3 198.2
United Kingdom construction and facilities services ........ 571.3 533.9 463.6 533.9 463.6
Other international construction and facilities services ... -- -- 11.6 -- 11.6
-------- -------- -------- -------- --------
Total worldwide operations ................................. $4,534.6 $3,968.0 $3,419.9 $4,481.3 $4,497.4
======== ======== ======== ======== ========
Operating income (loss):
United States electrical construction and
facilities services ...................................... $ 57.8 $ 78.9 $ 75.3 $ 79.2 $ 77.0
United States mechanical construction and
facilities services ...................................... 25.1 59.3 41.4 61.8 70.8
United States facilities services .......................... 17.0 4.3 (7.2) 14.3 9.6
-------- -------- -------- -------- --------
Total United States operations ............................. 99.9 142.5 109.5 155.3 157.4
Canada construction and facilities services ................ 2.0 3.3 2.3 3.3 2.3
United Kingdom construction and facilities services ........ (22.4) 0.0 7.2 0.0 7.2
Other international construction and facilities services ... 0.3 (0.1) (1.2) (0.1) (1.2)
Corporate administration ................................... (34.7) (31.3) (29.1) (31.3) (29.1)
-------- -------- -------- -------- --------
Total worldwide operations ................................. 45.1 114.4 88.7 127.2 136.6
Other corporate items:
Interest expense ........................................... (8.9) (4.1) (4.8) (10.7) (16.4)
Interest income ............................................ 0.7 2.0 5.6 2.2 5.8
-------- -------- -------- -------- --------
Income before taxes ........................................ $ 36.9 $ 112.3 $ 89.5 $ 118.7 $ 126.0
======== ======== ======== ======== ========
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2003 2002 2001
----- ----- -----
Capital expenditures:
United States electrical construction and facilities services ..................... $ 4.6 $ 3.0 $ 3.7
United States mechanical construction and facilities services ..................... 4.5 5.1 5.1
United States facilities services ................................................. 3.4 1.2 2.0
----- ----- -----
Total United States operations .................................................... 12.5 9.3 10.8
Canada construction and facilities services ....................................... 0.5 0.3 1.0
United Kingdom construction and facilities services ............................... 4.0 4.2 5.1
Other international construction and facilities services .......................... -- -- --
Corporate administration .......................................................... 0.9 1.8 1.0
----- ----- -----
Total worldwide operations ........................................................ $17.9 $15.6 $17.9
===== ===== =====
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services ..................... $ 3.4 $ 3.5 $ 3.5
United States mechanical construction and facilities services ..................... 6.5 6.9 3.9
United States facilities services ................................................. 6.4 1.9 1.1
----- ----- -----
Total United States operations .................................................... 16.3 12.3 8.5
Canada construction and facilities services ....................................... 0.7 0.6 0.8
United Kingdom construction and facilities services ............................... 4.0 2.4 2.8
Other international construction and facilities services .......................... -- -- --
Corporate administration .......................................................... 0.7 0.1 0.6
----- ----- -----
Total worldwide operations ........................................................ $21.7 $15.4 $12.7
===== ===== =====
2003 2002
------ ------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services ....................................... $ 60.4 $ 31.9
United States mechanical construction and facilities services ....................................... 135.5 157.4
United States facilities services ................................................................... 9.4 10.7
------ ------
Total United States operations ...................................................................... 205.3 200.0
Canada construction and facilities services ......................................................... 17.8 15.9
United Kingdom construction and facilities services ................................................. 26.3 19.9
Other international construction and facilities services ............................................ -- --
------ ------
Total worldwide operations .......................................................................... $249.4 $235.8
====== ======
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services ....................................... $152.7 $156.9
United States mechanical construction and facilities services ....................................... 126.6 130.5
United States facilities services ................................................................... 6.7 11.3
------ ------
Total United States operations ...................................................................... 286.0 298.7
Canada construction and facilities services ......................................................... 9.5 10.8
United Kingdom construction and facilities services ................................................. 49.7 53.6
Other international construction and facilities services ............................................ -- --
------ -------
Total worldwide operations .......................................................................... $345.2 $363.1
====== ======
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2003 2002
-------- --------
Long-lived assets:
United States electrical construction and facilities services ...................................... $ 13.7 $ 12.5
United States mechanical construction and facilities services ...................................... 191.5 203.5
United States facilities services .................................................................. 140.2 139.9
-------- --------
Total United States operations ..................................................................... 345.4 355.9
Canada construction and facilities services ........................................................ 3.9 3.3
United Kingdom construction and facilities services ................................................ 14.9 13.7
Other international construction and facilities services ........................................... -- --
Corporate administration ........................................................................... 2.2 2.1
-------- --------
Total worldwide operations ......................................................................... $ 366.4 $ 375.0
======== ========
Goodwill:
United States electrical construction and facilities services ...................................... $ 3.8 $ 3.8
United States mechanical construction and facilities services ...................................... 162.8 170.8
United States facilities services .................................................................. 111.4 115.8
-------- --------
Total United States operations ..................................................................... 278.0 290.4
Canada construction and facilities services ........................................................ -- --
United Kingdom construction and facilities services ................................................ -- --
Other international construction and facilities services ........................................... -- --
Corporate administration ........................................................................... -- --
-------- --------
Total worldwide operations ......................................................................... $ 278.0 $ 290.4
======== ========
Total assets:
United States electrical construction and facilities services ...................................... $ 362.3 $ 308.4
United States mechanical construction and facilities services ...................................... 771.6 810.0
United States facilities services .................................................................. 280.5 293.1
-------- --------
Total United States operations ..................................................................... 1,414.4 1,411.5
Canada construction and facilities services ........................................................ 98.2 77.7
United Kingdom construction and facilities services ................................................ 198.4 191.6
Other international construction and facilities services ........................................... 4.5 5.1
Corporate administration ........................................................................... 79.7 72.6
-------- --------
Total worldwide operations ......................................................................... $1,795.2 $1,758.5
======== ========
NOTE N -- SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
2003 QUARTERLY RESULTS
Revenues ................... $1,061,030 $1,144,378 $1,157,588 $1,171,650
Gross profit ............... $ 116,769 $ 123,275 $ 118,206 $ 124,204
Net income ................. $ 3,256 $ 8,273 $ 6,468 $ 2,624
Basic EPS .................. $ 0.22 $ 0.55 $ 0.43 $ 0.17
========== ========== ========== ==========
Diluted EPS ................ $ 0.21 $ 0.53 $ 0.42 $ 0.17
========== ========== ========== ==========
2002 QUARTERLY RESULTS
Revenues ................... $ 810,299 $ 986,399 $1,052,285 $1,119,068
Gross profit ............... $ 89,386 $ 120,216 $ 129,233 $ 143,799
Net income ................. $ 7,251 $ 14,828 $ 19,479 $ 21,344
Basic EPS .................. $ 0.49 $ 1.00 $ 1.31 $ 1.43
========== ========== ========== ==========
Diluted EPS ................ $ 0.47 $ 0.96 $ 1.26 $ 1.38
========== ========== ========== ==========
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
In December 2001, the Company's Canadian subsidiary Comstock Canada Limited
("Comstock") commenced an action against Atomic Energy of Canada Limited
("AECL") in the Ontario Superior Court of Justice claiming approximately Cdn.
$6.0 million (approximately $4.6 million) in connection with Comstock's work on
two medical isotope nuclear reactors and associated works at AECL's facility at
Chalk River, Ontario. Comstock's claim was for holdback, unpaid change requests,
loss of productivity and extended duration costs. AECL filed an amended defense
denying Comstock's claim and counterclaimed against Comstock for Cdn. $47.0
million (approximately $36.3 million) claiming fraud and substantial
deficiencies in Comstock's performance of work which are alleged to have
resulted in the need to replace much of Comstock's work and installed materials
and the need to redesign and reinstall various components of the reactor
systems. In December 2003, the matter was settled. The settlement provided for
payment of a portion of Comstock's claim by AECL and did not require payment of
any damages by Comstock.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim
in arbitration against EMCOR's United Kingdom subsidiary, EMCOR Drake & Scull
Group plc ("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 in 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 (pound)39.5 million
(approximately $70.5 million), which includes costs allegedly incurred by Mowlem
in connection with rectification of the alleged defects, overhead, legal fees,
delay and disruption costs related to such defects, and interest on such
amounts. The claim also includes amounts in respect of liabilities Mowlem
accepted in connection with a settlement agreement it entered into with the
Ministry of Defence and which it claims are attributable to D&S. D&S believes it
has good and meritorious defenses to the Mowlem claim. D&S has denied liability
and has asserted a counterclaim for approximately (pound)11.6 million
(approximately $20.7 million) for certain design, labor and delay and disruption
costs incurred by D&S in connection with its subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the proceedings and claims in which EMCOR is involved range from
a few thousand dollars to over $70.0 million, the outcome of which cannot be
predicted, adverse results could have a material adverse effect on EMCOR's
financial position and/or results of operations.
50
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR Group,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows and stockholders' equity and
comprehensive income for each of the years then ended. Our audits also included
the financial statement schedule listed on Schedule II in Item 15. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements and
schedule of EMCOR Group, Inc. and subsidiaries as of December 31, 2001, and for
the year then ended were audited by other auditors who have ceased operations
and whose report dated February 20, 2002, expressed an unqualified opinion on
those statements and schedule.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EMCOR Group, Inc.
and subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note B to the financial statements, on January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," which changed the method of accounting for
goodwill and other intangible assets.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 24, 2004
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR Group,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December
31, 2001 and 2000, and the related consolidated statements of operations, cash
flows and stockholders' equity and comprehensive income for each of the three
years in the period ended December 31, 2001. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 20, 2002
Note:
This is a copy of the Audit Report previously issued by Arthur Andersen LLP
in connection with EMCOR's filing on Form 10-K for the fiscal year ended
December 31, 2001. This Audit Report has not been reissued by Arthur Andersen
LLP in connection with this filing on Form 10-K for the fiscal year ended
December 31, 2003. For further discussion, see Exhibit 23.2 which is filed
herewith and hereby incorporated by reference into the Form 10-K for the fiscal
year ended December 31, 2003 of which this report forms a part.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 15, 2002, EMCOR dismissed Arthur Andersen LLP ("Arthur Andersen") as
its independent auditors and engaged Ernst & Young LLP ("Ernst & Young") to
serve as its independent auditors for the fiscal year ended December 31, 2002.
The Arthur Andersen dismissal and the Ernst & Young engagement were recommended
by EMCOR's Audit Committee and approved by EMCOR's Board of Directors and became
effective immediately.
Arthur Andersen's reports on EMCOR's consolidated financial statements as of
and for the fiscal year ended December 31, 2001 did not contain an adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope or accounting principles.
During the interim period from January 1, 2002 through May 15, 2002 and
EMCOR's 2001 fiscal year, there were (i) no disagreements with Arthur Andersen
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to Arthur Andersen's satisfaction, would have caused Arthur Andersen to make a
reference to the subject matter of the disagreements in connection with Arthur
Andersen's reports on EMCOR's financial statements for such periods and (ii) no
reportable events as defined in Item 304(a)(l)(v) of Regulation S-K.
EMCOR previously provided Arthur Andersen with a copy of the foregoing
disclosures, and a letter from Arthur Andersen confirming its agreement with
these disclosures was filed as an exhibit to EMCOR's Current Report on Form 8-K
filed with the SEC on May 15, 2002 and which is hereby incorporated herein by
reference.
During the interim period from January 1, 2002 through May 15, 2002 and
EMCOR's 2001 fiscal year, EMCOR did not consult Ernst & Young with respect to
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
EMCOR's consolidated financial statements, or any other matters or reportable
events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Based on an evaluation as of December 31, 2003 of EMCOR's disclosure controls
and procedures as required by Rule 13a-15(b) of the Securities Exchange Act of
1934, 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-15(e) of the Securities Exchange Act of 1934) are effective.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with respect to directors is
incorporated herein by reference to the sections of the Company's definitive
Proxy Statement for the 2004 Annual Meeting of Stockholders entitled "Election
of Directors," which Proxy Statement is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates (the "Proxy Statement").
The information required by this Item 10 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
to the section of the Proxy Statement entitled "Section 16(a) Beneficial
Ownership Reporting Compliance." The information required by this Item 10
concerning the Audit Committee of the Company's Board of Directors is
incorporated by reference to the Section of the Proxy Statement entitled "Audit
Committee." Information regarding executive officers is contained in Part I of
this Form 10-K following Item 4 under the heading "Executive Officers of the
Registrant." The Company has adopted a Code of Ethics that applies to its chief
executive officer and its senior financial officers, a copy of which is filed as
an Exhibit hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
to the sections of the Proxy Statement entitled "Executive Compensation,"
"Employment Contracts and Termination of Employment and Change of Control
Arrangements," "Director Compensation," "Compensation Committee Interlocks and
Insider Participation," and "Compensation Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 (other than the information required
by Section 201 (d) of Regulation S-K, which is set forth in Part I, Item 5 of
this Form 10-K) is incorporated herein by reference to the sections of the Proxy
Statement entitled "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference
to the section of the Proxy Statement entitled "Principal Accounting Fees and
Services."
54
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of EMCOR Group, Inc.
and Subsidiaries are included in Part II, Item 8: Financial
Statements:
Consolidated Balance Sheets -- December 31, 2003 and 2002
Consolidated Statements of Operations -- Years Ended December 31,
2003, 2002 and 2001
Consolidated Statements of Cash Flows -- Years Ended December 31,
2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity and Comprehensive
Income -- Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Reports of Independent Auditors
(a)(2) The following financial statement schedules are included in this Form
10-K report:
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(a)(3) The exhibits listed on the Exhibit Index following the consolidated
financial statements hereof are filed herewith in response to this
Item.
(b) Report on Form 8-K:
(1) Current report on Form 8-K, dated as of October 2, 2003 - Press
release dated October 2, 2003 with respect to the results of
operations for EMCOR's second half of fiscal 2003.
(2) Current report on Form 8-K, dated as of October 2, 2003 - Press
release dated October 2, 2003 with respect to EMCOR's business
alliance with Siemens Building Technologies, Inc. ("SBT") and the
purchase of SBT's Facilities Management Business in the United States.
(3) Current report on Form 8-K, dated as of October 23, 2003 - Press
release dated October 23, 2003 with respect to the results of
operations for EMCOR's fiscal 2003 third quarter ended September 30,
2003.
55
SCHEDULE II
EMCOR GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS (1) DEDUCTIONS (2) END OF YEAR
- -------------------------------------------------------- ---------- --------- ------------------ -------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 2003 ........................... $40,611 11,249 376 (8,530) $43,706
Year Ended December 31, 2002 ........................... $35,091 3,354 5,129 (2,963) $40,611
Year Ended December 31, 2001 ........................... $36,917 2,856 -- (4,682) $35,091
- ----------
(1) Amount principally relates to business acquisitions.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
56
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
2(a) -- Disclosure Statement and Third Amended Joint Plan of Exhibit 2(a) to EMCOR's Registration
Reorganization (the "Plan of Reorganization") proposed by Statement on Form 10 as originally filed
EMCOR Group, Inc. (formerly JWP INC.) (the "Company" March 17, 1995 (the "Form 10")
or "EMCOR") and its subsidiary SellCo Corporation ("SellCo"),
as approved for dissemination by the United States Bankruptcy
Court, Southern District of New York (the "Bankruptcy Court"),
on August 22, 1994.
2(b) -- Modification to the Plan of Reorganization dated Exhibit 2(b) to Form 10
September 29, 1994
2(c) -- Second Modification to the Plan of Reorganization dated Exhibit 2(c) to Form 10
September 30, 1994
2(d) -- Confirmation Order of the Bankruptcy Court dated September 30, Exhibit 2(d) to Form 10
1994 (the "Confirmation Order") confirming the Plan of
Reorganization, as amended
2(e) -- Amendment to the Confirmation Order dated December 8, 1994 Exhibit 2(e) to Form 10
2(f) -- Post-confirmation modification to the Plan of Reorganization Exhibit 2(f) to Form 10
entered on December 13, 1994
2.1 -- Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR's Report on Form
Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. 8-K dated February 14, 2002
3(a-1) -- Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10
December 15, 1994
3(a-2) -- Amendment dated November 28, 1995 to the Restated Exhibit 3(a-2) to EMCOR's Annual Report
Certificate of Incorporation of EMCOR on Form 10-K for the year ended December
31, 1995 (the "1995 Form 10-K")
3(a-3) -- Amendment dated February 12, 1998 to the Restated Exhibit 3(a-3) to EMCOR's Annual Report
Certificate of Incorporation on Form 10-K for the year ended December
31, 1997 (the "1997 Form 10-K")
3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report
on Form 10-K for the year ended December
31, 1998 (the "1998 Form 10-K")
3(c) -- Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on Form 8-K
the Bank of New York dated March 3, 1997
4.1(a) -- U.S. $275,000,000 Credit Agreement by and among EMCOR Exhibit 4.1(a) to EMCOR's Report on
Group, Inc. and certain of its Subsidiaries and Harris Form 8-K dated October 4, 2002
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 dated December 10, 2002 to the Exhibit 4.1(b) to EMCOR's Annual Report
Credit Agreement on Form 10-K for the year ended December
31, 2002 (the "2002 Form 10-K")
4.1(c) -- First Amendment to Credit Agreement dated as of June 2003 Exhibit 4.1(c) to EMCOR's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 2003 (the "June 2003 Form 10-Q")
4.1(d) -- Second Amendment to Credit Agreement dated as of June 2003 Exhibit 4.1(d) to 2003 Form 10Q
57
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- -------------------------------
4.1(e) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(e) to June 2003 Form 10-Q
Harris, National City Bank and EMCOR
4.1(f) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(f) to June 2003 Form 10-Q
Harris, Webster Bank and EMCOR
4.1(g) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(g) to June 2003 Form 10-Q
Harris, Union Bank of California, N.A. and EMCOR
4.1(h) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(h) to June 2003 Form 10-Q
Harris, Sovereign Bank and EMCOR
4.1(i) -- Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(i) to June 2003 Form 10-Q
Harris, Bank Hapoalim B.M. and EMCOR
4.1(j) -- Commitments Amount Increase Request dated July 9, Exhibit 4.1(j) to June 2003 Form 10-Q
2003 among Harris, The Governor and Company of Bank
of Scotland and EMCOR
4.1(k) -- Commitment Amount Increase Request dated July 9, 2003 Exhibit 4.1(k) to June 2003 Form 10-Q
among Harris, U.S. Bank, National Association and EMCOR
4.2 -- Subordinated Indenture dated as of March 18, 1998 Exhibit 4(b) to EMCOR's Quarterly Report
("Indentured") between EMCOR and State Street Bank and on Form 10-Q for the quarter ended
Trust Company, as Trustee ("State Street Bank") March 31, 1998 ("March 1998 Form 10-Q")
4.3 -- First Supplemental Indenture dated as of March 18, 1998 to Exhibit 4(c) to March 1998 Form 10-Q
Indenture between EMCOR and State Street Bank
4.4 -- Indenture dated as of December 15, 1994, between SellCo and Exhibit 4.4 to Form 10
Fleet National Bank of Connecticut, as trustee, in
respect of SellCo's 12% Subordinated Contingent Payment
Notes, Due 2004
10(a) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(a) to EMCOR's Annual Report
EMCOR and Frank T. MacInnis on Form 10-K for the year ended December
31, 2001 (the "2001 Form 10-K")
10(b) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(b) to 2001 Form 10-K
EMCOR and Sheldon I. Cammaker
10(c) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(c) to 2001 Form 10-K
EMCOR and Leicle E. Chesser
10(d) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(d) to 2001 Form 10-K
EMCOR and Jeffrey M. Levy
10(e) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(e) to 2001 Form 10-K
EMCOR and R. Kevin Matz
10(f) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(f) to 2001 Form 10-K
EMCOR and Mark A. Pompa
10(g-1) -- 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(g-2) -- Amendment to Section 12 of the 1994 Option Plan Exhibit 10(g-2) to 2001 Form 10-K
10(g-3) -- Amendment to Section 13 of the 1994 Option Plan Exhibit 10(g-3) to 2001 Form 10-K
10(h-1) -- 1995 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(p) to Form 10
("1995 Option Plan")
10(h-2) -- Amendment to Section 10 of the 1995 Option Plan Exhibit 10(h-2) to 2001 Form 10-K
10(i-1) -- 1997 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(k) to 1999 Form 10-K
("1997 Option Plan")
58
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------ ----------- -------------------------------
10(i-2) -- Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2001 Form 10-K
10(j) -- 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
10(k-1) -- Continuity Agreement dated as of June 22, 1998 Exhibit 10(a) to EMCOR's Quarterly
between Frank T. MacInnis and EMCOR ("MacInnis Continuity Report on Form 10-Q for the quarter ended
Agreement") June 30, 1998 ("June 1998 Form 10-Q")
10(k-2) -- Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) to June 1999 Form 10-Q
Agreement
10(l-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q
Sheldon I. Cammaker and EMCOR ("Cammaker Continuity
Agreement")
10(l-2) -- Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to June 1999 Form 10-Q
Agreement
10(m-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(d) to the June 1998 Form 10-Q
Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement")
10(m-2) -- Amendment dated as of May 4, 1999 to Chesser Continuity Exhibit 10(j) to June 1999 Form 10-Q
Agreement
10(n-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(b) to the June 1998 Form 10-Q
Jeffrey M. Levy and EMCOR ("Levy Continuity Agreement")
10(n-2) -- Amendment dated as of May 4, 1999 to Levy Continuity Agreement Exhibit 10(l) to June 1999 Form 10-Q
10(o-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form 10-Q
R. Kevin Matz and EMCOR ("Matz Continuity Agreement")
10(o-2) -- Amendment dated as of May 4, 1999 to Matz Continuity Agreement Exhibit 10(m) to June 1999 Form 10-Q
10(o-3) -- Amendment dated as of January 1, 2002 to R. Kevin Matz Exhibit 10(o-3) to March 31, 2002
Continuity Agreement Form 10-Q
10(p-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form 10-Q
Mark A. Pompa and EMCOR ("Pompa Continuity Agreement")
10(p-2) -- Amendment dated as of May 4, 1999 to Pompa Continuity Agreement Exhibit 10(n) to June 1999 Form 10-Q
10(p-3) -- Amendment dated as of January 1, 2002 to Mark A. Pompa Exhibit 10(p-3) to March 31, 2002
Continuity Agreement Form 10-Q
10(q) -- Release and Settlement Agreement dated December 22, 1999 Exhibit 10(q) to EMCOR's Annual Report
between EMCOR and Thomas D. Cunningham on Form 10-K for the year ended
December 31, 1999
10(r) -- Executive Stock Bonus Plan, as amended Exhibit 4.1 to EMCOR's Registration
Statement on Form S-8) (No. 333-112940)
filed with the Securities and Exchange
Commission on February 18, 2004 (the
"2004 Form S-8")
10(s) -- 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's proxy statement for
its annual meeting held June 12, 2003
("2003 Proxy Statement")
10(t-1) -- 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy
Statement
10(t-2) -- Amendments to 2003 Management Stock Incentive Plan* Page
10(u) -- Key Executive Incentive Bonus Plan Exhibit C to EMCOR's 2003 Proxy
Statement
59
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------ ----------- -------------------------------
10(v) -- Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(w) -- Form of EMCOR Option Agreement for Messrs. Frank T. MacInnis, Exhibit 4.5 to 2004 Form S-8
Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E. Chesser,
R. Kevin Matz, and Mark A. Pompa (collectively the "Executive
Officers") for options granted January 4, 1999, January 3, 2000,
and January 2, 2001
10(x) -- Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.6 to 2004 Form S-8
December 14, 2001
10(y) -- Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.7 to 2004 Form S-8
January 2, 2002, January 2, 2003, and January 2, 2004
10(z) -- Form of EMCOR Option Agreement for Directors granted June 19, Exhibit 4.8 to 2004 Form S-8
2002, October 25, 2002, and February 27, 2003
11 -- Computation of Basic EPS and Diluted EPS for the years ended Page
December 2003 and 2002*
14 -- Code of Ethics of EMCOR for Chief Executive Officer and Page
Senior Financial Officers*
16 -- Current Report on Form 8-K - Changes in Registrant's Certifying Exhibit 16 to EMCOR's Report on
Accountant, dated May 15, 2002 Form 8-K dated May 15, 2002
21 -- List of Significant Subsidiaries* Page
23.1 -- Consent of Ernst & Young LLP* Page
23.2 -- Notice Regarding Consent of Arthur Andersen LLP* Page
31.1 -- Certification Pursuant to Section 302 of the Sarbanes-- Oxley Page
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer*
31.2 -- Certification Pursuant to Section 302 of the Sarbanes-- Oxley Page
Act of 2002 by the Executive Vice President and Chief
Financial Officer*
32.1 -- Certification Pursuant to Section 906 of the Sarbanes-- Oxley Page
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer**
32.2 -- Certification Pursuant to Section 906 of the Sarbanes-- Page
Oxley Act of 2002 by the Executive Vice President and
Chief Financial Officer**
- ----------
* Filed Herewith
** Furnished Herewith
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Registrant hereby undertakes to furnish
a copy of any unfiled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
60
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
EMCOR GROUP, INC.
(Registrant)
Date: February 26, 2004 by /s/ FRANK T. MACINNIS
-----------------------------
FRANK T. MACINNIS
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON FEBRUARY 26, 2004.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors,
-------------------------------- Chief Executive Officer
Frank T. MacInnis and President
/s/ STEPHEN W. BERSHAD Director
--------------------------------
Stephen W. Bershad
/s/ DAVID A. B. BROWN Director
--------------------------------
David A. B. Brown
/s/ LARRY J. BUMP Director
--------------------------------
Larry J. Bump
/s/ ALBERT FRIED, JR. Director
--------------------------------
Albert Fried, Jr.
/s/ RICHARD F. HAMM, JR. Director
--------------------------------
Richard F. Hamm, Jr.
/s/ MICHAEL T. YONKER Director
--------------------------------
Michael T. Yonker
/s/ LEICLE E. CHESSER Executive Vice President and
-------------------------------- Chief Financial Officer
Leicle E. Chesser (Principal Financial Officer)
/s/ MARK A. POMPA Senior Vice President,
-------------------------------- Chief Accounting Officer and Treasurer
Mark A. Pompa (Principal Accounting Officer)
61