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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, 2005
[ ] 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 1-8267
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
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COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes [ ]
No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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 filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $760,000,000 as of the last business day of the
registrant's most recently completed second fiscal quarter, based upon the
closing sale price on the New York Stock Exchange reported for such date. Shares
of common stock held by each officer and director and by each person who owns 5%
or more of the outstanding common stock have been excluded from such calculation
as such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
Number of shares of the registrant's common stock outstanding as of the
close of business on February 17, 2006: 31,127,906 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2006 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 of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business
General ................................................................................ 1
Operations ............................................................................. 2
Competition ............................................................................ 4
Employees .............................................................................. 4
Backlog ................................................................................ 4
Available Information .................................................................. 4
Item 1A. Risk Factors ............................................................................. 5
Item 1B. Unresolved Staff Comments ................................................................ 8
Item 2. Properties ............................................................................... 9
Item 3. Legal Proceedings ........................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 13
Executive Officers of the Registrant ..................................................... 14
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities ......................... 15
Item 6. Selected Financial Data .................................................................. 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition .................................................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................... 30
Item 8. Financial Statements and Supplementary Data .............................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .............................................................. 61
Item 9A. Controls and Procedures .................................................................. 61
Item 9B. Other Information ........................................................................ 61
PART III
Item 10. Directors and Executive Officers of the Registrant ....................................... 62
Item 11. Executive Compensation ................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ............................................ 62
Item 13. Certain Relationships and Related Transactions ........................................... 62
Item 14. Principal Accounting Fees and Services ................................................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................... 63
FORWARD-LOOKING STATEMENTS
Certain information included in this report, or in other materials we have
filed or will file with the Securities and Exchange Commission (the "SEC") (as
well as information included in oral statements or other written statements made
or to be made by us) contains or may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995
Act"). Such statements are being made pursuant to the 1995 Act and with the
intention of obtaining the benefit of the "Safe Harbor" provisions of the 1995
Act. Forward-looking statements are based on information available to us and our
perception of such information as of the date of this report and our current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They contain words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "may," "can," "could," "might,"
variations of such wording and other words or phrases of similar meaning in
connection with a discussion of our future operating or financial performance,
and other aspects of our business, including market share growth, gross profit,
project mix, projects with varying profit margins, selling general and
administrative expenses, and trends in our business and other characterizations
of future events or circumstances. From time to time, forward-looking statements
also are included in our other periodic reports on Forms 10-Q and 8-K, in press
releases, in our presentations, on our web site and in other material released
to the public. Any or all of the forward-looking statements included in this
report and in any other reports or public statements made by us are only
predictions and are subject to risks, uncertainties and assumptions, including
those identified below in the "Risk Factors" section, the Management's
Discussion and Analysis of Results of Operations and Financial Condition"
section, and other sections of this report, and in our Forms 10-Q for the three
months ended March 31, 2005, June 30, 2005 and September 30, 2005 and in other
reports filed by us from time to time with the SEC as well as in press releases,
in our presentations, on our web site and in other material released to the
public. Such risks, uncertainties and assumptions are difficult to predict,
beyond our control and may turn out to be inaccurate causing actual results to
differ materially from those that might be anticipated from our forward-looking
statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in our subsequent
reports on Forms 10-K, 10-Q and 8-K should be consulted.
PART I
ITEM 1. BUSINESS
References to the "Company," "EMCOR," "we," "us," "our" and words of
similar import refer to EMCOR Group, Inc. and its consolidated subsidiaries
unless the context indicates otherwise.
GENERAL
We are 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 2005, we had revenues of approximately $4.7 billion. We provide
services to a broad range of commercial, industrial, utility and institutional
customers through approximately 70 principal operating subsidiaries and joint
venture entities. Our offices are located in 41 states and the District of
Columbia in the United States, six provinces in Canada and 12 primary locations
in the United Kingdom. In the United Arab Emirates, we carry on business through
two joint ventures. Our executive offices are located at 301 Merritt Seven
Corporate Park, Norwalk, Connecticut 06851-1060, and our telephone number at
those offices is (203) 849-7800.
We specialize 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."
We design, integrate, install, start up, operate and maintain various
electrical and mechanical systems, including:
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems;
o Plumbing, process and high-purity piping systems;
o Fire protection systems;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications
and process control systems; and
o Voice and data communications systems.
Our 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 to which we
also provided construction services and others to which construction services
were provided by others. Our varied facilities services are frequently combined
to provide integrated service packages which include operations and maintenance,
mobile services and facility improvement programs.
We provide construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. We also provide these services indirectly by acting as
a subcontractor to general contractors, systems suppliers and other
subcontractors. Worldwide, we have approximately 26,000 employees.
Our revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of our
2005 revenues, approximately 79% were generated in the United States and
approximately 21% were generated internationally. In 2005, approximately 45% of
revenues were derived from new construction projects, 28% were derived from
renovation and retrofit of customer's existing facilities and 27% were derived
from facilities services operations.
The broad scope of our operations is more particularly described below.
For information regarding the revenues, operating income and total assets of
each of our segments with respect to each of the last three fiscal years, and
our revenues and assets attributable to the United States, Canada, the United
Kingdom and all other foreign countries, see Note M to our financial statements
included in this report.
1
OPERATIONS
The mechanical and electrical construction services industry has a high
growth rate 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 need 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 substantial environmental controls within a building, due to the
heightened need for climate control to maintain extensive computer systems at
optimal temperatures, and the 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: (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b) fire
protection systems; (c) plumbing, process and high-purity piping systems; (d)
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; (e) lighting systems,
including fixtures and controls; (f) low-voltage systems, including fire alarm,
security and process control systems; and (g) voice and data communications
systems, including fiber-optic and low-voltage copper cabling.
Mechanical and electrical construction services generally fall into one of
two categories: (a) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (b) smaller
installation projects typically involving fit-out, renovation and retrofit work.
Our United States mechanical and electrical construction services
operations accounted for about 62% of our 2005 revenues, of which revenues
approximately 59% was related to new construction and approximately 41% was
related to renovation and retrofit projects. Our United Kingdom and Canada
mechanical and electrical construction services operations accounted for
approximately 21% of our 2005 revenues, of which revenues approximately 78% were
related to new construction and approximately 22% were related to renovation and
retrofit projects. We provide mechanical and electrical construction services
for both large and small installation and renovation projects. Our largest
projects include those (a) for institutional use (such as water and wastewater
treatment facilities, hospitals, correctional facilities and research
laboratories); (b) for industrial use (such as pharmaceutical plants, steel,
pulp and paper mills, chemical, automotive and semiconductor manufacturing
facilities and oil refineries); (c) for transportation projects (such as
highways, airports and transit systems); (d) for commercial use (such as office
buildings, data centers, hotels, casinos, convention centers, sports stadiums,
shopping malls and resorts); and (e) for power generation and energy management
projects. Our largest projects, which typically range in size from $10.0 million
up to and occasionally exceeding $50.0 million and are frequently multi-year
projects, represented about 30% of our construction services revenues in 2005.
Our projects of less than $10.0 million accounted for approximately 70% of
our 2005 mechanical and electrical 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, fire protection systems,
special environmental controls and high-purity air systems, sophisticated
electrical and mechanical systems for data centers, 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.
We perform services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term complex projects that require
significant technical and management skills and the financial strength to obtain
bid and performance bonds, which are often a condition to bidding for and
winning these projects.
We also install and maintain 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, we manufacture and install sheet metal air
handling systems for both our own mechanical construction operations and for
unrelated mechanical contractors. We also maintain welding and pipe fabrication
shops in support of some of our mechanical operations.
Our United States facilities services segment, as well as our other
segments, provide facilities services to a wide range of commercial, industrial
and institutional facilities, including both those for which we have provided
construction services and those for which construction services were provided by
others. Facilities services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by our customer site-based
employees.
2
These facilities services, which generated approximately 27% of our 2005
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.
In 1997, we established a subsidiary to expand our facilities services
operations in North America (primarily in the United States). This division has
built on our traditional mechanical and electrical services operations,
facilities services activities at our mechanical and electrical contracting
subsidiaries, and our 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, our United States facilities services division offers a
broad range of facilities services, including maintenance and service of
mechanical and electrical systems, which we have 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.
We have experienced an expansion in the demand for our facilities services
which we believe 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. Our
clients requiring facilities services include the federal government, utilities
and major corporations in information technology, telecommunications,
pharmaceuticals, financial services, publishing and manufacturing.
Illustrative of the outsourcing of companies' facilities services are
multi-year agreements we have with (a) Bank One under which we provide
facilities services for approximately 2,400 Bank One locations encompassing 33.0
million square feet of space in 30 states; (b) LAM Research under which we
provide such services to approximately 1.0 million square feet of production and
research and development facilities and office space; (c) Fifth Third Bank under
which we provide facilities services to over 1,200 Fifth Third locations with
over 9.0 million square feet in seven states; (d) Exelon Corp. under which we
provide comprehensive facilities services to substations, power generation
facilities and offices encompassing over 5.7 million square feet of space in
four states; (e) Fidelity Investments under which we provide integrated services
to approximately 2.5 million square feet of office and data center space; and
(f) Hewlett-Packard Company under which we provide integrated services to
approximately 20.0 million square feet of production, distribution and office
space in seven states. Through a limited liability company owned by us and CB
Richard Ellis Inc., a nationwide real estate management company, operations and
maintenance services are provided to over 3,000 commercial facilities comprising
approximately 135.0 million square feet of space. In addition, a joint venture,
of which we are the managing partner, has recently secured an eight year
contract that commenced February 2006 pursuant to which the joint venture
provides base operations services to 25.0 million square feet of U.S. Navy
facilities in the West Sound region of the state of Washington.
In December 2002, we acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business. 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 Ronald Reagan Building, the second largest federal
government facility after the Pentagon. It currently provides its services in 28
states. As part of its operations, CES is responsible for (a) the oversight of
all or most of a business' facilities operations, including operation and
maintenance, (b) the oversight of logistical processes, (c) tenant services and
management, (d) servicing upgrade and retrofit of HVAC, electrical, plumbing and
industrial piping and sheet metal systems in existing facilities and (e)
diagnostic and solution engineering for building systems and their components.
Our United Kingdom subsidiary also has a division focusing on facilities
services. This division currently provides a full range of facilities services
to public and private sector customers under multi-year agreements, including
the maintenance of British Airways' facilities at Heathrow and Gatwick Airports,
GlaxoSmithKline Research Laboratories and the Tubelines, a maintenance operating
company of the London Underground. In the United Kingdom, we also provide
facilities services at several manufacturing facilities, including BAE Systems
manufacturing plants. In addition, our United Kingdom operations provide on-call
and mobile service support on a task-order or contract basis, small renovation
and alteration project work and installation and maintenance services for data
communications and security systems.
Our EMCOR Energy Services business designs and constructs energy-related
projects on a turnkey basis. We also operate 17 central heating and cooling
plants/power and cogeneration facilities and provide maintenance services for
high voltage systems. In addition, we provide consulting and national program
energy management services under multi-year agreements. Our energy services
business's recent projects include the design and construction of a $15.6
million 14 megawatt central utility plant and a combined heat and power facility
to supply all HVAC, hot water and electrical requirements for the Morongo Native
American Hotel/Casino complex in Cabazon, California and the design and
construction of a $27.0 million cogeneration facility and chiller plant to
provide cooling, heat and power at the University of New Hampshire main campus
in Durham, New Hampshire. We also provide plant staffing for the Morongo and
University of New Hampshire energy projects under 20 year operations and
maintenance contracts. Over the past five years, we have completed more than
3
80 energy-related projects ranging from basic life safety standby systems to
complete utility grade power plants and cogeneration/central utility plants
supplying thermal and power requirements completely separated from utilities'
electrical grids. This business is reported within our United States facilities
services segment.
We believe mechanical and electrical construction services and facilities
services activities are complementary, permitting us to offer customers a
comprehensive package of services. The ability to offer both construction and
facilities services enhances our competitive position with customers.
Furthermore, our facilities services operations tend to be less cyclical than
our construction operations because facilities services are more responsive to
the needs of an industry's operational requirements rather than its construction
requirements.
COMPETITION
We believe that the mechanical and electrical construction services
business is highly fragmented and our competition includes thousands of small
companies across the United States and around the world. We compete with
national, regional and local companies, many of which are small, owner-operated
entities that operate in a limited geographic area. However, there are a few
public companies focused on providing mechanical and electrical construction
services, such as Integrated Electrical Services, Inc. and Comfort Systems USA,
Inc. A majority of our revenues are derived from projects requiring competitive
bids; however, an invitation to bid is often conditioned upon prior experience,
technical capability and financial strength. Because we have total assets,
annual revenues, net worth, access to bank credit and surety bonding and
expertise significantly greater than most of our competitors, we believe we have
a significant competitive advantage over our competitors in providing mechanical
and electrical construction services. Competitive factors in the mechanical and
electrical construction services business include: (a) the availability of
qualified and/or licensed personnel; (b) reputation for integrity and quality;
(c) safety record; (d) cost structure; (e) relationships with customers; (f)
geographic diversity; (g) the ability to control project costs; (h) experience
in specialized markets; (i) the ability to obtain surety bonding; (j) adequate
working capital; and (k) access to bank credit.
While the facilities services business is also highly fragmented with most
competitors operating in a specific geographic region, a number of large
corporations such as Johnson Controls, Inc., Fluor Corp., Unicco Service
Company, Washington International, Inc., Trammel Crow and Jones Lang LaSalle are
engaged in this field. The key competitive factors in the facilities services
business include price, service, quality, technical expertise, geographic scope
and the availability of qualified personnel and mangers. Due to our size, both
financial and geographic, and our technical capability and management
experience, we believe we are in a strong competitive position in the facilities
services business.
EMPLOYEES
We presently employ approximately 26,000 people, approximately 69% of whom
are represented by various unions pursuant to more than 475 collective
bargaining agreements between our individual subsidiaries and local unions. We
believe that our employee relations are generally good. Only two of these
collective bargaining agreements are national or regional in scope.
BACKLOG
We had contract backlog as of December 31, 2005 of approximately $2.76
billion, compared with backlog of approximately $2.75 billion as of December 31,
2004. Backlog is not a term recognized under accounting principles generally
accepted in the United States; however, it is a common measurement used in our
industry. Backlog includes unrecognized revenues to be realized from uncompleted
construction contracts plus unrecognized revenues expected to be realized over
the remaining term of the facilities services contracts. However, if the
remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. These filings are available to the public over the
internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room located at 100 F Street,
N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
Our Internet address is www.emcorgroup.com. We make available free of
charge on or through www.emcorgroup.com our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
4
Our Board of Directors has an audit committee, a compensation and
personnel committee and a nominating and corporate governance committee. Each of
these committees has a formal charter. We also have Corporate Governance
Guidelines, a Code of Ethics for Chief Executive Officer and Senior Financial
Officers, and a Code of Ethics and Business Conduct for Directors, Officers and
Employees. Copies of these charters, guidelines and codes, and any waivers or
amendments to such codes which are applicable to our executive officers, senior
financial officers or directors, can be obtained free of charge from our web
site, www.emcorgroup.com.
In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes and any waivers or amendments to such
codes which are applicable to our executive officers, senior financial officers
or directors, at no cost by writing to us at EMCOR Group, Inc., 301 Merritt
Seven, Norwalk, CT 06851, Attention: Corporate Secretary, or by telephoning us
at (203) 849-7800.
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks, including the risks
described below as well as adverse business conditions, mix of business and
risks associated with foreign operations. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
known to us or not described below which we have not determined to be material
may also impair our business operations. You should carefully consider the risks
described below, together with all other information in this report, including
information contained in the "Business," "Management's Discussion and Analysis
of Results of Operations and Financial Condition," and "Quantitative and
Qualitative Disclosures about Market Risk" sections. If any of the following
risks actually occur, our business, financial condition and results of
operations could be adversely affected, and we may not be able to achieve our
goals. Such events may cause actual results to differ materially from expected
and historical results, and the trading price of our common stock could decline.
AN ECONOMIC DOWNTURN MAY LEAD TO LESS DEMAND FOR OUR SERVICES. If the
general level of economic activity slows, our ultimate customers may delay or
cancel new projects. For example, the recent economic downturn led to increased
bankruptcies and pricing pressures. These factors contributed to the delay and
cancellation of projects, especially with respect to more profitable private
sector work and impacted our operations and ability to continue at historical
levels. A number of other factors, including financing conditions for the
industries we serve, could further adversely affect our ultimate customers and
their ability or willingness to fund capital expenditures in the future or pay
for past services. In addition, consolidation, competition or capital
constraints in the industries of our ultimate customers may result in reduced
spending by such customers. If economic conditions do not continue to improve,
or if there is another economic downturn, reducing in particular the
availability of the more profitable private sector work, our results of
operations are likely to be adversely affected.
AN INCREASE IN THE PRICE OF CERTAIN MATERIALS USED IN OUR BUSINESSES COULD
ADVERSELY AFFECT OUR BUSINESSES. We are exposed to market risk of fluctuations
in certain commodity prices of materials such as copper and steel utilized in
both our construction and facilities services operations. We are also exposed to
increases in energy prices, particularly as they relate to gasoline prices for
our fleet of over 5,000 vehicles.
OUR INDUSTRY IS HIGHLY COMPETITIVE. Our industry is served by numerous
small, owner-operated private companies, a few public companies and several
large regional companies. In addition, relatively few barriers prevent entry
into some of our businesses. As a result, any organization that has adequate
financial resources and access to technical expertise may become one of our
competitors. Competition in our industry depends on numerous factors, including
price. Certain of our competitors have lower overhead cost structures and,
therefore, are able to provide their services at lower rates than we are
currently able to provide. In addition, some of our competitors have greater
resources than we do. We cannot be certain that our competitors will not develop
the expertise, experience and resources to provide services that are superior in
both price and quality to our services. Similarly, we cannot be certain that we
will be able to maintain or enhance our competitive position within the industry
or maintain a customer base at current levels. We may also face competition from
the in-house service organizations of existing or prospective customers,
particularly with respect to facilities services. Many of our customers employ
personnel who perform some of the same types of services that we do. We cannot
be certain that our existing or prospective customers will continue to outsource
facilities services in the future.
OUR BUSINESS MAY ALSO BE AFFECTED BY ADVERSE WEATHER CONDITIONS. Adverse
weather conditions, particularly during the winter season, could affect our
ability to perform efficient work outdoors in certain regions of the United
States, the United Kingdom and Canada. As a result, we could experience reduced
revenue in the first and fourth quarters of each year. In addition, cooler than
normal temperatures during the summer months could reduce the need for our
services, and we may experience reduced revenues and profitability during the
period such weather conditions persist.
OUR BUSINESS MAY BE AFFECTED BY THE WORK ENVIRONMENT. We perform our work
under a variety of conditions, including but not limited to, difficult terrain,
difficult site conditions and busy urban centers where delivery of materials and
availability of labor may be impacted, clean-room environments where strict
procedures must be followed and sites which may have been exposed to
environmental hazards. Performing work under these conditions can negatively
affect efficiency and therefore, our gross profit.
5
OUR DEPENDENCE UPON FIXED PRICE CONTRACTS COULD ADVERSELY AFFECT OUR
BUSINESS. We currently generate, and expect to continue to generate, a
significant portion of our revenues under fixed price contracts. We must
estimate the costs of completing a particular project to bid for fixed price
contracts. The cost of labor and materials, however, may vary from the costs we
originally estimated. These variations, along with other risks, inherent in
performing fixed price contracts, may cause actual revenues and gross profits
from projects to differ from those we originally estimated and could result in
reduced profitability or losses on projects. Depending upon the size of a
particular project, variations from the estimated contract costs, can have a
significant impact on our operating results for any fiscal quarter or year.
WE COULD INCUR ADDITIONAL COSTS TO COVER GUARANTEES. In some instances, we
guarantee completion of a project by a specific date, achievement of certain
performance standards or performance of our services as a certain standard of
quality. If we subsequently fail to meet such guarantees, we may be held
responsible for costs resulting from such failure. Such failure could result in
our payment in the form of contractually agreed upon liquidated or other
damages. To the extent that any of these events occur, the total costs of a
project could exceed the original estimated costs, and we would experience
reduced profits or, in some cases, a loss.
MANY OF OUR CONTRACTS, ESPECIALLY OUR FACILITIES SERVICES CONTRACTS, MAY
BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING SUCH
CONTRACTS IF THEY ARE CANCELED OR AS THEY ARE COMPLETED OR EXPIRE. We could
experience a decrease in revenue, net income and liquidity if any of the
following occur:
o customers cancel a significant number of contracts;
o we fail to win a significant number of our existing contracts upon
re-bid;
o we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
o we fail to reduce operating and overhead expenses consistent with
any decrease in our revenue.
WE MAY BE UNSUCCESSFUL AT GENERATING INTERNAL GROWTH. Our ability to
generate internal growth will be affected by, among other factors, our ability
to:
o expand the range of services offered to customers to address their
evolving needs;
o attract new customers;
o increase the number of projects performed for existing customers;
and
o hire and retain qualified employees.
In addition, our customers may reduce the number or size of projects
available to us due to their inability to obtain capital or pay for services
provided. Many of the factors affecting our ability to generate internal growth
may be beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. If we are not successful, we may not
be able to achieve internal growth, expand operations or grow our business.
THE DEPARTURE OF KEY PERSONNEL COULD DISRUPT OUR BUSINESS. We depend on
the continued efforts of our senior management. The loss of key personnel, or
the inability to hire and retain qualified executives, could negatively impact
our ability to manage our business. However, we have executive development and
management succession plans in place in order to minimize any such negative
impact.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES. Our ability to
maintain productivity and profitability will be limited by our ability to
employ, train and retain skilled personnel necessary to meet our requirements.
We cannot be certain that we will be able to maintain an adequate skilled labor
force necessary to operate efficiently and to support our growth strategy or
that labor expenses will not increase as a result of a shortage in the supply of
these skilled personnel. Labor shortages or increased labor costs could impair
our ability to maintain our business or grow our revenues.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS COULD RESULT IN SIGNIFICANT
LIABILITIES. Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and disposal of waste
products, PCBs and fuel storage. A violation of such laws and regulations may
expose us to liabilities, including remediation costs and fines. We own and
lease several facilities. Some of these facilities contain fuel storage tanks
which may be above or below ground. If these tanks were to leak, we could be
responsible for the cost of remediation as well as potential fines. As a part of
our business, we also install fuel storage tanks and are sometimes required to
deal with hazardous materials, all of which may expose us to environmental
liability.
In addition, new laws and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown contamination or
leaks, or the imposition of new clean-up requirements could require us to incur
significant costs or become the basis for new or increased liabilities that
could harm our financial condition and results of operations. In certain
instances, we have obtained indemnification or covenants from third parties
(including predecessors or lessors) for such cleanup and other obligations and
liabilities that we believe are adequate to cover such obligations and
liabilities. However, such third-party indemnities or covenants may not cover
all
6
of such costs or third-party indemnitors may default on their obligations. In
addition, unanticipated obligations or liabilities, or future obligations and
liabilities, may have a material adverse effect on our business operations or
financial condition. Further, we cannot be certain that we will be able to
identify, or be indemnified for, all potential environmental liabilities
relating to any acquired business.
ADVERSE RESOLUTION OF LITIGATION MAY HARM OUR OPERATING RESULTS OR
FINANCIAL CONDITION. We are a party to lawsuits most of which are in the normal
course of our business. Litigation can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. An unfavorable resolution of a particular lawsuit
could have a material adverse affect on our business, operating results,
financial condition, and in some cases, on our reputation. See Item 3, "Legal
Proceedings" for more information regarding certain lawsuits in which we are
involved.
OPPORTUNITIES WITHIN THE GOVERNMENT SECTOR COULD LED TO INCREASED
GOVERNMENTAL REGULATION APPLICABLE TO US AND UNRECOVERABLE START UP COSTS. Most
government contracts are awarded through a regulated competitive bidding
process. As we pursue increased opportunities in the government arena,
particularly in our facilities services segment, management's focus associated
with the start up and bidding process may be diverted away from other
opportunities. If we were to be successful in being awarded additional
government contracts, a significant amount of costs could be required before any
revenues were realized from these contracts. In addition, as a government
contractor we are subject to a number of procurement rules and other
regulations, any deemed violation of which could lead to fines or penalties or a
loss of business. Government agencies routinely audit and investigate government
contractors. Government agencies may review a contractor's performance under its
contracts, cost structure and compliance with applicable laws, regulations and
standards. If government agencies determine through these audits or reviews that
costs were improperly allocated to specific contracts, they will not reimburse
the contractor for those costs or may require the contractor to refund
previously reimbursed costs. If government agencies determine that we are
engaged in improper activity, we may be subject to civil and criminal penalties.
A SIGNIFICANT PORTION OF OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE
SURETY BONDS. WE MAY BE UNABLE TO COMPETE FOR OR WORK ON CERTAIN PROJECTS IF WE
ARE NOT ABLE TO OBTAIN THE NECESSARY SURETY BONDS. Our construction contracts
frequently require that we obtain from surety companies and provide to our
customers payment and performance bonds as a condition to the award of such
contracts. Such surety bonds secure our payment and performance obligations.
Surety market conditions are currently difficult as a result of
significant losses incurred by many surety companies in recent periods, both in
the construction industry as well as in certain large corporate bankruptcies.
Consequently, less overall bonding capacity is available in the market and terms
have become more expensive and restrictive. Further, under standard terms in the
surety market, surety companies issue bonds on a project-by-project basis and
can decline to issue bonds at any time or require the posting of additional
collateral as a condition to issuing any bonds.
Current or future market conditions, as well as changes in our sureties'
assessment of their operating and financial risk, could cause our surety
companies to decline to issue, or substantially reduce the amount of, bonds for
our work and could increase our bonding costs. These actions can be taken on
short notice. If our surety companies were to limit or eliminate our access to
bonding, our alternatives would include seeking bonding capacity from other
surety companies, increasing business with clients that do not require bonds and
posting other forms of collateral for project performance, such as letter of
credit, or cash. We may be unable to secure these alternatives in a timely
manner, on acceptable terms, or at all. Accordingly, if we were to experience an
interruption or reduction in the availability of bonding capacity, we may be
unable to compete for or work on certain projects.
WE ARE EFFECTIVELY SELF-INSURED AGAINST MANY POTENTIAL LIABILITIES.
Although we maintain insurance policies with respect to a broad range of risks,
including automobile liability, general liability, workers compensation and
employee group health, these policies do not cover all possible claims and
certain of the policies are subject to large deductibles. Accordingly, we are
effectively self-insured for a substantial number of actual and potential
claims. Our estimates for unpaid claims and expenses are based on known facts,
historical trends and industry averages utilizing the assistance of an actuary.
We reflect these liabilities in our balance sheet as other current and
non-current liabilities. The determination of such estimated liabilities and
their appropriateness are reviewed and updated at least quarterly. However,
these liabilities are difficult to assess and estimate due to many relevant
factors, the effects of which are often unknown, including the severity of an
injury or damage, the determination of liability in proportion to other parties,
the timeliness of reported claims, the effectiveness of our risk management and
safety programs and the terms and conditions of our insurance policies. Our
accruals are based upon known facts, historical trends and our reasonable
estimate of future expenses, and we believe such accruals are adequate. However,
unknown or changing trends, risks or circumstances, such as increases in claims,
a weakening economy, increases in medical costs, changes in case law or
legislation or changes in the nature of the work we perform, could render our
current estimates and accruals inadequate. In such case, adjustments to our
balance sheet may be required and these increased liabilities would be recorded
in the period that the experience becomes known. Insurance carriers may be
unwilling, in the future, to provide our current levels of coverage without a
significant increase in insurance premiums and/or collateral requirements to
cover our deductible obligations. Increased collateral requirements may be in
the form of additional letters of credit, and an increase in collateral
requirements could significantly reduce our liquidity. If insurance premiums
increase, and/or if insurance claims are higher than our estimates, our
profitability could be adversely affected.
7
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AS A RESULT OF
GOODWILL IMPAIRMENTS. When we acquire a business, we record an asset called
"goodwill" equal to the excess amount paid for the business, including
liabilities assumed, over the fair value of the tangible and intangible assets
of the business acquired. In 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141
which requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. Also in 2001,
the FASB issued SFAS No. 142 which provides that goodwill and other intangible
assets that have indefinite useful lives not be amortized, but instead must be
tested at least annually for impairment, and intangible assets that have finite
useful lives should continue to be amortized over their useful lives. SFAS No.
142 also provides specific guidance for testing goodwill and other non-amortized
intangible assets for impairment. SFAS No. 142 requires management to make
certain estimates and assumptions to allocate goodwill to reporting units and to
determine the fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market conditions, projected
cash flows, investment rates, cost of capital and growth rates, which could
significantly impact the reported value of goodwill and other intangible assets.
Fair value is determined using discounted estimated future cash flow. Absent any
impairment indicators, we perform impairment tests annually each October 1.
Impairments, if any, would be recognized as operating expenses and would
adversely affect profitability.
AMOUNTS INCLUDED IN OUR BACKLOG MAY NOT RESULT IN ACTUAL REVENUE OR
TRANSLATE INTO PROFITS. Many of our contracts do not require purchase of a
minimum amount of services. In addition, many contracts are cancelable on short
notice. We have historically experienced variances in the components of backlog
related to project delays or cancellations resulting from weather conditions,
external market factors and economic factors beyond our control, and we may
experience such delays or cancellations in the future. If our backlog fails to
materialize, we could experience a reduction in revenue and a decline in
profitability which would result in a deterioration of our financial condition,
profitability and liquidity.
WE ACCOUNT FOR A MAJORITY OF OUR PROJECTS USING THE
PERCENTAGE-OF-COMPLETION ACCOUNTING METHOD; THEREFORE, VARIATIONS OF ACTUAL
RESULTS FROM OUR ASSUMPTIONS MAY REDUCE OUR PROFITABILITY. We recognize revenue
on construction contracts using the percentage-of-completion accounting method.
See Item 7 "Management's Discussion And Analysis Of Results Of Operations And
Financial Condition - Application of Critical Accounting Policies." Under the
percentage-of-completion accounting method, we record revenue as work on the
contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that
incurred costs to date bear to total estimated costs. Accordingly, contract
revenue and total cost estimates are reviewed and revised monthly as the work
progresses. Adjustments are reflected in contract revenue in the period when
such estimates are revised. Estimates are based on management's reasonable
assumptions and experience, but are only estimates. Variation of actual results
from assumptions on an unusually large project or on a number of average size
projects could be material. We are also required to immediately recognize the
full amount of the estimated loss on a contract when estimates indicate such a
loss. Such adjustments and accrued losses could result in reduced profitability
which could negatively impact our cash flow from operations.
CERTAIN PROVISIONS OF OUR CORPORATE GOVERNANCE DOCUMENTS COULD MAKE AN
ACQUISITION OF THE COMPANY, OR A SUBSTANTIAL INTEREST THEREIN, MORE DIFFICULT.
The following provisions of our certificate of incorporation and bylaws, as
currently in effect, as well as our stockholder rights plan and Delaware law,
could discourage potential proposals to acquire us, delay or prevent a change in
control of us or limit the price that investors may be willing to pay in the
future for shares of our common stock:
o our certificate of incorporation permits the board of directors to
issue "blank check" preferred stock and to adopt amendments to our
bylaws;
o our bylaws contain restrictions regarding the right of stockholders
to nominate directors and to submit proposals to be considered at
stockholder meetings;
o our certificate of incorporation and bylaws restrict the right of
stockholders to call a special meeting of stockholders and to act by
written consent;
o we are subject to provisions of Delaware law which prohibit us from
engaging in any of a broad range of business transactions with an
"interested stockholder" for a period of three years following the
date such stockholder becomes classified as an interested
stockholder; and
o We adopted a stockholder rights plan that could cause substantial
dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors or permitted by our
stockholder rights plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
8
ITEM 2. PROPERTIES
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) .......................................... 30,603 3/31/08
1200 North Sickles Drive
Tempe, Arizona (b) ............................................ 29,000 Owned
601 S. Vincent Avenue
Azusa, California (c) ......................................... 33,450 10/31/08
3208 Landco Drive
Bakersfield, California (c) ................................... 49,875 6/30/07
1168 Felser Street
El Cajon, California (b) ...................................... 48,360 8/31/10
24041 Amador Street
Hayward, California (b) ....................................... 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) ....................................... 34,800 6/30/14
4462 Corporate Center Drive
Los Alamitos, California (c) .................................. 57,863 7/31/06
825 Howe Road
Martinez, California (c) ...................................... 109,800 12/31/07
8670 Younger Creek Drive
Sacramento, California (a) .................................... 54,135 1/13/12
9505 and 9525 Chesapeake Drive
San Diego, California (c) ..................................... 25,124 12/31/06
345 Sheridan Boulevard
Lakewood, Colorado (c) ........................................ 63,000 Owned
3145 Northwoods Parkway
Norcross, Georgia (c) ......................................... 25,808 1/31/12
400 Lake Ridge Drive
Smyrna, Georgia (a) ........................................... 30,000 9/30/12
2160 North Asland Avenue
Chicago, Illinois (b) ......................................... 36,850 6/30/10
2100 South York Road
Oak Brook, Illinois (c) ....................................... 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) ..................................... 40,000 6/9/10
1406 Cardinal Court
Urbana, Illinois (b) .......................................... 33,750 10/1/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ....................................... 136,695 10/31/08
9
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
2655 Garfield Road
Highland, Indiana (c) ......................................... 45,816 6/30/06
3100 Brinkerhoff Road
Kansas City, Kansas (b) ....................................... 42,836 11/30/07
2118 W. Harry
Wichita, Kansas (b) ........................................... 25,600 8/31/07
4530 Hollins Ferry Road
Baltimore, Maryland (b) ....................................... 26,792 Owned
80 Hawes Way
Stoughton, Massachusetts (a) (b) .............................. 36,000 6/10/13
3555 W. Oquendo Road
Las Vegas, Nevada (c) ......................................... 90,000 11/30/08
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ................................. 25,000 1/14/11
348 New Country Road
Secaucus, New Jersey (b) ...................................... 37,905 12/31/07
301 and 305 Suburban Avenue
Deer Park, New York (b) ....................................... 33,535 3/31/10
111-01 and 109-15 14th Avenue
College Point, New York (c) ................................... 82,000 2/28/11
516 West 34th Street
New York, New York (c) ........................................ 25,000 6/30/12
Two Penn Plaza
New York, New York (a) (c) .................................... 55,891 1/31/16
704 Clinton Avenue South
Rochester, New York (a) ....................................... 25,000 7/31/06
3976 Southern Avenue
Cincinatti, Ohio (a) .......................................... 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) ............................................ 25,500 10/31/07
9815 Roosevelt Boulevard
Philadelphia, Pennsylvania (a) ................................ 33,405 11/30/11
4067 New Getwell Road
Memphis, Tennessee (b) ........................................ 36,000 8/28/07
5550 Airline Drive
Houston, Texas (b) ............................................ 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) ............................................ 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ...................................... 120,904 12/31/06
320 23rd Street
Arlington, VA (a) ............................................. 43,028 3/5/10
22930 Shaw Road
Dulles, Virginia (c) .......................................... 32,616 2/28/15
3280 Formex Road
Richmond, Virginia (a) ........................................ 30,640 7/31/08
8657 South 190th Street
Kent, Washington (b) .......................................... 46,125 6/30/08
10
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
6950 Gisholt Drive
Madison, Wisconsin (b) ........................................ 32,000 5/30/09
400 Parkdale Avenue N.
Hamilton, Ontario, Canada (d) ................................. 48,826 5/29/06
We believe that our 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. We
utilize substantially all of our leased or owned facilities and believe there
will be no difficulty either in negotiating the renewal of our 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 "Canada construction and
facilities services" segment.
11
ITEM 3. LEGAL PROCEEDINGS
In July 2003, our subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empanelled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.
On September 6, 2005, a former employee of Poole & Kent and the employee's
wife pled guilty to federal fraud charges that they used an alleged woman-owned
business enterprise ("WBE") to help Poole & Kent qualify for public construction
projects. The former employee also pled guilty to filing a false federal
personal income tax return for his failure to report on his tax return the value
of free work done at his home by Poole & Kent. In addition, on October 19, 2005,
W. David Stoffregen, the former President and Chief Executive Officer of Poole &
Kent was indicted by a federal grand jury in Baltimore for racketeering,
conspiracy, fraud and obstruction of justice in connection with his role in
connection with the alleged WBE fraud scheme and for his role in a related
alleged scheme to provide benefits to a former Maryland state senator in
exchange for his help and using his influence on behalf of Poole & Kent. On
October 26, 2005, a former project manager of Poole & Kent pled guilty to giving
false statements to federal investigators in connection with such alleged scheme
to provide benefits to the former state senator. In conjunction with the federal
investigation, others, including present and former employees at Poole & Kent,
may be charged.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against our United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named 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 39.5 million British pounds sterling (approximately $68.0 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $20.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
We are involved in other proceedings in which damages and claims have been
asserted against us. We believe that we have a number of valid defenses to such
proceedings and claims and intend to vigorously defend ourselves and do not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which we or our
subsidiaries are involved range from a few thousand dollars to over $68.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on our financial position and/or results of operations.
These proceedings include the following: (a) A civil action brought against our
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW conspired to prevent competition and to
monopolize the market for communications wiring services in the New York City
area thereby excluding plaintiffs from wiring jobs in that market. Plaintiffs
allege they have lost profits as a result of this concerted activity and seek
damages in the amount of $50 million after trebling plus attorney's fees.
However, plaintiffs' damages expert has stated in his pre-trial deposition that
he estimates plaintiffs' damages at $8.7 million before trebling. Forest has
denied the allegations of wrongdoing set forth in the complaint, and pre-trail
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. In August 2005, Forest and the other
defendants moved for summary judgment dismissing all claims. The parties do not
know when the motion will be decided and there is no assurance that the motion
will be granted in the action. (b) A civil action brought by a joint venture
(the "JV") between our subsidiary Poole & Kent Corporation and an unrelated
company in the Fairfax, Virginia Circuit Court in which the JV seeks damages
from the Upper Occoquan Sewage Authority ("UOSA") resulting from material
breaches of a construction contract (the "Contract") entered into between the JV
and UOSA for construction of a wastewater treatment facility. As a result of a
jury decision on March 11, 2005 and a subsequent ruling on June 27, 2005 of the
trial judge in the action, it was determined that the JV is entitled to be paid
approximately $17.0 million in connection with the UOSA project in addition to
the amounts it has already received from UOSA. The JV has asserted additional
claims against UOSA relating to the same project which are also pending in the
Fairfax, Virginia Circuit Court and which could result in another trial between
the JV and UOSA to be held at a date not yet determined and in which the JV
would seek damages in excess of $18.0 million. In accordance with the joint
venture agreement establishing the JV, Poole & Kent is entitled to approximately
one-half of the aggregate amounts paid and to be paid by UOSA to the JV. The JV
and UOSA are each seeking to have the determinations in the trial court reversed
on appeal to the Virginia Supreme Court. However, there is no assurance that the
Virginia Supreme Court will hear the appeals or, if the appeals are heard, that
they will be resolved in favor of the JV.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2005.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 59; Chairman of the Board and Chief Executive
Officer of the Company since April 1994. Mr. MacInnis was elected to the
additional position of President on February 26, 2004 and served as such until
October 25, 2004. He also served as President of the Company from April 1994 to
April 1997. From April 1990 to April 1994, Mr. MacInnis served as President and
Chief Executive Officer, and from August 1990 to April 1994 as Chairman of the
Board, of Comstock Group, Inc., a nationwide electrical contracting company.
From 1986 to April 1990, Mr. MacInnis was Senior Vice President and Chief
Financial Officer of Comstock Group, Inc. In addition, from 1986 to April 1994,
Mr. MacInnis was also President of Spie Group Inc., which had interests in
Comstock Group, Inc., Spie Construction Inc., a Canadian pipeline construction
company, and Spie Horizontal Drilling Inc., a U.S. company, engaged in
underground drilling for the installation of pipelines and communications cable.
ANTHONY J. GUZZI, Age 41; President and Chief Operating Officer since
October 25, 2004. From August 2001, until he joined the Company, Mr. Guzzi
served as President of the North American Distribution and Aftermarket Division
of Carrier Corporation ("Carrier"). Carrier is a manufacturer and distributor of
commercial and residential HVAC and refrigeration systems and equipment and a
provider of aftermarket services and components of its own products and those of
other manufacturers in both the HVAC and refrigeration industries. From January
2001 to August 2001, Mr. Guzzi was President of Carrier's Commercial Systems and
Services Division and from June 1998 to December 2000, he was Vice President and
General Manager of Carrier's Commercial Sales and Services Division.
SHELDON I. CAMMAKER, Age 66; 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 59; 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 47; 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 41; 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.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION. Our 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,
adjusted for a 2-for-1 stock split effected in the form of a 100% stock
distribution made on February 10, 2006:
2005 HIGH LOW
- ---- ------ ------
First Quarter ........................................... $24.95 $20.90
Second Quarter .......................................... $25.50 $21.76
Third Quarter ........................................... $29.76 $24.15
Fourth Quarter .......................................... $36.14 $27.98
2004 HIGH LOW
- ---- ------ ------
First Quarter ........................................... $22.56 $17.03
Second Quarter .......................................... $23.01 $17.90
Third Quarter ........................................... $22.00 $18.76
Fourth Quarter .......................................... $23.69 $18.71
HOLDERS. As of February 17, 2006, there were 123 stockholders of record
and, as of that date, we estimate there were approximately 8,800 beneficial
owners holding our common stock in nominee or "street" name.
DIVIDENDS. We did not pay dividends on our common stock during 2005 or
2004, and we do not anticipate that we will pay dividends on our common stock in
the foreseeable future. Our working capital credit facility limits the payment
of dividends on our common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes, as of December 31, 2005, equity compensation plans
that were approved by stockholders and equity compensation plans that were not
approved by stockholders. The information in the table and in the Notes thereto
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
Equity Compensation Plan Information
A B C
-------------------------- -------------------- -------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
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 1,449,996 $19.20 1,206,524(2)
Equity Compensation
Plans Not Approved
by Security Holders 2,364,944(1) $19.71 51,058(3)
--------- ---------
Total 3,814,940 $19.52 1,257,582
========= =========
- ---------
(1) 129,666 shares relate to outstanding options to purchase shares of our
common stock which were granted to our employees (other than executive
officers) (the "Employee Options"), 2,041,066 shares relate to outstanding
options to purchase shares of our common stock which were granted to our
executive officers (the "Executive Options"), 28,000 shares relate to
outstanding options to purchase shares of our common stock which were
granted to our Directors (the "Director Options"), and 166,212 shares
relate to restricted common stock units ("RSUs") described below under
"Restricted Share Units."
(2) Includes 114,924 shares of our common stock available for future issuance
under our 1997 Non-Employee Directors' Non-Qualified Stock Option Plan
(the "1997 Directors' Plan"), 60,000 shares of our common stock available
for future issuance under our 2003 Non-Employee Directors' Stock Option
Plan, 79,600 shares of our common stock available for future issuance
under our 2003 Management Stock Incentive Plan, 900,000 shares of our
common stock available for future issuance under our 2005 Management Stock
Incentive Plan and 52,000 shares of our common stock available for future
issuance under our 2005 Stock Plan for Directors. The shares available for
future issuance under our 2003 and 2005 Management Stock Incentive Plans
may be issuable in respect of options and/or stock appreciation rights
granted under the Plan and/or may also be issued pursuant to the award of
restricted stock, unrestricted stock and/or awards that are valued in
whole or in part by reference to, or are otherwise based on the fair
market value of, our common stock. Our shares of common stock that remain
available for issuance under our 2005 Stock Plan for Directors are
issuable to each non-employee director who elects to receive $40,000 of
his non-cash annual retainer in shares of our common stock. The number of
shares issuable to each such director is determined
15
by dividing $40,000 by the fair market value of a share of our common
stock as of the first business day of each calendar year and increasing
such resulting number by 20%. One-half of such shares are to be delivered
to the director promptly after the first business day of the calendar
year, and the other half are held by us for one year after which they are
to be delivered to the director.
(3) Represents shares relating to the grant of RSUs.
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. Our Board of Directors granted such
Employee Options to certain of our key employees based upon their performance.
Those Employee Options have an exercise price per share equal to the fair market
value of a share of our common stock on their respective grant dates and have a
term of ten years from the grant date.
EXECUTIVE OPTIONS
The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
280,000 of the Executive Options referred to in note (1) to the Table were
granted to six of our executive officers in connection with their employment
agreements with us, which employment agreements were made as of January 1, 1998,
as amended (the "1998 Employment Agreements"). Pursuant to the terms of the 1998
Employment Agreements, each such executive officer received a fixed number of
Executive Options on the first business day of 2000 and 2001 with respective
exercise prices of $8.78 and $12.72 per share; in addition, Mr. MacInnis, our
Chairman of the Board and Chief Executive Officer, received an additional grant
under his 1998 Employment Agreement of an option to purchase 400,000 shares with
an exercise price of $9.88 per share. Such Executive Options vested on the first
anniversary of the grant date, other than the option granted to Mr. MacInnis for
400,000 shares which vested in four equal installments based upon our common
stock reaching target stock prices of $12.50, $15.00, $17.50 and $20.00.
1,301,066 of the Executive Options referred to in note (1) to the Table
were granted to six executive officers in connection with employment agreements
with us, which employment agreements were dated January 1, 2002 (the "2002
Employment Agreements") and 60,000 of the Executive Options were granted to Mr.
Anthony Guzzi, our President and Chief Operating Officer, when he joined us in
October 2004. Of these Executive Options, (i) an aggregate amount of 342,200 of
such Executive Options were granted on December 14, 2001 (exercisable in full
upon grant) with an exercise price of $20.85 per share, (ii) an aggregate amount
of 291,400 of such Executive Options were granted on January 2, 2002 with an
exercise price of $23.18 per share, (iii) an aggregate amount of 282,670 of such
Executive Options were granted on January 2, 2003 with an exercise price of
$27.37 and (iv) an aggregate amount of 384,796 of such Executive Options were
granted on January 2, 2004 with an exercise price of $21.92. The Executive
Options referred to above in clause (i) were exercisable in full on the grant
date; the Executive Options referred to above in clauses (ii), (iii) and (iv)
provided that they were exercisable as follows: one-fourth on the grant date,
one-fourth on the first anniversary of the grant date, one-fourth on the second
anniversary of the grant date and one-fourth on the last business day of the
calendar year immediately preceding the third anniversary of the grant date.
During 2004, the out-of-the-money Executive Options referred to in clauses (iii)
and (iv) were vested in full in anticipation of a change in accounting rules
requiring the expensing of stock options beginning in January 2006. The options
granted to Mr. Guzzi are exercisable in three equal annual installments,
commencing with the first anniversary of the date of grant.
Each of the Executive Options granted have a term of ten years from their
respective grant dates and an exercise price per share equal to the fair market
value of a share of common stock on their respective grant dates.
DIRECTOR OPTIONS
The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
During 2002, each of our non-employee directors received 4,000 Director
Options and in 2003, Mr. Larry J. Bump, upon his election to the Board, received
4,000 Director Options. These options were in addition to the 6,000 options to
purchase our common stock that were granted to each non-employee director under
our 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, which plan has
been approved by the our 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 $27.75
per share, except those granted to Mr. Yonker, upon his election to the Board on
October 25, 2002, which have an exercise price of $25.88 per share, and those
granted to Mr. Bump, upon his election to the Board on February 27, 2003, which
have an exercise price of $24.08 per share. All of these options became
exercisable commencing with the grant date and have a term of ten years from the
grant date.
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RESTRICTED SHARE UNITS
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by our
Board of Directors in October 2000 and amended on December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of Restricted
Stock Units ("RSUs") that will subsequently be converted into shares of our
common stock at a 15% discount from the fair market value of common stock as of
the date the annual bonus is determined. The units are to be converted into
shares of common stock and delivered to the executive officer on the earliest of
(i) the first business day following the day upon which we release to the public
generally our 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 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." In addition, on October 25, 2004, when Mr. Guzzi
joined the Company, he was granted 50,000 (as adjusted for the 2-for-1 stock
split effected on February 10, 2006) restricted stock units, and 25,000 (as
adjusted for the 2-for-1 stock split) of these units were converted into an
equal number of shares of the Company's common stock on March 1, 2005 and 25,000
(as adjusted for the 2-for-1 stock split effected on February 10, 2006) of those
units will be converted into an equal number of shares of our common stock on
the first business day immediately following the day upon which the Company
releases to the public our results for the fourth quarter of 2005.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
financial statements and should be read in conjunction with the consolidated
financial statements, the related notes thereto and the report of our
independent registered public accounting firm thereon included elsewhere in this
and in previously filed annual reports on Form 10-K of EMCOR.
As required, the results of operations for all years presented have been
adjusted to reflect a 2-for-1 stock split effected in the form of a 100% stock
distribution made February 10, 2006. See Note H - Common Stock. The results of
operations for all years presented reflect discontinued operations accounting
due to the sale of a subsidiary in 2005.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Revenues .............................................. $4,714,547 $4,718,010 $4,500,401 $3,968,051 $3,419,854
Gross profit .......................................... 499,764 444,600 477,511 482,634 391,823
Operating income ...................................... 81,131 42,250 46,057 115,539 88,682
Net income ............................................ $ 60,042 $ 33,207 $ 20,621 $ 62,902 $ 50,012
========== ========== ========== ========== ==========
Basic earnings per share - continuing operations ...... $ 1.97 $ 1.09 $ 0.67 $ 2.12 $ 1.93
Basic earnings per share - discontinued operations .... (0.04) (0.00) 0.02 -- --
---------- ---------- ---------- ---------- ----------
$ 1.93 $ 1.09 $ 0.69 $ 2.12 $ 1.93
========== ========== ========== ========== ==========
Diluted earnings per share - continuing operations .... $ 1.93 $ 1.07 $ 0.65 $ 2.04 $ 1.70
Diluted earnings per share - discontinued operations .. (0.04) (0.00) 0.02 -- --
---------- ---------- ---------- ---------- ----------
$ 1.89 $ 1.07 $ 0.67 $ 2.04 $ 1.70
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
-----------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) .............................. $ 615,436 $ 562,361 $ 521,356 $ 489,870 $ 421,933
Total assets .......................................... $1,778,941 $1,817,969 $1,795,247 $1,758,491 $1,349,664
Goodwill .............................................. $ 283,412 $ 279,432 $ 277,994 $ 290,412 $ 56,011
Notes payable ......................................... $ -- $ -- $ -- $ 21,815 $ 573
Borrowings under working capital credit lines ......... $ -- $ 80,000 $ 139,400 $ 112,000 $ --
Other long-term debt, including current maturities .... $ 387 $ 476 $ 589 $ 1,015 $ 973
Capital lease obligations ............................. $ 1,570 $ 1,662 $ 339 $ 351 $ 249
- ----------
(a) No cash dividends on the Company'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
We are one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. We provide services to a broad range of commercial, industrial,
utility and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. Our offices are located in 41 states
and the District of Columbia in the United States, six provinces in Canada and
12 primary locations in the United Kingdom. In the United Arab Emirates, we
carry on business through two joint ventures.
OVERVIEW
On February 10, 2006, we effected a 2-for-1 stock split in the form of a
stock distribution of one common share for each common share owned on the record
date of January 30, 2006. The earnings per share data gives effect to the stock
split, applied retroactively, to all periods presented.
Operating income for 2005 was $81.1 million, an increase of $38.9 million,
or 92.2%, compared to operating income of $42.2 million for 2004, on revenues of
approximately $4.7 billion in both periods. Our United States mechanical
construction and facilities services, United States facilities services and
United Kingdom construction and facilities services operating segments each
reported
18
increased operating income and operating income as a percentage of revenues
("operating margin") for 2005 compared to 2004, the United States electrical
construction and facilities services operating segment performed approximately
the same as 2004, and the Canada construction and facilities services segment
reported a smaller operating loss for 2005 than for 2004.
Net income for 2005 was positively impacted by tax adjustments of $17.5
million, compared to $13.9 million of positive tax adjustments for 2004. Net
cash provided by operating activities was $143.3 million in 2005, a $98.4
million improvement over 2004. Primarily as a result of the improvement in net
cash provided by operating activities, we reduced borrowings under our working
capital credit line to zero at December 31, 2005 compared to $80.0 million at
December 31, 2004 and increased cash and cash equivalents by $44.7 million to
$103.8 million at December 31, 2005.
On September 30, 2005, we disposed of one of our subsidiaries in the
United States facilities services segment. Consequently, results of operations
for all prior periods reflect discontinued operations accounting. Included in
the results of discontinued operations for 2005 is a loss of $1.3 million, net
of income tax, by reason of the sale of the subsidiary. We will not have any
future involvement with this subsidiary.
Net income and diluted earnings per share for 2005 compared to 2004 were
positively impacted by (a) generally improved performance on United States and
United Kingdom construction contracts, (b) greater availability of generally
higher margin discretionary project work in the United States and United
Kingdom, (c) favorable income tax adjustments of $17.5 million, (d) the
settlement of an insurance coverage related dispute which contributed
approximately $5.6 million to operating income, (e) a generally improved
economic environment, particularly for the commercial construction industry and
(f) reduced losses in the Canada construction and facilities services segment.
The favorable income tax adjustments of $17.5 million were comprised of a
reversal of $22.7 million in income tax reserves no longer required, partially
offset by a $5.2 million income tax provision related to a valuation allowance
recorded to reduce deferred tax assets related to net operating losses and other
temporary differences of our Canada construction and facilities services
segment. The valuation allowance was required because there is uncertainty as to
whether the segment will have sufficient taxable income in the future to realize
the income tax benefit of such deferred tax assets. The results for 2004 also
included favorable income tax adjustments of $13.9 million (see discussion
below). Results for 2005 were negatively impacted by non-cash expenses of $11.7
million as a result of proceedings in a civil action described below brought
against the Upper Occoquan Sewage Authority by a joint venture consisting of one
of our subsidiaries and an unrelated company.
Net income and diluted earnings per share for 2004 increased compared to
2003 after excluding 2004 restructuring expenses of $8.3 million and a gain on
the sale of assets of the United Kingdom Delcommerce equipment rental services
division of $2.8 million. Positively impacting 2004 operating income was
increased gross profits from our United Kingdom construction and facilities
services segment, increased gross profit from United States transportation
infrastructure projects and favorable income tax adjustments of $13.9 million.
The income tax adjustment was comprised of $22.1 million in income tax reserves
no longer required, partially offset by $8.2 million of income tax provision
related to a valuation allowance recorded to reduce deferred tax assets related
to net operating losses and other temporary differences in the United Kingdom
construction and facilities services segment inasmuch as there was uncertainty
whether that segment will have sufficient taxable income in the future to
realize the income tax benefit of such deferred tax assets. These increases were
offset by decreased gross profits due to (a) poor performance on certain
construction work, particularly in the United States mechanical construction and
facilities services and Canada construction and facilities services segments,
(b) continued decreased availability of generally higher margin discretionary
small project spending and repair and maintenance work in certain geographical
markets in the United States, (c) heightened price competition for commercial,
industrial and public sector work in the United States and (d) increased prices
for certain fixed price construction project materials, particularly in Canada.
Selling, general and administrative expenses for 2004 decreased compared to 2003
primarily due to reduced salary costs and other variable costs associated with
reductions in personnel in all segments. We also sold our interest in a South
African joint venture for a gain of $1.8 million during 2004.
A civil action (the "UOSA Action") was brought by a joint venture (the
"JV") between our subsidiary Poole & Kent Corporation ("Poole & Kent") and an
unrelated company in the Fairfax, Virginia Circuit Court based on a material
breach by the Upper Occoquan Sewage Authority ("UOSA") of a construction
contract between the JV and UOSA. As a result of a jury decision on March 11,
2005 and a subsequent ruling on June 27, 2005 of the trial judge in the action,
it was determined that the JV is entitled to be paid approximately $17.0 million
in connection with the UOSA project in addition to the amounts it has already
received from UOSA. However, inasmuch as the jury decision and the trial judge's
subsequent ruling did not reflect the amount the JV sought in the trial, we
recorded a non-cash expense of approximately $8.7 million during the first
quarter of 2005 following the jury decision on March 11, 2005 and an additional
non-cash expense of approximately $3.0 million during the second quarter of 2005
following the trial judge's ruling on June 27, 2005. These non-cash expenses
reflected a write-off of unrecovered costs of Poole & Kent in completing certain
work related to this project based on what we believe is probable of recovery by
the JV based on current facts. (The unrecoverable costs were included in the
balance sheet account "costs and estimated earnings in excess of billings on
uncompleted contracts" in our consolidated balance sheet as of December 31,
2004.) The JV has asserted additional claims against UOSA relating to the same
project which are also pending in the Fairfax, Virginia Circuit Court and which
could result in another trial between the JV and UOSA to be held at a date not
yet determined and in which the JV would seek damages in excess of $18.0
million. Upon the resolution of the additional claims referred to in the
immediately preceding sentence, we may record income or additional non-cash
expense. In accordance with the joint venture agreement establishing the JV,
Poole & Kent
19
is entitled to approximately one-half of the aggregate amounts paid and to be
paid by UOSA to the JV. The JV and UOSA are each seeking to have the
determinations in the trial court reversed on appeal to the Virginia Supreme
Court. However, there is no assurance that the Virginia Supreme Court will hear
the appeals or, if the appeals are heard, that they will be resolved in favor of
the JV.
The 2005 and 2004 results were also positively affected by the
implementation, beginning in 2003, of significant strategic decisions and
management changes we initiated. These actions included the curtailment of work
on certain types of public sector projects, replacement of senior management at
certain business units and increased focus on reducing selling, general and
administrative expenses in all segments. Related to these actions were $1.8
million and $8.3 million of restructuring expenses for 2005 and 2004,
respectively. The restructuring expenses were primarily related to employee
severance obligations.
OPERATING SEGMENTS
We have 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, fire protection 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, energy management programs and the design and
construction of energy-related projects) 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 our operations outside of the United States, Canada and the
United Kingdom (currently primarily in the Middle East). In August of 2004, we
sold our interest in a South African joint venture.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. Our 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 adoption
of any new accounting policies during 2005. We believe that some of the more
critical judgment areas in the application of accounting policies that affect
our 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) goodwill and intangible assets.
REVENUE RECOGNITION FROM LONG-TERM CONSTRUCTION CONTRACTS AND SERVICES CONTRACTS
We believe our most critical accounting policy is revenue recognition from
long-term construction contracts for which we use the percentage-of-completion
method of accounting. Percentage-of-completion accounting is the prescribed
method of accounting for long-term contracts in accordance with accounting
principles generally accepted in the United States, Statement of Position No.
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and, accordingly, is the method used for revenue
recognition within our 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 our electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to perform such
contract at completion. Provisions for the entirety of estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Application of percentage-of-completion accounting results in the
recognition of costs and estimated earnings in excess of billings on uncompleted
contracts in our consolidated balance sheets. Costs and estimated earnings in
excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers based upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion of a contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also
include amounts we seek or will seek to collect from customers or others for
errors or changes in contract specifications or design, contract change orders
in dispute or unapproved as to both scope and price or other customer-related
causes of unanticipated additional contract costs (claims and unapproved change
orders). Such amounts are recorded at estimated net realizable value and take
into account factors that may affect the ability to bill unbilled revenues and
collect amounts after billing. No profit is recognized in connection with claim
amounts. As of December 31, 2005 and 2004, costs and estimated earnings in
excess of billings on uncompleted contracts included unbilled revenues for
unapproved change orders of approximately
20
$56.3 million and $65.4 million, respectively, and claims of approximately $36.6
million and $53.5 million, respectively. In addition, accounts receivable as of
December 31, 2005 and 2004 include claims of approximately $4.7 million and $5.4
million, respectively, plus unapproved change orders and contractually billed
amounts related to such contracts of approximately $76.2 million and $75.5
million, respectively. Generally, contractually billed amounts will not be paid
by the customer to us 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, we recognize revenues from services contracts as such
contracts are performed in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition, revised and updated" ("SAB 104"). There are two basic
types of services contracts: (a) fixed price services contracts which are signed
in advance for maintenance, repair and retrofit work over periods typically
ranging from one to three years (pursuant to which our employees may be at a
customer's site full time) and (b) services contracts which may or may not be
signed in advance for similar maintenance, repair and retrofit work on an as
needed basis (frequently referred to as time and material work). Fixed price
services contracts are generally performed over the contract period, and
accordingly, revenue is recognized on a pro-rata basis over the life of the
contract. Revenues derived from other services contracts are recognized when the
services are performed in accordance with SAB 104. Expenses related to all
services contracts are recognized as incurred.
ACCOUNTS RECEIVABLE
We are required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the realization of
receivables. Relevant assessment factors include the creditworthiness of the
customer, our prior collection history with the customer and related aging of
past due balances. The provisions for bad debts during 2005, 2004 and 2003
amounted to approximately $8.5 million, $7.0 million and $11.2 million,
respectively. At December 31, 2005 and 2004, our accounts receivable of $1,046.4
million and $1,073.5 million, respectively, included allowances for doubtful
accounts of $30.0 million and $36.2 million, respectively. Specific accounts
receivable are evaluated when we believe a customer may not be able to meet its
financial obligations due to a deterioration of its financial condition or its
credit ratings. The allowance requirements are based on the best facts available
and are re-evaluated and adjusted on a regular basis and as additional
information is received.
INSURANCE LIABILITIES
We have deductibles for certain workers' compensation, auto liability,
general liability and property claims, have self-insured retentions for certain
other casualty claims, and are self-insured for employee-related health care
claims. Losses are recorded based upon estimates of our liability for claims
incurred and for 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. We
believe the liabilities recognized on our balance sheets for these obligations
are adequate. However, such obligations are difficult to assess and estimate due
to numerous factors, including severity of injury, determination of liability in
proportion to other parties, timely reporting of occurrences and effectiveness
of safety and risk management programs. Therefore, if our actual experience
differs from the assumptions and estimates used for recording the liabilities,
adjustments may be required and will be recorded in the period that the
experience becomes known.
INCOME TAXES
We have net deferred tax assets primarily resulting from deductible
temporary differences of $12.3 milion and $2.5 million at December 31, 2005 and
2004, respectively, which will reduce taxable income in future periods. A
valuation allowance is required when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. As of December 31, 2005
and 2004, the total valuation allowance on net deferred tax assets was
approximately $18.7 million and $10.9 million, respectively. The increase in the
valuation allowance for 2005 was recorded to reduce deferred tax assets related
to net operating losses and other temporary differences of our Canada
construction and facilities services segment inasmuch as there is uncertainty of
sufficient future income from this segment to realize the benefit of such
deferred tax assets. Additionally, an increase in the valuation allowance was
required for an increase in the deferred tax asset recorded to reflect an
increase in the minimum pension liability for the United Kingdom pension plan
inasmuch as there is uncertainity of sufficient future income from the United
Kingdom construction and facilities services segment to realize the benefit of
such deferred tax assets.
GOODWILL AND INTANGIBLE ASSETS
As of December 31, 2005, we had goodwill and net identifiable intangible
assets (primarily the market value of our backlog, customer relationships and
trademarks and trade names) of $283.4 million and $17.0 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 Other Intangible Assets"
("SFAS 142") requires goodwill to be tested for impairment, on at least an
annual basis (each October 1), and be
21
written down when impaired, rather than amortized as previous standards
required. Furthermore, SFAS 142 requires that identifiable intangible assets,
other than goodwill, 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,
2005, no indicators of impairment of our goodwill or indefinite lived intangible
assets resulted from our annual impairment review, which was performed in
accordance with the provisions of SFAS 142 and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). See Note B - Summary of Significant Accounting Policies of
the notes to consolidated financial statements for additional discussion of the
provisions of SFAS 142 and SFAS 144.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The reportable segments reflect, in all years presented, discontinued
operations accounting due to the sale of a subsidiary in 2005 and certain
reclassifications of prior years amounts among the segments due to changes in
EMCOR's internal reporting structure.
REVENUES
As described below in more detail, revenues for 2005 and 2004 were
approximately $4.7 billion. Although the total revenues in the two years were
approximately the same, 2005 revenues when compared to 2004 were positively
impacted by increased private sector commercial construction and discretionary
project work, offset by our planned curtailment of work on certain types of
public sector and other longer-term projects by certain of our subsidiaries.
Revenues for 2004 increased 4.8% to $4.7 billion compared to $4.5 billion for
2003. This revenue growth in 2004 was principally due to (a) increased work on
United States transportation infrastructure, financial services, healthcare and
hospitality construction projects, (b) the impact of favorable foreign exchange
rate changes on revenues generated in the Canada construction and facilities
services segment (despite reduced revenues from our Canadian segment as a
consequence of certain power generation and healthcare projects having been
completed in 2003) and in the United Kingdom construction and facilities
services segment and (c) an increase in the number of United States site-based
facilities services contracts. This growth in 2004 revenues was partially offset
by reduced revenues from power generation projects, office and manufacturing
construction projects and repair and maintenance work in the United States.
Our contract backlog at December 31, 2005 was $2.76 billion compared to
$2.75 billion at December 31, 2004. The increase in backlog compared to the
prior year end was primarily due to the addition of private sector construction
contracts, partially offset by the curtailment of work on certain types of
public sector and other longer-term projects at certain subsidiaries. This
increase in backlog has been supplemented by an increase in smaller shorter-term
discretionary project work. A portion of the increase in such work is not
included in backlog due to its shorter duration (i.e. work started and completed
in less than a three month period). Backlog is not a term recognized under
accounting principles generally accepted in the United States; however, it is a
common measurement used in our industry. Backlog includes unrecognized revenues
to be realized from uncompleted construction contracts plus unrecognized
revenues expected to be realized over the remaining term of facilities services
contracts. However, if the remaining term of a facilities services contract
exceeds 12 months, the unrecognized revenues attributable to such contract
included in the backlog are limited to only 12 months of revenues.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages that each segment's revenues was of total revenues for
the years ended December 31, 2005, 2004 and 2003 (in millions, except for
percentages):
% OF % OF % OF
2005 TOTAL 2004 TOTAL 2003 TOTAL
-------- ----- -------- ----- -------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services .... $1,224.6 26% $1,235.3 26% $1,239.5 28%
United States mechanical construction and facilities services .... 1,718.5 36% 1,825.7 39% 1,715.8 38%
United States facilities services ................................ 756.2 16% 697.7 15% 627.0 14%
-------- -------- --------
Total United States operations ................................... 3,699.3 78% 3,758.7 80% 3,582.3 80%
Canada construction and facilities services ...................... 342.1 7% 280.8 6% 346.8 8%
United Kingdom construction and facilities services .............. 673.1 14% 678.5 14% 571.3 13%
Other international construction and facilities services ......... -- -- -- -- -- --
-------- -------- --------
Total worldwide operations ....................................... $4,714.5 100% $4,718.0 100% $4,500.4 100%
======== ======== ========
Revenues of our United States electrical construction and facilities
services segment for 2005 decreased $10.7 million compared to 2004. The decrease
in revenues were primarily attributable to reduced transportation infrastructure
construction work and construction work for financial services firms, partially
offset by increased commercial construction and discretionary project work
generally due to the greater availability of such work. Revenues for 2004
decreased $4.2 million compared to 2003. The decrease in revenues was primarily
due to fewer power generation and manufacturing construction projects available,
partially offset by an increase in the availability of transportation
infrastructure, financial services and hospitality work.
22
Revenues of our United States mechanical construction and facilities
services segment for 2005 decreased $107.2 million compared to 2004. The
revenues decrease was primarily attributable to a planned decrease in activities
of certain subsidiaries related to the reduction in certain types of public
sector and other long-term projects undertaken, partially offset by increased
wastewater treatment and hospitality projects undertaken by certain of our
subsidiaries and increased discretionary project work. The increase in
discretionary project work was partially attributable to seasonably warm weather
conditions in 2005 compared to unseasonably cool weather conditions in 2004.
Revenues for 2004 increased $109.9 million compared to 2003. The increase in
revenues was primarily attributable to increased work on healthcare, hospitality
and financial services construction projects, partially offset by decreased
power generation work, commerical work, discretionary small projects and repair
and maintenance work. In 2003, our mid-western markets were negatively impacted
by a fall off in available outage upgrade and replacement work at manufacturing
facilities. In addition, revenues in 2003 were negatively impacted by declines
in small and discretionary projects and repairs and maintenance work caused
largely by the cooler than normal summer weather conditions in parts of the
United States.
United States facilities services revenues, which include our operations
that principally provide maintenance and consulting services, increased $58.5
million for 2005 compared to 2004. The increase was primarily attributable to
increases in the availability of discretionary project work due to improved
economic conditions, an increase in mobile services revenues which was partially
attributable to seasonably warm weather conditions compared to unseasonably cool
weather conditions for 2004 and increases in the number of site based operations
contracts as a result of increased sales efforts. Revenues increased $70.7
million for 2004 compared to 2003. The increase in revenues for 2004 was
primarily attributable to increased site-based facilities services contracts as
a result of increased sales efforts.
Revenues of the Canada construction and facilities services segment
increased by $61.3 million for 2005 compared to 2004. The increase in revenues
were due to increased discretionary project work at manufacturing facilities,
construction work at oil and gas extraction facilities, construction work at
hospitals and power transmission line work generally due to the greater
availability of such work. The revenues increases also reflected an increase of
$22.9 million related to the change in the rate of exchange of Canadian dollars
for United States dollars due to the strengthening of the Canadian dollar.
Revenues decreased by $66.0 million for 2004 compared to 2003. This decrease was
primarily due to the completion in 2003 of certain long-term power generation
and healthcare projects, partially offset by increased revenues from power
transmission projects. The decrease was also partially offset by $19.7 million
of increased revenues resulting from the impact of changes in the rates of
exchange of Canadian dollars for United States dollars due to the strengthening
of the Canadian dollar.
United Kingdom construction and facilities services revenues decreased
$5.4 million for 2005 compared to 2004, principally due to a $7.3 million
decrease related to the rate of exchange of British pounds for United States
dollars due to the weakening of the British pound, partially offset by increased
small discretionary project work. Revenues increased $107.2 million for the year
ended December 31, 2004 compared to the year ended December 31, 2003. This
increase in revenues was principally due to an increase of $72.6 million
resulting from the impact of changes in the rates of exchange of British pounds
for United States dollars due to strengthening of the British pound and to
increases in transportation infrastructure work.
Other international construction and facilities services activities
consist of operations primarily in South Africa (until the sale of our interest
in its South African joint venture in August 2004) and in the Middle East.
During each of 2005, 2004 and 2003, all of the projects in these markets were
performed by joint ventures, and accordingly, the results of these joint venture
operations were accounted for under the equity method of accounting. We continue
to pursue new business selectively in the Middle Eastern and European markets;
however, the availability of opportunities in these markets 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 cost of sales, gross profit, and gross profit
as a percentage of revenues for the years ended December 31, 2005, 2004 and 2003
(in millions, except for percentages):
2005 2004 2003
-------- -------- --------
Cost of sales ........... $4,214.8 $4,273.4 $4,022.9
Gross profit ............ $ 499.8 $ 444.6 $ 477.5
Gross profit margin ..... 10.6% 9.4% 10.6%
Our gross profit (revenues less cost of sales) increased $55.2 million for
2005 compared to 2004. Gross profit margin (gross profit as a percentage of
revenues) was 10.6% for 2005 compared to 9.4% for 2004. The increase in gross
profit was primarily attributable to improvements in United States and United
Kingdom construction contract performance compared to the prior year primarily
related to an increase in generally more profitable commercial construction
work, the greater availability of generally higher margin small discretionary
project work (including mobile services work), a decrease in certain types of
public sector work which is generally less profitable, an improvement in gross
profit in the Canada construction and facilities services segment and a
favorable settlement of an insurance coverage related dispute of approximately
$5.6 million. These improvements were partially offset by the results of the
UOSA Action which resulted in $11.7 million of non-cash expenses during 2005.
The increase in gross profit also reflected an increase of $1.1 million related
to the change
23
in the rate of exchange of Canadian dollars for United States dollars due to the
strengthening of the Canadian dollar, offset by a decrease of $0.6 million
related to the rate of exchange of British pounds for United States dollars due
to the weakening of the British pound. Our gross profit decreased $32.9 million
for 2004 compared to 2003. Gross profit margin was 9.4% for 2004 compared to
10.6% for 2003. Gross profit for 2004 was lower than in the prior year, despite
greater revenues than in 2003, primarily due to (a) greater than originally
estimated labor requirements to perform work as well as continued reduced labor
productivity due to the uncertain construction job market, (b) reduced
availability of higher margin small and discretionary project spending and
repair and maintenance work, (c) increased competition for, and a related
decrease in gross profit on, commercial, industrial and public sector work in
the United States and (d) increased prices for material required for certain
construction projects, which price increases particularly negatively impacted
the Canada construction and facilities services segment gross profit. Positively
impacting overall gross profit margin during 2004 were improved gross profit
from the United Kingdom construction and facilities services segment and
increased gross profit from United States transportation infrastructure,
financial services and hospitality projects due to the increased availability
and successful performance of these types of projects. Additionally, total gross
profit increased $5.7 million in 2004 compared to 2003, primarily resulting from
the impact of changes in the rates of exchange for British pounds to United
States dollars.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents selling, general and administrative expenses,
and selling, general and administrative expenses as a percentage of revenues,
for the years ended December 31, 2005, 2004 and 2003 (in millions, except for
percentages):
2005 2004 2003
------ ------ ------
Selling, general and administrative expenses .............................. $416.9 $396.9 $431.5
Selling, general and administrative expenses as a percentage of revenues .. 8.8% 8.4% 9.6%
Our selling, general and administrative expenses for 2005 increased $20.0
million to $416.9 million compared to $396.9 million for 2004. Selling, general
and administrative expenses as a percentage of revenues were 8.8% for 2005
compared to 8.4% for 2004. Selling, general and administrative expenses were
impacted in 2005 by increased incentive compensation expense due to our improved
profitability. Selling, general and administrative expenses for 2004 decreased
$34.5 million compared to 2003. Selling, general and administrative expenses as
a percentage of revenues were 8.4% for 2004 compared to 9.6% for 2003. This
decline in selling, general and administrative expenses both in dollars and as a
percentage of revenues was primarily attributable to lower salary costs and
other variable costs associated with reductions in personnel.
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance
obligations, were $1.8 million and $8.3 million for 2005 and 2004, respectively.
As of December 31, 2005, the balance of these obligations was $0.2 million,
which we anticipate paying during 2006. There were no restructuring expenses for
the year ended December 31, 2003.
GAIN ON SALE OF ASSETS
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 2004 sale of assets of our United Kingdom
Delcommerce equipment rental services division. Concurrently with the sale, we
entered into a long-term agreement to utilize the equipment rental services of
the purchaser, a publicly traded United Kingdom company. In addition to this
sale, there were no other sales of such assets in 2005, 2004 or 2003 other than
the disposal of property, plant and equipment in the normal course of business.
24
OPERATING INCOME
The following table presents our operating income (gross profit less
selling, general and administrative expenses, restructuring expenses plus gain
on sale of assets) by segment, and each segment's operating income as a
percentage of its segment's revenues, for the years ended December 31, 2005,
2004 and 2003 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2005 REVENUES 2004 REVENUES 2003 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services ..... $ 79.7 6.5% $ 81.2 6.6% $ 57.8 4.7%
United States mechanical construction and facilities services ..... 22.0 1.3% (1.2) -- 25.6 1.5%
United States facilities services ................................. 24.6 3.3% 14.1 2.0% 17.4 2.8%
------ ------ ------
Total United States operations .................................... 126.3 3.4% 94.1 2.5% 100.8 2.8%
Canada construction and facilities services ....................... (7.9) -- (11.9) -- 2.0 0.6%
United Kingdom construction and facilities services ................ 7.5 1.1% 0.0 -- (22.4) --
Other international construction and facilities services .......... 0.0 -- 0.5 -- 0.3 --
Corporate administration .......................................... (43.0) -- (35.0) -- (34.7) --
Restructuring expense ............................................. (1.8) -- (8.3) -- -- --
Gain on sale of assets ............................................. -- -- 2.8 -- -- --
------ ------ ------
Total worldwide operations ......................................... 81.1 1.7% 42.2 0.9% 46.0 1.0%
Other corporate items:
Interest expense .................................................. (8.3) (8.9) (8.9)
Interest income ................................................... 2.7 1.9 0.7
Gain on sale of equity investment .................................. -- 1.8 --
Minority interest ................................................. (4.5) (3.8) (1.9)
Income from continuing operations before income taxes ............. $ 71.0 $ 33.3 $ 35.9
As described in more detail below, our operating income was $81.1 million
for 2005, $42.2 million for 2004 and $46.0 million for 2003. 2005 operating
income increased $38.9 million compared to 2004 primarily due to (a) generally
improved performance on United States and United Kingdom construction contracts,
(b) greater availability of generally higher margin discretionary project work
in the United States and United Kingdom, (c) the settlement of an insurance
coverage related dispute which contributed approximately $5.6 million, (d) a
generally improved economic environment, particularly for the commercial
construction industry and (e) reduced losses in the Canada construction and
facilities services segment. Excluding 2004 restructuring expenses of $8.3
million and a gain on the sale of assets of $2.8 million, 2004 operating income
increased $1.6 million compared to 2003. Operating income for 2004 compared to
2003 was also impacted by other factors previously discussed in the Overview
above. Operating income was favorably impacted by $3.6 million, $9.8 million and
$4.5 million in 2005, 2004 and 2003, respectively, in reduction of insurance
liabilities previously established for insurance exposures as a consequence of
effective risk management and safety programs.
Our United States electrical construction and facilities services segment
operating income was $79.7 million for 2005, a $1.5 million decrease compared to
operating income of $81.2 million for 2004. The decrease in operating income was
primarily the result of reduced transportation infrastructure and financial
services projects, mostly offset by increased commercial construction and
discretionary project work and approximately $4.5 million of income resulting
from the settlement of the insurance coverage-related dispute referred to
earlier. Our selling, general and administrative expenses decreased compared to
the prior year primarily due to a reduction in personnel and a reduction in
incentive compensation expense related to reduced profitability. Operating
income for 2004 increased $23.4 million compared to 2003. This increase in 2004
operating income, when compared to 2003, was attributable principally to
increased gross profit on transportation infrastructure, financial services and
hospitality construction projects due to the increased availability and
successful performance of these types of projects. Selling, general and
administrative expenses decreased in 2004, when compared to 2003, due to lower
salary costs and other variable costs associated with reductions in personnel.
Our United States mechanical construction and facilities services
operating income for 2005 was $22.0 million, a $23.2 million improvement, when
compared to an operating loss of $1.2 million 2004. The operating income
reflects an approximately $11.7 million reduction in gross profit as a result of
the write-off of unrecovered costs related to the UOSA Action. Notwithstanding
the impact of the UOSA Action, this segment had generally improved results for
2005 as a consequence of (a) improved construction performance when compared to
construction performance for 2004 partially due to the greater availability of
generally more profitable private sector commercial construction work as a
result of improved economic conditions and (b) increased discretionary project
work which was partially attributable to seasonably warm weather conditions
compared to unseasonably cool weather conditions in 2004. In addition, operating
income for 2005 includes approximately $1.1 million of income resulting from the
settlement of the insurance coverage related dispute referred to earlier. The
improvement in performance was partially attributable to our planned curtailment
of certain public sector and other longer-term contracts of certain of our
subsidiaries, which work is generally been less profitable than private sector
work currently being
25
performed. Increased selling, general and administrative expenses related to
increased incentive compensation expense due to the segment's improved
profitability was partially offset by personnel reductions during 2005, which
reductions also contributed to the improvement in operating income. The
operating loss for 2004 was $1.2 million compared to operating income of $25.6
million for 2003. The segment's 2004 operating loss was primarily attributable
to (a) decreases in the recovery of estimated costs upon completion of certain
projects, principally in the Western United States, (b) poor performance on
certain construction work related to greater labor requirements than originally
estimated to perform the work and continued reduced labor productivity due to
the uncertain construction job market, (c) a continued decrease in the
availability of generally more profitable discretionary small projects and
repair and maintenance work due to general economic conditions negatively
impacting commercial construction spending and (d) increased competition for,
and a related decrease in gross profit margin on, commercial, industrial and
public sector work. Partially offsetting these operating results for 2004 were
decreased selling, general and administrative expenses attributable to lower
salary costs and other variable costs associated with reductions in personnel
and to reduced incentive compensation due to less favorable financial
performance.
Operating income of our United States facilities services segment for 2005
increased by $10.5 million compared to 2004. During 2005, operating income
improved primarily due to improved gross margins on increased revenues, which
for the mobile services business was partially related to seasonably warm
weather conditions in 2005 compared to unseasonably cool weather conditions in
2004, partially offset by increased selling, general and administrative expenses
for 2005 related to increased incentive compensation due to improved financial
performance. Operating income for 2004 decreased $3.3 million compared to 2003.
The reduced operating income was primarily related to a decrease in revenues
from, and profits earned on, discretionary small projects and repair and
maintenance work due to general economic conditions negatively impacting
commercial construction spending and an increase in expenses for site-based
facilities services business development. In addition, during 2004 this segment
also incurred approximately $2.3 million of losses on certain construction
projects, outside of the normal facilities services operations of this segment,
that were contracted for by a subsidiary in this segment prior to our
acquisition of the subsidiary. The decrease in operating income for 2004
compared to 2003 was partially offset by a reduction in selling, general and
administrative expenses related to lower salary costs and other variable costs
associated with reductions in personnel.
Our Canada construction and facilities services operating loss was $7.9
million for 2005 compared to an operating loss of $11.9 million for 2004. The
2005 loss was primarily associated with a large power transmission project,
severance expenses not associated with restructuring activities and legal
expenses. The impact of exchange rate movements increased operating losses by
$0.7 million for 2005 compared to 2004. The operating loss for 2004 was $11.9
million compared to operating income of $2.0 million for 2003. The 2004 loss was
primarily due to greater labor requirements than originally estimated to perform
certain projects, increased material prices and the completion of certain
long-term power generation projects in 2003 that were absent in 2004. The impact
of exchange rate movements increased operating losses by $1.5 million for 2004
compared to 2003.
Our United Kingdom construction and facilities services operating income
for 2005 was $7.5 million compared to breakeven for 2004. This improvement in
2005 operating income was primarily attributable to improved performance on
construction projects and to a reduction in selling, general and administrative
expenses related to a reorganization of the United Kingdom operations, partially
offset by increased incentive compensation due to improved financial
performance. Operating income was breakeven in 2004 compared to an operating
loss of $22.4 million for 2003. This improvement was primarily attributable to
(a) an improvement in the 2004 gross profit as the contracts causing large
losses, which were incurred in 2003, were substantially completed by December
31, 2003 and to (b) reductions in selling, general and administrative expenses
related to a reorganization of the United Kingdom operations in late 2003. The
2003 operating loss was primarily attributable to (a) net unfavorable
settlements and closeouts of certain construction projects completed during that
year, (b) increased bad debt expense of $5.8 million in 2003 primarily related
to the then potential non-payment of a large customer account receivable (which
account receivable was subsequently written-off against the allowance in 2004),
(c) reorganization expenses of approximately $2.0 million related to employee
severance expenses and the closing of several offices and (d) $1.5 million
resulting from the impact of the change in exchange rates due to strengthening
of the British pound.
Other international construction and facilities services operating income
was at breakeven for 2005 compared to operating income of $0.5 million for 2004
and $0.3 million for 2002. EMCOR continues to pursue new business selectively in
the Middle Eastern and European markets; however, the availability of
opportunities has been significantly reduced as a result of local economic
factors, particularly in the Middle East.
Our corporate administration expense for 2005 was $43.0 million compared
to $35.0 million for 2004. This increase in expense was primarily due to
increased incentive compensation, and to a lesser extent, increased professional
fees and the absence of a non-recurring benefit attributable to expense
reimbursement that occurred in 2004. General corporate expenses for 2004
increased by $0.3 million compared to 2003 primarily due to the negative impact
of higher audit fees and other costs of complying with the provisions of the
Sarbanes - Oxley Act of 2002. However, these increased costs in 2004 compared to
2003 were largely offset by other expense reductions.
26
NON-OPERATING ITEMS
Interest expense was $8.3 million for 2005 and $8.9 million for both 2004
and 2003. Decreased borrowings under the revolving credit facility for 2005
compared to 2004 and 2003, was partially offset by the impact of increases in
interest rates during 2005 and 2004.
Interest income increased by $0.8 million for 2005 compared to 2004 and
increased by $1.2 million for 2004 compared to 2003 due primarily to interest
earned on cash provided by the United Kingdom constructon and facilities
services segment, as such cash was invested in the United Kingdom at interest
rates generally greater than the net cost of borrowing under our revolving
credit facility.
The $1.8 million gain on sale of an equity investment of 2004 was
attributable to the August 2004 sale of our interest in a South African joint
venture, the operating results of which had been reported previously in the
Other international construction and facilities services segment.
Minority interest represents the allocation of earnings to those of our
joint venture partners who have a minority-ownership interest in joint ventures
to which we are a party and which joint ventures have been consolidated.
For 2005, the income tax provision was $9.7 million compared to an income
tax provision of less than $0.01 million for 2004. Our income tax provision for
2005 was comprised of (a) $27.3 million of income tax provision in respect of
pre-tax earnings of $71.0 million, (b) $5.2 million of income tax provision
related to a valuation allowance recorded to reduce deferred tax assets related
to net operating losses and other temporary differences with respect to our
Canadian construction and facilities services segment, since there is
uncertainty as to whether the segment will have sufficient taxable income in the
future to realize the benefit of such deferred tax assets and (c) the offset of
such income tax provisions by a $22.7 million income tax benefit for income tax
reserves no longer required based on a current analysis of probable exposures.
The income tax benefit of less than $0.01 million for 2004 was comprised of (a)
$13.9 million of income tax provision on pre-tax earnings of $33.2 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficent future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by $22.1 million of income tax benefits for income tax
reserves no longer required based on current analysis of probable exposures. The
provision on income before income taxes for each of 2005, 2004 and 2003 was
recorded at an effective income tax rate of approximately 38%, 42% and 42%,
respectively.
On September 30, 2005, we disposed of one of our subsidiaries in our
United States facilities services segment. The results of operations for all
periods presented reflect discontinued operations accounting. Included in the
$1.3 million loss from discontinued operations for 2005 is a loss of $1.0
million, net of income tax, by reason of the sale of the subsidiary. We will not
have any future involvement with the subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2005 and 2004 (in millions):
2005 2004
------- -------
Net cash provided by operating activities ................. $ 143.3 $ 44.9
Net cash used in investing activities ..................... $ (20.1) $ (3.1)
Net cash used in financing activities ..................... $ (78.5) $ (58.4)
Our consolidated cash balance increased by approximately $44.7 million
from $59.1 million at December 31, 2004 to $103.8 million at December 31, 2005.
The $98.4 million improvement in net cash provided by operating activities for
2005 compared to 2004 was primarily due to an improvement in our working capital
position of $81.3 million primarily as a result of an improvement in the
billings and collection cycle and an increase in net income of $26.8 million. In
2005, net cash used in investing activities of $20.1 million was primarily due
to (a) earn-out payments and acquisitions aggregating $10.7 million, (b) net
disbursements for other investments of $5.0 million and (c) payments for
purchases of property, plant and equipment of $12.4 million, which were offset
by (i) $4.4 million of proceeds from the sale of discontinued operations, the
sale of assets and an equity investment and (ii) $3.6 million of proceeds from
the sale of property, plant and equipment. In 2004, net cash used for investing
activities of $3.1 million was primarily due to (a) earn-out payments of $1.6
million for acquisitions in prior periods, (b) net disbursements for other
investments of $1.0 million and (c) payments for purchases of property, plant
and equipment of $16.1 million, which were offset by (i) $10.1 million of
proceeds from the sale of assets and an equity investment and (ii) $5.5 million
of proceeds from the sale of property, plant and equipment. Net cash used in
financing activities during 2005 increased $20.1 million compared to 2004 and
was primarily a result of net repayments under the working capital credit line
in 2005 of $80.0 million compared to $59.4 million in 2004.
27
The following is a summary of material contractual obligations and other
commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- -------- ------- ------- ------ -------
Other long-term debt ............................. $ 0.4 $ 0.1 $ 0.2 $ 0.1 $ --
Capital lease obligations ....................... 1.6 0.5 0.8 0.3 --
Operating leases ................................. 161.2 40.1 60.6 31.9 28.6
Minimum funding requirement for pension plan ..... 9.5 9.5 -- -- --
Open purchase obligations (1) .................... 664.0 554.8 109.2 -- --
Other long-term obligations, including current
portion (2) ................................... 125.1 13.0 112.1 -- --
-------- ------- ------- ------ -------
Total Contractual Obligations .................... $ 961.8 $ 618.0 $ 282.9 $ 32.3 $ 28.6
======== ======= ======= ====== =======
AMOUNT OF COMMITMENT EXPIRATIONS BY PERIOD
------------------------------------------------
OTHER TOTAL LESS
COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
----------- --------- ------- ------- ------ -------
Revolving Credit Facility (3) .................... $ -- $ -- $ -- $ -- $ --
Letters of credit ................................ 53.3 -- 53.3 -- --
Guarantees ....................................... 25.0 -- -- -- 25.0
--------- ------- ------- ------ -------
Total Commercial Commitments ..................... $ 78.3 $ -- $ 53.3 $ -- $ 25.0
========= ======= ======= ====== =======
- ----------
(1) Represents open purchase orders for material and subcontracting costs
related to construction and service contracts. These purchase orders are
not reflected in EMCOR's consolidated balance sheet and should not impact
future cash flows as amounts will be recovered through customer billings.
(2) Represents primarily insurance related liabilities, classified as other
long-term liabilities in the consolidated balance sheets. Cash payments
for insurance related liabilities may be payable beyond three years, but
it is not practical to estimate.
(3) We classify these borrowings as short-term on its consolidated balance
sheet because of our intent and ability to repay the amounts on a
short-term basis. As of December 31, 2005, there were no borrowings
outstanding.
Our previous revolving credit agreement (the "Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility that was due to expire September 26, 2007 with an
amended and restated $350.0 million revolving credit facility (the "2005
Revolving Credit Facility"). The 2005 Revolving Credit Facility expires on
October 17, 2010. It permits us to increase our borrowing to $500.0 million if
additional lenders are identified and/or existing lenders are willing to
increase their current commitments. We utilized this feature to increase the
line of credit under the 2005 Revolving Credit Facility from $350.0 million to
$375.0 million on November 29, 2005. We may allocate up to $125.0 million of the
borrowing capacity under the 2005 Revolving Credit Facility to letters of
credit, which amount compares to $75.0 million under the previous Old Revolving
Credit Facility. The 2005 Revolving Credit Facility is guaranteed by certain of
our direct and indirect subsidiaries, is secured by substantially all of our
assets and most of the assets of our subsidiaries, and provides for borrowings
in the form of revolving loans and letters of credit. The 2005 Revolving Credit
Facility contains various covenants requiring, among other things, maintenance
of certain financial ratios and certain restrictions with respect to payment of
dividends, common stock repurchases, investments, acquisitions, indebtedness and
capital expenditures. A commitment fee is payable on the average daily unused
amount of the 2005 Revolving Credit Facility. The fee ranges from 0.25% to 0.5%
of the unused amount, based on certain financial tests. Borrowings under the
2005 Revolving Credit Facility bear interest at (1) a rate which is the prime
commercial lending rate announced by Harris N.A. from time to time (7.25% at
December 31, 2005) plus 0.0% to 0.5%, based on certain financial tests or (2)
United States dollar LIBOR (at December 31, 2005, the rate was 4.38%) plus 1.0%
to 2.25%, based on certain financial tests. The interest rates in effect at
December 31, 2005 were 7.25% and 5.38% for the prime commercial lending rate and
the United States dollar LIBOR, respectively. Letter of credit fees issued under
this facility range from 1.0% to 2.25% of the respective face amounts of the
letters of credit issued and are charged based on the type of letter of credit
issued and certain financial tests. In connection with the replacement of the
Old Revolving Credit Facility, $0.4 million of prepaid commitment fees were
recorded as interest expense. As of December 31, 2005 and 2004, we had
approximately $53.3 million and $54.3 million of letters of credit outstanding,
respectively. There were no borrowings under the 2005 Revolving Credit Facility
as of December 31, 2005. We had borrowings of $80.0 million outstanding under
the Old Revolving Credit Facility at December 31, 2004.
In August 2001, our 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 5.25% at December 31, 2005.
There were no borrowings outstanding under this credit agreement at December 31,
2005 or 2004.
28
One of our subsidiaries has guaranteed indebtedness of a venture in which
we have a 40% interest; the other venture partner, Baltimore Gas and Electric (a
subsidiary of Constellation Energy), has a 60% interest. The venture designs,
constructs, owns, operates, leases and maintains facilities to produce chilled
water for sale to customers for use in air conditioning commercial properties.
These guarantees are not expected to have a material effect on our financial
position or results of operations. We and Baltimore Gas and Electric are jointly
and severally liable, in the event of default, for the venture's $25.0 million
borrowing due December 2031.
The terms of our construction contracts frequently require that we obtain
from surety companies ("Surety Companies") and provide to our customers payment
and performance bonds ("Surety Bonds") as a condition to the award of such
contracts. The Surety Bonds secure our payment and performance obligations under
such contracts, and we have agreed to indemnify the Surety Companies for
amounts, if any, paid by them in respect of Surety Bonds issued on our behalf.
In addition, at the request of labor unions representing certain of our
employees, Surety Bonds are sometimes provided to secure obligations for wages
and benefits payable to or for such employees. Public sector contracts require
Surety Bonds more frequently than private sector contracts, and accordingly, our
bonding requirements typically increase as the amount of public sector work
increases. As of December 31, 2005, Surety Companies had issued Surety Bonds for
our account in the aggregate amount of approximately $1.5 billion. The Surety
Bonds are issued by Surety Companies in return for premiums, which vary
depending on the size and type of bond. The largest single Surety Bond
outstanding for our account is approximately $170.0 million.
In recent periods there has been a reduction in the aggregate bond
issuance capacity of Surety Companies due to industry consolidations and
significant losses of Surety Companies as a result of providing Surety Bonds to
construction companies as well as companies in other industries. Consequently,
the availability of Surety Bonds has become more limited and the terms upon
which Surety Bonds are available have become more restrictive. We had been
notified earlier in 2005 by one of our Surety Companies, which provides
approximately 20% of our Surety Bonds, that it (the "Terminating Surety") would
be terminating its Surety Bond business. Following that notification, we entered
into an arrangement with another Surety Company in August 2005 to provide us
with the level of Surety Bonds previously provided by the Terminating Surety. If
we experience other changes in our bonding relationships or if there are further
changes in the surety industry, we may seek to satisfy certain customer requests
for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds
such as letters of credit or guarantees by EMCOR Group, Inc., by seeking to
convince customers to forego the requirement of a Surety Bond, by increasing our
activities in business segments that rarely require Surety Bonds such as the
facilities services segment and/or by refraining from bidding for certain
projects that require Surety Bonds. There can be no assurance that we will be
able to effectuate alternatives to providing Surety Bonds to our customers or to
obtain, on favorable terms, sufficient additional work that does not require
Surety Bonds to replace projects requiring Surety Bonds that we may decline to
pursue. Accordingly, if we were to experience a reduction in the availability of
Surety Bonds, we could experience a material adverse effect on our financial
position, results of operations and/or cash flow.
We do not have any other material financial guarantees or off-balance
sheet arrangements other than those disclosed herein.
Our primary source of liquidity has been, and is expected to continue to
be, cash generated by operating activities. We also maintain the 2005 Revolving
Credit Facility that may be utilized, among other things, to meet short-term
liquidity needs in the event cash generated by operating activities is
insufficient or to enable us to seize opportunities to participate in joint
ventures or to make acquisitions that may require access to cash on short notice
or for any other reason. We may also increase liquidity through an equity
offering or issuance of other debt instruments. Short-term changes in
macroeconomic trends may have an affect, positively or negatively, on liquidity.
In addition to managing borrowings, our focus on the facilities services market
is intended to provide an additional buffer against economic downturns inasmuch
as the facilities services business is characterized by annual and multi-year
contracts that provide a more predictable stream of cash flow than the
construction business. Short-term liquidity is also impacted by the type and
length of construction contracts in place. During economic downturns, such as
the downturn during 2001 through 2004 in the commercial construction industry,
there were typically fewer small discretionary projects from the private sector,
and companies like us more aggressively bid more large long-term infrastructure
and public sector contracts. Performance of long duration contracts typically
requires working capital until initial billing milestones are achieved. While we
strive to maintain a net over-billed position with our customers, there can be
no assurance that a net over-billed position can be maintained. Our net
over-billings, defined as the balance sheet accounts "billings in excess of
costs and estimated earnings on uncompleted contracts" less "cost and estimated
earnings in excess of billings on uncompleted contracts", was $144.6 million and
$119.0 million as of December 31, 2005 and 2004, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the 2005 Revolving Credit Facility and the
sale of various secured or unsecured debt and/or equity interests in the public
and private markets. Based upon our current credit ratings and financial
position, we can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, our primary revenue risk factor
continues to be the level of demand for non-residential construction services,
which is in turn influenced by macroeconomic trends including interest rates and
governmental economic policy. In addition to the primary revenue risk factor,
our ability to perform work at profitable levels is critical to meeting
long-term liquidity requirements.
29
We believe that current cash balances and borrowing capacity available
under the 2005 Revolving Credit Facility or other forms of financing available
through debt or equity offerings, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements. However,
we are a party to lawsuits and other proceedings in which other parties seek to
recover from us amounts ranging from a few thousand dollars to over $68.0
million. If we were required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on our financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2005, we utilized approximately $49.4 million of
letters of credit issued pursuant to our 2005 Revolving Credit Facility as
collateral for insurance obligations.
NEW ACCOUNTING PRONOUNCEMENT
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("123(R)"),
which is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation". Statement 123(R) supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees", ("Opinion 25") and amends FASB Statement No. 95,
"Statement of Cash Flows". Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure will no longer be an alternative. Statement 123(R)
must be adopted no later than January 1, 2006. As of January 1, 2006, we will
adopt Statement 123(R).
As permitted by Statement 123, we currently account for share-based
payments to employees using Opinion 25's intrinsic value method and, as such, we
generally recognize no compensation cost for employee stock options. We will
utilize the modified prospective method of accounting as permitted under 123(R).
Accordingly, the adoption of Statement 123(R)'s fair value method will have an
impact on our future results of operations, although it will have no impact on
our overall financial position. The impact of that standard on reported results
would be approximately as described in Note B - Summary of Significant
Accounting Policies of the notes to the consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were not material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used any material derivative financial instruments during the
years ended December 31, 2005 and 2004, including trading or speculating on
changes in interest rates or commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings
under the 2005 Revolving Credit Facility. Borrowings under that facility bear
interest at variable rates, and the fair value of this borrowing is not
significantly affected by changes in market interest rates. As of December 31,
2005, there were no borrowings outstanding under the facility. Had there been
borrowings, they would bear interest at (1) a rate which is the prime commercial
lending rate announced by Harris N.A. from time to time (7.25% at December 31,
2005) plus 0.0% to 0.5%, based on certain financial tests or (2) United States
dollar LIBOR (at December 31, 2005, the rate was 4.38%) plus 1.0% to 2.25%,
based on certain financial tests. The 2005 Revolving Credit Facility expires in
October 2010.
We are 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 our
customers' ability to pay these obligations is negatively impacted by economic
conditions. We continually monitor the credit worthiness of our customers and
maintain on-going discussions with customers regarding contract status with
respect to change orders and billing terms. Therefore, we believe we take
appropriate action to manage market and other risks, but there is no assurance
that we 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 our 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, a component
of stockholders' equity, in our consolidated balance sheets. We believe the
exposure to the effects that fluctuating foreign currencies may have on our
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.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 103,785 $ 59,109
Accounts receivable, less allowance for doubtful accounts of $29,973 and $36,185, respectively .... 1,046,380 1,073,454
Costs and estimated earnings in excess of billings on uncompleted contracts ....................... 185,634 240,716
Inventories ....................................................................................... 10,175 10,580
Prepaid expenses and other ........................................................................ 43,829 41,712
----------- -----------
Total current assets ........................................................................... 1,389,803 1,425,571
Investments, notes and other long-term receivables ................................................... 28,659 26,472
Property, plant and equipment, net ................................................................... 46,443 56,468
Goodwill ............................................................................................. 283,412 279,432
Identifiable intangible assets, less accumulated amortization of $10,209 and $7,017, respectively .... 16,990 18,782
Other assets ......................................................................................... 13,634 11,244
----------- -----------
Total assets ......................................................................................... $ 1,778,941 $ 1,817,969
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ...................................................... $ -- $ 80,000
Current maturities of long-term debt and capital lease obligations ................................ 551 806
Accounts payable .................................................................................. 452,709 467,415
Billings in excess of costs and estimated earnings on uncompleted contracts ....................... 330,235 359,667
Accrued payroll and benefits ...................................................................... 154,276 138,771
Other accrued expenses and liabilities ............................................................ 107,545 115,714
----------- -----------
Total current liabilities ...................................................................... 1,045,316 1,162,373
Long-term debt and capital lease obligations ......................................................... 1,406 1,332
Other long-term obligations .......................................................................... 116,783 91,903
----------- -----------
Total liabilities .................................................................................... 1,163,505 1,255,608
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding ........... -- --
Common stock, $0.01 par value, 80,000,000 shares authorized, 33,266,154 and 32,648,670 shares
issued, respectively .............................................................................. 333 326
Capital surplus ...................................................................................... 325,232 317,959
Accumulated other comprehensive (loss) income ........................................................ (5,370) 7,699
Retained earnings .................................................................................... 313,170 253,128
Treasury stock, at cost 2,162,388 and 2,176,572 shares, respectively ................................. (17,929) (16,751)
----------- -----------
Total stockholders' equity ........................................................................... 615,436 562,361
----------- -----------
Total liabilities and stockholders' equity ........................................................... $ 1,778,941 $ 1,817,969
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
31
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003
---------- ---------- ----------
Revenues ............................................................. $4,714,547 $4,718,010 $4,500,401
Cost of sales ........................................................ 4,214,783 4,273,410 4,022,890
---------- ---------- ----------
Gross profit ......................................................... 499,764 444,600 477,511
Selling, general and administrative expenses ......................... 416,883 396,915 431,454
Restructuring expenses ............................................... 1,750 8,274 --
Gain on sale of assets ............................................... -- 2,839 --
---------- ---------- ----------
Operating income ..................................................... 81,131 42,250 46,057
Interest expense ..................................................... (8,316) (8,883) (8,939)
Interest income ...................................................... 2,730 1,886 703
Gain on sale of equity investment .................................... -- 1,844 --
Minority interest .................................................... (4,515) (3,814) (1,905)
---------- ---------- ----------
Income from continuing operations before income taxes ................ 71,030 33,283 35,916
Income tax provision ................................................. 9,738 1 15,915
---------- ---------- ----------
Income from continuing operations .................................... 61,292 33,282 20,001
(Loss) gain from discontinued operations, net of income tax effect ... (1,250) (75) 620
---------- ---------- ----------
Net income ........................................................... $ 60,042 $ 33,207 $ 20,621
========== ========== ==========
Net income (loss) per common share - Basic
From continuing operations ........................................ $ 1.97 $ 1.09 $ 0.67
From discontinued operations ...................................... (0.04) (0.00) 0.02
---------- ---------- ----------
$ 1.93 $ 1.09 $ 0.69
========== ========== ==========
Net income (loss) per common share - Diluted
From continuing operations ........................................ $ 1.93 $ 1.07 $ 0.65
From discontinued operations ...................................... (0.04) (0.00) 0.02
---------- ---------- ----------
$ 1.89 $ 1.07 $ 0.67
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
32
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net income ............................................................................ $ 60,042 $ 33,207 $ 20,621
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ....................................................... 19,439 20,939 21,717
Amortization of identifiable intangible assets ...................................... 3,192 3,444 2,818
Provision for doubtful accounts ..................................................... 8,457 7,026 11,249
Minority interest ................................................................... 4,515 3,814 1,905
Deferred income taxes ............................................................... 5,002 13,704 7,451
Loss (gain) on sale of discontinued operation, sale of assets
and equity investment ............................................................ 1,250 (4,683) --
Loss (gain) on sale of property, plant and equipment ................................ 263 (196) 314
Non-cash expense for amortization of debt issuance costs ............................ 2,589 1,925 1,416
----------- ----------- -----------
104,749 79,180 67,491
Change in operating assets and liabilities excluding effect of businesses acquired:
Decrease (increase) in accounts receivable .......................................... 11,029 (52,993) (52,350)
Decrease (increase) in inventories and contracts in progress, net ................... 28,837 20,979 (28,538)
(Decrease) increase in accounts payable ............................................. (7,759) 6,846 41,978
Increase (decrease) in accrued payroll and benefits and other accrued expenses
and liabilities ................................................................... 14,907 10,534 (26,420)
Changes in other assets and liabilities, net ........................................ (8,454) (19,632) (4,087)
----------- ----------- -----------
Net cash provided by (used in) operating activities ................................... 143,309 44,914 (1,926)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of discontinued operation, sale of assets and equity investment .. 4,413 10,061 --
Proceeds from sale of property, plant and equipment ................................. 3,577 5,478 2,500
Purchase of property, plant and equipment ........................................... (12,445) (16,134) (17,940)
Payments for acquisitions of businesses, net of cash acquired, and related earn-out
agreements ........................................................................ (10,690) (1,568) (10,943)
Net disbursements for other investments ............................................. (4,959) (970) (1,439)
Payments received pursuant to indemnity provisions of acquisition agreements ........ -- -- 5,244
----------- ----------- -----------
Net cash used in investing activities ................................................. (20,104) (3,133) (22,578)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit line ........................................... 899,552 1,365,950 1,445,904
Repayments of working capital credit line ........................................... (979,552) (1,425,350) (1,418,504)
Borrowings for long-term debt ....................................................... -- 31 --
Repayments for long-term debt ....................................................... (89) (144) (22,241)
Repayments for capital lease obligations ............................................ (182) (458) (12)
Net proceeds from exercise of stock options ......................................... 1,742 1,590 1,963
----------- ----------- -----------
Net cash (used in) provided by financing activities ................................... (78,529) (58,381) 7,110
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ...................................... 44,676 (16,600) (17,394)
Cash and cash equivalents at beginning of year ........................................ 59,109 75,709 93,103
----------- ----------- -----------
Cash and cash equivalents at end of year .............................................. $ 103,785 $ 59,109 $ 75,709
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
33
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 (LOSS) INCOME(1) EARNINGS STOCK INCOME
--------- --------- --------- ---------------- ----------- --------- -------------
Balance, December 31, 2002 .......... $ 489,870 $ 321 $ 312,233 $ (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 2 2,901 -- -- 123
Value of restricted stock units (4) 1,434 -- 1,434 -- -- --
--------- --------- --------- --------- ----------- ---------
Balance, December 31, 2003 .......... 521,356 323 316,568 1,257 219,921 (16,713)
Net income ........................ 33,207 -- -- -- 33,207 -- $ 33,207
Foreign currency translation
adjustments ..................... 5,409 -- -- 5,409 -- -- 5,409
Pension plan reduction of
minimum liability, net of
tax provision of $2.6 million ... 1,033 -- -- 1,033 -- -- 1,033
---------
Comprehensive income .............. $ 39,649
=========
Issuance of treasury stock
for restricted stock units (2) .. -- -- (836) -- -- 836
Treasury stock, at cost (3) ....... (902) -- -- -- -- (902)
Common stock issued under
stock option plans, net ......... 1,590 3 1,559 -- -- 28
Value of restricted stock units (4) 668 -- 668 -- -- --
--------- --------- --------- --------- ----------- ---------
Balance, December 31, 2004 .......... 562,361 326 317,959 7,699 253,128 (16,751)
Net income ........................ 60,042 -- -- -- 60,042 -- $ 60,042
Foreign currency translation
adjustments ..................... (1,174) -- -- (1,174) -- -- (1,174)
Pension plan additional
minimum liability, net of
$0 tax effect ................... (11,895) -- -- (11,895) -- -- (11,895)
---------
Comprehensive income .............. $ 46,973
=========
Issuance of treasury stock
for restricted stock units (2) .. -- -- (540) -- -- 540
Treasury stock, at cost (3) ....... (871) -- -- -- -- (871)
Common stock issued under
stock option plans, net (5)...... 5,615 7 6,455 -- -- (847)
Value of restricted stock units (4) 1,358 -- 1,358 -- -- --
--------- --------- --------- --------- ----------- ---------
Balance, December 31, 2005 .......... $ 615,436 $ 333 $ 325,232 $ (5,370) $ 313,170 $ (17,929)
========= ========= ========= ========= =========== =========
- ---------
(1) Represents cumulative foreign currency translation and net of tax minimum
pension liability adjustments of $11.5 million and $(16.9) million,
respectively, as of December 31, 2005. Represents cumulative foreign
currency translation and net of tax minimum pension liability adjustments
of $12.7 million and $(5.0) million, respectively, as of December 31,
2004.
(2) Represents common stock transferred at cost from treasury stock upon the
vesting of restricted stock units.
(3) Represents value of shares of common stock withheld by EMCOR for income
tax withholding requirements upon the vesting of restricted stock units.
(4) Shares of common stock will be issued in respect of restricted stock
units. This amount represents the value of restricted stock units at the
date of grant.
(5) Includes the tax benefit of stock option exercises.
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
34
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS
References to the "Company," "EMCOR," "we," "us," "our" and words of
similar import refer to EMCOR Group, Inc. and its consolidated subsidiaries
unless the context indicates otherwise.
We are one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. We specialize 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." We
design, integrate, install, start up, operate and maintain various electrical
and mechanical systems, including, (a) systems for the generation and
distribution of electrical power, (b) fire protection systems, (c) lighting
systems, (d) low-voltage systems, such as fire alarm, security, communication
and process control systems, (e) voice and data communications systems, (f)
heating, ventilation, air conditioning, refrigeration and clean-room process
ventilation systems and (g) plumbing, process and high-purity piping systems. We
provide mechanical and electrical construction services and facilities services
directly to corporations, municipalities and other governmental entities,
owners/developers and tenants of buildings. We also provide 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: (a) large installation
projects with contracts often in the multi-million dollar range that involve
construction of industrial and commercial buildings and institutional and public
works facilities or the fit-out of large blocks of space within commercial
buildings and (b) smaller installation projects typically involving fit-out,
renovation and retrofit work. Our facilities services, which 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, energy management programs and the design and construction of
energy-related projects. These services are provided to a wide range of
commercial, industrial, utility and institutional facilities including those at
which we provided construction services.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. All investments over which we exercise
significant influence, but do not control (a 20% to 50% ownership interest), are
accounted for using the equity method of accounting.
Minority interest represents the allocation of earnings to our joint
venture partners who have a minority-ownership interest in joint ventures to
which we are a party and which joint ventures have been accounted for by us
using the consolidation method of accounting.
On February 10, 2006, we effected a 2-for-1 stock split in the form of a
stock distribution of one common share for each common share owned on the record
date of January 30, 2006. The capital stock accounts, all share data and
earnings per share data give effect to the stock split, applied retroactively,
to all periods presented. See Note H - Common Stock.
The results of operations for all years presented reflect discontinued
operations accounting due to the sale of a subsidiary in 2005.
The results of operations of acquisitions in each of 2005 and 2003, which
are not material, have been included in the results of operations from the date
of the respective acquisition by us.
PRINCIPLES OF PREPARATION
The preparation of the consolidated financial statements, in conformity
with accounting principles generally accepted in the United States, requires us
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.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of our 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 (a) fixed
price facilities services contracts which are signed in advance for maintenance,
repair and retrofit work over periods typically ranging from one to three years
(for which there may be our employees at the customer's site full time) and (b)
services contracts which may or may not be signed in advance for similar
maintenance, repair and retrofit work on an as needed basis (frequently referred
to as time and material work). Fixed price services contracts are generally
performed over the contract period, and, accordingly, revenue is recognized on a
pro-rata basis over the life of the contract. Revenues derived from other
services contracts are recognized when the services are performed in accordance
with Staff Accounting Bulletin No. 104, "Revenue Recognition, revised and
updated." Expenses related to all services contracts are recognized as incurred.
Provisions for estimated losses on uncompleted long-term contracts are made in
the period in which such losses are determined. In the case of customer change
orders for uncompleted long-term construction contracts, estimated recoveries
are included for work performed in forecasting ultimate profitability on certain
contracts. Due to uncertainties inherent in the estimation process, it is
reasonably possible that completion costs, including those arising from contract
penalty provisions and final contract settlements, will be revised in the
near-term. Such revisions to costs and income are recognized in the period in
which the revisions are determined.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts reflected in the consolidated balance sheets arise when revenues have
been recognized but the amounts cannot be billed under the terms of the
contracts. Such amounts are recoverable from customers based 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 we seek or will seek to
collect from customers or others for errors or changes in contract
specifications or design, contract change orders in dispute or unapproved as to
scope and price or other customer-related causes of unanticipated additional
contract costs (claims and unapproved change orders). Such amounts are recorded
at estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the construction costs incurred
in connection with claim amounts. Claims and unapproved change orders made by us
involve negotiation and, in certain cases, litigation. In the event litigation
costs are incurred by us in connection with claims or unapproved change orders,
such litigation costs are expensed as incurred although we may seek to recover
these costs. We believe that we have established legal bases for pursuing
recovery of our recorded unapproved change orders and claims, and it is
management's intention to pursue and litigate such claims, if necessary, until a
decision or settlement is reached. Unapproved change orders and claims also
involve the use of estimates, and it is reasonably possible that revisions to
the estimated recoverable amounts of recorded claims and unapproved change
orders may be made in the near-term. If we do not successfully resolve these
matters, a net expense (recorded as a reduction in revenues), may be required,
in addition to amounts that have been previously provided for. Claims against us
are recognized when a loss is considered probable and amounts are reasonably
determinable.
36
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2005 and 2004 were as follows (in thousands):
2005 2004
----------- -----------
Costs incurred on uncompleted contracts ....................................... $ 8,927,230 $ 8,390,950
Estimated earnings ............................................................ 546,394 450,481
----------- -----------
9,473,624 8,841,431
Less: billings to date ........................................................ 9,618,225 8,960,382
----------- -----------
$ (144,601) $ (118,951)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets
at December 31, 2005 and 2004 under the following captions (in thousands):
2005 2004
---------- ----------
Costs and estimated earnings in excess of billings on uncompleted contracts ... $ 185,634 $ 240,716
Billings in excess of costs and estimated earnings on uncompleted contracts ... (330,235) (359,667)
---------- ----------
$(144,601) $ (118,951)
========== ==========
As of December 31, 2005 and 2004, costs and estimated earnings in excess
of billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $56.3 million and $65.4 million, respectively,
and for claims of approximately $36.6 million and $53.5 million, respectively.
In addition, accounts receivable as of December 31, 2005 and 2004 includes
claims of approximately $4.7 million and $5.4 million, respectively, plus
unapproved change orders and contractually billed amounts related to such
contracts of $76.2 million and $75.5 million, respectively. Generally,
contractually billed amounts will not be paid by the customer to us until final
resolution of related claims. Included in the claims amount is approximately
$18.2 million and $28.6 million as of December 31, 2005 and 2004, respectively,
related to projects of our Poole & Kent subsidiary, which projects had commenced
prior to our acquisition of Poole & Kent in 1999. The Poole and Kent claims
amount principally related to a civil action in which Poole and Kent is a
participant, see Note O - Legal Proceedings.
CLASSIFICATION OF CONTRACT AMOUNTS
In accordance with industry practice, we classify as current all assets
and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year,
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Accounts receivable at December 31, 2005 and 2004
included $209.5 million and $210.1 million, respectively, of retainage billed
under terms of the contracts. We estimate that approximately 87% of retainage
recorded at December 31, 2005 will be collected during 2006. Accounts payable at
December 31, 2005 and 2004 included $43.1 million and $47.8 million,
respectively, of retainage withheld under terms of the contracts. We estimate
that approximately 85% of retainage withheld at December 31, 2005 will be paid
during 2006. Specific accounts receivable are evaluated when we believe a
customer may not be able to meet its financial obligations. The allowance for
doubtful accounts requirements are re-evaluated and adjusted on a regular basis
and as additional information is received.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, we consider all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. We maintain a centralized cash management system whereby our
excess cash balances are invested in high quality, short-term money market
instruments, which are considered cash equivalents. At times, cash balances in
our 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.
37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables were $28.7 million and
$26.5 million at December 31, 2005 and 2004, respectively, 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 $18.3 million and $18.7 million as of December 31, 2005 and 2004,
respectively, relating to a venture with Baltimore Gas & Electric (a subsidiary
of Constellation Energy). This joint venture designs, constructs, owns,
operates, leases and maintains facilities to produce chilled water for use in
air conditioning commercial properties.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation, including
amortization of assets under capital leases, is recorded principally using the
straight-line method over estimated useful lives of 3 to 10 years for machinery
and equipment, 3 to 5 years for furniture and fixtures and 25 years for
buildings. Leasehold improvements are amortized over the shorter of the
remaining life of the lease term or the expected service life of the
improvement. As events and circumstances indicate, we review the carrying amount
of property, plant and equipment for impairment. In performing this review for
recoverability, long-lived assets are assessed for possible impairment by
comparing their carrying values to their undiscounted net pre-tax cash flows
expected to result from the use of the asset. Impaired assets are written down
to their fair values, generally determined based on their estimated future
discounted cash flows. Through December 31, 2005, 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, 2005 and 2004 (in
thousands):
2005 2004
-------- --------
Machinery and equipment ..................... $ 78,211 $ 69,902
Furniture and fixtures ...................... 47,256 45,540
Land, buildings and leasehold improvements .. 43,934 45,375
-------- --------
169,401 160,817
Accumulated depreciation and amortization ... (122,958) (104,349)
-------- --------
$ 46,443 $ 56,468
======== ========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2005 and 2004 was approximately $283.4 million
and $279.4 million, respectively, and reflects the excess of cost over fair
market value of net identifiable assets of companies acquired. We have 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
(each October 1). 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 of such goodwill, an
impairment loss is recorded to the extent that the fair value of the goodwill
within the reporting unit is less than the carrying value. The fair value 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 changes in the carrying amount of goodwill during the year ended
December 31, 2005 were as follows (in thousands):
Balance at beginning of period .................................. $ 279,432
Earn-out payments on prior year acquisitions .................... 673
Goodwill recorded for acquisition of businesses ................. 4,506
Goodwill allocated to the sale of assets and other items, net ... (1,199)
---------
Balance at end of period ........................................ $ 283,412
=========
As of December 31, 2005, there are remaining contingent payments related
to a 2005 acquisition, the impact of which if paid is not expected to be
material.
38
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 $12.8 million of customer
backlog, $7.1 million of customer relationships and $7.4 million of trademarks
and tradenames, all acquired as a result of acquisitions in 2002 and 2005. The
$12.8 million attributable to backlog and $7.1 million attributable to customer
relationships are being amortized on a straight-line method over periods from
one to seven years. The backlog and customer relationships are presented in the
consolidated balance sheets net of accumulated amortization of $10.2 million and
$7.0 million at December 2005 and 2004, respectively. The $7.4 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 SFAS 142. See Note C - Acquisitions of Businesses
for additional information. The following table presents the estimated future
amortization expense of identifiable intangible assets as of December 31, 2005
(in thousands):
2006 ................................................... $3,103
2007 ................................................... 2,746
2008 ................................................... 2,745
2009 ................................................... 1,075
2010 ................................................... 5
Thereafter ............................................. 31
------
$9,705
======
INSURANCE LIABILITIES
Our insurance liabilities are determined actuarially based on claims filed
and an estimate of claims incurred but not yet reported. At December 31, 2005
and 2004, the estimated current portion of undiscounted insurance liabilities of
$13.0 million and $17.6 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 included
in "Other long-term obligations" at December 31, 2005 and 2004 were $76.9
million and $63.2 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of our financial instruments, which include accounts
receivable and other financing commitments, approximate their fair values due
primarily to their short-term maturities.
FOREIGN OPERATIONS
The financial statements and transactions of our 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 (loss) income", a separate component of
"Stockholders'equity".
INCOME TAXES
We account 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
As of December 31, 2005, 2004 and 2003, we did not have any material
derivative instruments.
39
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, 2005, we had stock-based compensation plans and programs,
which are described more fully in Note I - Stock Options and Stock Plans. We
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("Opinion 25") and related interpretations in accounting for stock
options. Accordingly, no compensation cost has been recognized in the
accompanying Consolidated Statements of Operations for the years ended December
31, 2005, 2004 and 2003 in respect of stock options granted during those years
inasmuch as we grant 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"), our 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 for the years ended
December 31, 2005, 2004 and 2003 (in thousands, except per share amounts):
2005 2004 2003
------- ------- -------
Income from continuing operations:
As reported .......................................................................... $61,292 $33,282 $20,001
Less: Total stock-based compensation expense determined under fair value based method,
net of related tax effects ......................................................... 2,112 2,981 1,199
------- ------- -------
Pro Forma ............................................................................ $59,180 $30,301 $18,802
======= ======= =======
Basic EPS:
As reported .......................................................................... $ 1.97 $ 1.09 $ 0.67
Pro Forma ............................................................................ $ 1.90 $ 1.00 $ 0.63
Diluted EPS:
As reported .......................................................................... $ 1.93 $ 1.07 $ 0.65
Pro Forma ............................................................................ $ 1.86 $ 0.97 $ 0.61
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("123(R)"),
which is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation". Statement 123(R) supersedes Opinion No. 25 and amends FASB
Statement No. 95, "Statement of Cash Flows". Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure will no longer be an alternative.
Statement 123(R) must be adopted no later than January 1, 2006. As of January 1,
2006, we adopted Statement 123(R).
As permitted by Statement 123, we currently account for share-based
payments to employees using Opinion 25's intrinsic value method and, as such, we
generally recognize no compensation cost for employee stock options. We will
utilize the modified prospective method of accounting as permitted under 123(R).
Accordingly, the adoption of Statement 123(R)'s fair value method will have an
impact on our future results of operations, although it will have no impact on
our overall financial position. The impact of that standard on reported results
would be approximately as described above in the disclosure of pro forma net
income and earnings per share. Statement 123(R) also requires the benefit of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While we cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating
cash flows recognized in prior periods for such excess tax deductions were not
material.
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS
In November 2005, we acquired one company for which an aggregate of $13.6
million was paid. Goodwill, representing the excess purchase price over the fair
value of amounts assigned to the net assets acquired, was preliminarily valued
at $4.5 million.
We believe the addition of this company furthers our goal of market and
geographic diversification, expansion of our facilities services operations and
expansion of our service offerings. Additionally, this acquisition creates more
opportunities for our subsidiaries to collaborate on national facilities
services contracts. See Note B - Summary of Significant Accounting Policies for
a discussion of goodwill and intangible assets.
During 2005 and 2004, we paid an aggregate of $0.7 million and $1.6 million
in cash, respectively, by reason of earn-out obligations in respect of prior
year acquisitions.
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 1, 2004 sale of assets of our United Kingdom
Delcommerce equipment rental service division. Concurrently with the sale, we
entered into a long-term agreement to utilize the equipment rental services of
the purchaser, a publicly traded United Kingdom company. The $1.8 million gain
in 2004 on the sale of an equity investment was attributable to the August 2004
sale of our interest in a South African joint venture, the operating results of
which had been reported in the Other international construction and facilities
services segment. There were no other sales of such assets or equity investments
in the years ended December 31, 2005, 2004 and 2003 other than the disposal of
property, plant and equipment in the normal course of business.
On September 30, 2005, we disposed of one of our subsidiaries in our United
States facilities services segment. The results of operations for all periods
presented reflect discontinued operations accounting. Included in the $1.3
million loss from discontinued operations for 2005 is a loss of $1.0 million,
net of income tax, by reason of the sale of the subsidiary. We will not have any
future involvement with the subsidiary. The results of operations for the
discontinued operation is not presented as it is not material to the
consolidated results of operations for the years ended December 31, 2005, 2004
and 2003.
NOTE D -- EARNINGS PER SHARE
The following tables summarize our calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 2005, 2004 and 2003:
2005 2004 2003
----------- ----------- -----------
NUMERATOR:
Income before discontinued operations .......................................... $61,292,000 $33,282,000 $20,001,000
(Loss) gain from discontinued operations ....................................... (1,250,000) (75,000) 620,000
----------- ----------- -----------
Net income available to common stockholders .................................... $60,042,000 $33,207,000 $20,621,000
=========== =========== ===========
DENOMINATOR:
Weighted average shares outstanding used to compute basic earnings per share ... 31,143,363 30,395,810 29,972,158
Effect of diluted securities - options to purchase common stock ................ 691,518 737,664 951,238
----------- ----------- -----------
Shares used to compute diluted earnings per share .............................. 31,834,881 31,133,474 30,923,396
=========== =========== ===========
Basic earnings (loss) per share:
Continuing operations ........................................................ $ 1.97 $ 1.09 $ 0.67
Discontinued operations ...................................................... (0.04) (0.00) $ 0.02
----------- ----------- -----------
Total ........................................................................ $ 1.93 $ 1.09 $ 0.69
=========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations ........................................................ $ 1.93 $ 1.07 $ 0.65
Discontinued operations ...................................................... (0.04) (0.00) $ 0.02
----------- ----------- -----------
Total ........................................................................ $ 1.89 $ 1.07 $ 0.67
=========== =========== ===========
The number of options granted to purchase shares of our common stock, which
options were excluded from the computation of Diluted EPS for the years ended
December 31, 2005, 2004 and 2003 because they would be antidilutive, were
365,940, 1,773,294 and 850,998, respectively.
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT
CREDIT FACILITIES
Our previous revolving credit agreement (the "Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility that was due to expire September 26, 2007 with an
amended and restated $350.0 million revolving credit facility (the "2005
Revolving Credit Facility"). The 2005 Revolving Credit Facility expires on
October 17, 2010. It permits us to increase our borrowing to $500.0 million if
additional lenders are identified and/or existing lenders are willing to
increase their current commitments. We utilized this feature to increase the
line of credit under the 2005 Revolving Credit Facility from $350.0 million to
$375.0 million on November 29, 2005. We may allocate up to $125.0 million of the
borrowing capacity under the 2005 Revolving Credit Facility to letters of
credit, which amount compares to $75.0 million under the previous Old Revolving
Credit Facility. The 2005 Revolving Credit Facility is guaranteed by certain of
our direct and indirect subsidiaries, is secured by substantially all of our
assets and most of the assets of our subsidiaries, and provides for borrowings
in the form of revolving loans and letters of credit. The 2005 Revolving Credit
Facility contains various covenants requiring, among other things, maintenance
of certain financial ratios and certain restrictions with respect to payment of
dividends, common stock repurchases, investments, acquisitions, indebtedness and
capital expenditures. A commitment fee is payable on the average daily unused
amount of the 2005 Revolving Credit Facility. The fee ranges from 0.25% to 0.5%
of the unused amount, based on certain financial tests. Borrowings under the
2005 Revolving Credit Facility bear interest at (1) a rate which is the prime
commercial lending rate announced by Harris N.A. from time to time (7.25% at
December 31, 2005) plus 0.0% to 0.5%, based on certain financial tests or (2)
United States dollar LIBOR (at December 31, 2005, the rate was 4.38%) plus 1.0%
to 2.25%, based on certain financial tests. The interest rates in effect at
December 31, 2005 were 7.25% and 5.38% for the prime commercial lending rate and
the United States dollar LIBOR, respectively. Letter of credit fees issued under
this facility range from 1.0% to 2.25% of the respective face amounts of the
letters of credit issued and are charged based on the type of letter of credit
issued and certain financial tests. In connection with the replacement of the
Old Revolving Credit Facility, $0.4 million of prepaid commitment fees were
recorded as interest expense. As of December 31, 2005 and 2004, we had
approximately $53.3 million and $54.3 million of letters of credit outstanding,
respectively. There were no borrowings under the 2005 Revolving Credit Facility
as of December 31, 2005. We had borrowings of $80.0 million outstanding under
the Old Revolving Credit Facility at December 31, 2004.
FOREIGN BORROWINGS
In August 2001, our 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 5.25% at December 31, 2005.
There were no borrowings outstanding under this credit agreement at December 31,
2005 or 2004.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 2005 and 2004 (in thousands):
2005 2004
------- -------
Capitalized Lease Obligations at weighted average interest rates from 2.0% to 7.0%
payable in varying amounts through 2014 ............................................. $ 1,570 $ 1,662
Other, at weighted average interest rates of approximately 9.0%, payable in varying
amounts through 2012 ................................................................ 387 476
------- -------
1,957 2,138
Less: current maturities .............................................................. 551 806
------- -------
$ 1,406 $ 1,332
======= =======
CAPITALIZED LEASE OBLIGATIONS
See Note K -- Commitments and Contingencies.
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT -- (CONTINUED)
OTHER LONG-TERM DEBT
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. The aggregate amount of other
long-term debt maturing is approximately $0.1 million in each of the next five
years.
NOTE G -- INCOME TAXES
For 2005, the income tax provision was $9.7 million, compared to an income
tax provision of less than $0.01 million for 2004. Our income tax provision for
2005 was comprised of (a) $27.3 million of income tax provision in respect of
pre-tax earnings of $71.0 million, (b) $5.2 million of income tax provision
related to a valuation allowance recorded to reduce deferred tax assets related
to net operating losses and other temporary differences with respect to our
Canadian construction and facilities services segment, since there is
uncertainty as to whether the segment will have sufficient taxable income in the
future to realize the benefit of such deferred tax assets and (c) the offset of
such income tax provisions by a $22.7 million income tax benefit for income tax
reserves no longer required based on a current analysis of probable exposures.
The income tax benefit of less than $0.01 million for 2004 was comprised of (a)
$13.9 million of income tax provision on pre-tax earnings of $33.2 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficent future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by $22.1 million of income tax benefits for income tax
reserves no longer required based on current analysis of probable exposures. The
provision on income before income taxes for 2005, 2004 and 2003 each was
recorded at an effective income tax rate of approximately 38%, 42% and 42%,
respectively.
We have recorded liabilities for our best estimate of the probable loss on
certain positions taken on our income tax returns. We believe our recorded
income tax liabilities are adequate for all tax years subject to audit based on
our assessment of many factors. Although we believe our recorded income tax
assets and liabilities are reasonable, tax regulations are subject to
interpretation and tax litigation is inherently uncertain; therefore, our
assessments involve judgments about future events and rely on reasonable
estimates and assumptions. These income tax liabilities generally are not
finalized with the individual tax authorities until several years after the end
of the annual period for which income taxes have been estimated. As of December
31, 2005 and 2004, we had income tax reserves of $4.3 million (included in Other
accrued expenses and liabilities) and $24.9 million (included in Other long-term
obligations), respectively. The decrease in income tax reserves relates to the
reversals discussed above.
We file a consolidated federal income tax return including all of our U.S.
subsidiaries. At December 31, 2005, we had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $2.3 million, which
expire in the year 2009. In addition, at December 31, 2005, we had NOLs for
United Kingdom income tax purposes of approximately $4.7 million, which have no
expiration date and NOLs for Canadian income tax purposes of approximately $20.5
million, which expire in 2015. The NOLs are subject to review by taxing
authorities.
The income tax provision (benefit)in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2005, 2004 and 2003
consisted of the following (in thousands):
2005 2004 2003
-------- -------- --------
Current:
Federal (benefit) provision ...... $ (154) $(16,385) $ 2,682
State and local .................. 5,642 4,988 4,987
Foreign (benefit) provision ...... (752) (2,306) 795
-------- -------- --------
4,736 (13,703) 8,464
-------- -------- --------
Deferred ......................... 5,002 13,704 7,451
-------- -------- --------
$ 9,738 $ 1 $ 15,915
======== ======== ========
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
Factors accounting for the variation from U.S. statutory income tax rates
for the years ended December 31, 2005, 2004 and 2003 were as follows (in
thousands):
2005 2004 2003
-------- -------- --------
Federal income taxes at the statutory rate ..................................... $ 24,861 $ 11,653 $ 12,541
State and local income taxes, net of federal tax benefits ...................... 1,655 3,242 3,242
Foreign income taxes ........................................................... (1,673) (2,086) (158)
Adjustments to valuation allowance for deferred tax assets ..................... 5,181 7,387 (153)
Reversal of tax reserves ....................................................... (22,745) (22,083) --
Other .......................................................................... 2,459 1,888 443
-------- -------- --------
$ 9,738 $ 1 $ 15,915
======== ======== ========
The components of the net deferred income tax asset are included in
"Prepaid expenses and other" ($22.0 million) and "Other long-term liabilities"
($9.7 million) at December 31, 2005 and "Prepaid expenses and other" ($17.1
million) and "Other long-term liabilities" ($14.6 million) at December 31, 2004
in the accompanying Consolidated Balance Sheets. The amounts recorded for the
years ended December 31, 2005 and 2004 were as follows (in thousands):
2005 2004
-------- --------
Deferred income tax assets:
Net operating loss carryforwards ........................................................... $ 9,486 $ 11,496
Excess of amounts expensed for financial statement purposes over amounts deducted for income
tax purposes ............................................................................. 42,497 34,451
-------- --------
Total deferred income tax assets ........................................................... 51,983 45,947
Valuation allowance for deferred tax assets ................................................ (18,738) (10,859)
-------- --------
Net deferred income tax assets ............................................................. 33,245 35,088
-------- --------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes .... (20,931) (32,595)
-------- --------
Total deferred income tax liabilities ...................................................... (20,931) (32,595)
-------- --------
Net deferred income tax asset .............................................................. $ 12,314 $ 2,493
======== ========
Income (loss) from continuing operations before income taxes for the years
ended December 31, 2005, 2004 and 2003 consisted of the following (in
thousands):
2005 2004 2003
-------- -------- --------
United States .................................................................. $ 68,398 $ 39,725 $ 54,013
Foreign ........................................................................ 2,632 (6,442) (18,097)
-------- -------- --------
$ 71,030 $ 33,283 $ 35,916
======== ======== ========
We have not recorded deferred income taxes on the undistributed earnings
of our foreign subsidiaries because of our intent to indefinitely reinvest such
earnings. Upon distribution of these earnings in the form of dividends or
otherwise, we 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. If invested capital was
repatriated to the United States, there could be income taxes payable on any
such amount.
NOTE H -- COMMON STOCK
On January 27, 2006, our stockholders approved an amendment to our
Restated Certificate of Incorporation authorizing an increase in the number of
shares of our common stock from 30 million shares to 80 million shares.
Following this approval, we effected on February 10, 2006 a 2-for-1 stock split
in the form of a stock distribution of one common share for each common share
owned, payable to shareholders of record on January 30, 2006. As of December 31,
2005 and 2004, 31,103,766 and 30,472,098 shares of our common stock were
outstanding, respectively. Pursuant to a program authorized by our Board of
Directors, we purchased 2,263,970 shares of our common stock prior to January 1,
2000. The aggregate amount of $16.8 million paid for those shares has been
classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at
December 31, 2005, less the value of shares reissued pursuant to the exercise of
stock options or issuance of restricted stock units as described in Note I -
Stock Options and Stock Plans. Our management is authorized to expend up to an
additional $3.2 million to purchase our common stock under this program.
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS
We have stock option plans and programs under which employees may receive
stock options, and certain executives have a stock bonus plan and a long-term
incentive plan pursuant to which they receive restricted stock units. EMCOR also
has stock option plans under which non-employee directors may receive stock
options. A summary of the general terms of the grants under stock option plans
and programs and stock plans are as follows (adjusted for the February 10, 2006
2-for-1 stock split):
AUTHORIZED EXERCISE PRICE/
SHARES VESTING EXPIRATION VALUATION DATE
---------- ------------------------- --------------- -----------------
1994 Management Stock Option Plan 2,000,000 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' 400,000 100% on grant date Ten years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "1995 Plan") on grant date
1997 Non-Employee Directors' 600,000 (1) Five years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock on grant date (3)
Option Plan")
1997 Stock Plan for Directors 300,000 (2) Five years from Fair market value
(the "1997 Directors' Stock Plan") grant date of common stock
on grant date (3)
2003 Non-Employee Directors' 240,000 100% 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 660,000 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 440,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
2005 Management Stock 900,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2005 Management Plan") on grant date
2005 Stock Plan for Directors 52,000 50% on grant or award Ten years from Fair market value
(the "2005 Directors' Stock Plan") date, 50% on the first grant date of common stock
anniversary of grant date on grant date
Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value
100% on first grant date of common stock
anniversary of grant on grant date
date or 25% on grant and
25% on each anniversary
of grant date
- ----------
(1) Until July 2000, non-employee directors could elect to receive one-third,
two-thirds or all of their retainer for a calendar year in the form of
stock options. Since then such directors have received all of their
retainer in the form of stock options. All options under this plan become
exercisable quarterly over the calendar year in which they are granted. In
addition, each director received additional stock options equal to the
product of 0.5 times the amount of stock options otherwise issued.
(2) The plan terminated during 2003.
(3) Generally, the grant date was the first business day of a calendar year.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes our stock option and stock bonus plan
activity since December 31, 2002:
1997 DIRECTORS' STOCK
1994 PLAN 1995 PLAN OPTION PLAN
-------------------- ------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- -------- ---------
Balance, December 31, 2002 ......... 1,158,402 $5.00 222,000 $15.05 265,044 $11.52
Granted .......................... -- -- 6,000 $24.08 39,924 $26.82
Forfeited ........................ -- -- -- -- (12,148) $10.00
Exercised ........................ (64,000) $5.30 (30,000) $12.83 (104,964) $ 8.84
--------- ------- --------
Balance, December 31, 2003 ......... 1,094,402 $4.99 198,000 $15.66 187,856 $16.37
Granted .......................... -- -- -- -- 51,300 $21.92
Forfeited ........................ (6,000) $5.31 -- -- -- --
Exercised ........................ (246,166) $3.17 -- -- (60,816) $ 8.78
--------- ------- --------
Balance, December 31, 2004 ......... 842,236 $5.52 198,000 $15.66 178,340 $20.55
Granted .......................... -- -- -- -- 63,504 $22.47
Forfeited ........................ -- -- -- -- -- --
Exercised ........................ (515,234) $3.09 (24,000) $ 8.88 (53,250) $12.72
--------- ------- --------
Balance, December 31, 2005 ......... 327,002 $9.34 174,000 $16.60 188,594 $23.41
========= ======= ========
1997 DIRECTORS' OTHER STOCK
STOCK PLAN ESBP OPTION GRANTS
-------------------- ------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- --------- --------
Balance, December 31, 2002 ......... 660 $9.82 186,552 $15.66 1,479,934 $15.72
Granted .......................... -- -- 74,660 $19.56 286,670 $27.32
Forfeited ........................ -- -- -- -- -- --
Exercised ........................ (660) $9.82 -- -- (27,668) $ 9.76
----- -------- ---------
Balance, December 31, 2003 ......... -- -- 261,212 $16.78 1,738,936 $17.72
Granted .......................... -- -- 85,276 $19.18 444,796 $21.57
Forfeited ........................ -- -- -- -- (10,000) $15.82
Exercised ........................ -- -- (113,414) $10.81 (36,000) $ 8.12
----- -------- ---------
Balance, December 31, 2004 ......... -- -- 233,074 $20.56 2,137,732 $18.70
Granted .......................... -- -- 31,276 $20.49 59,000 $24.04
Forfeited ........................ -- -- -- -- -- --
Exercised ........................ -- -- (98,138) $22.20 (18,000) $12.75
----- -------- ---------
Balance, December 31, 2005 ......... -- -- 166,212 $19.57 2,178,732 $18.89
===== ======== =========
46
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
2003 DIRECTORS'
STOCK OPTION PLAN 2003 MANAGEMENT PLAN
------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Balance, December 31, 2003 ......... 60,000 $26.39 20,000 $20.81
Granted .......................... 60,000 $21.98 -- --
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2004 ......... 120,000 $24.19 20,000 $20.81
Granted .......................... 60,000 $25.08 580,400 $22.54
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2005 ......... 180,000 $24.48 600,400 $22.48
======= =======
2005 DIRECTORS'
STOCK PLAN 2005 MANAGEMENT PLAN
------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Balance, December 31, 2004 ......... -- -- -- --
Granted .......................... -- -- -- --
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2005 ......... -- -- -- --
======= =======
At December 31, 2005, 2004 and 2003 approximately 2,866,000, 2,920,000 and
2,908,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2005, 2004 and 2003 was
approximately $17.83, $14.17 and $11.89, respectively.
The following table summarizes information about our stock options at
December 31, 2005 (adjusted for the February 10, 2006 2-for-1 stock split):
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- --------- ---------------- ---------------- ------- ----------------
$ 7.16 - $10.00 919,668 3.02 Years $ 9.46 919,668 $ 9.46
$10.97 - $13.57 212,000 4.69 Years $12.51 212,000 $12.51
$18.93 - $21.15 646,412 6.77 Years $20.39 599,746 $20.46
$21.92 - $23.18 1,462,400 7.48 Years $22.47 689,610 $22.57
$23.68 - $27.75 574,460 7.14 Years $26.58 444,806 $26.80
The weighted average fair value of options granted during 2005, 2004 and
2003 were $8.02, $6.21 and $7.29, respectively.
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The pro forma effect on our 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 $2.1 million,
$3.0 million and $1.2 million for the years ending December 31, 2005, 2004 and
2003, 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
2005, 2004 and 2003: risk-free interest rates of 1.9% to 4.3% (representing the
risk-free interest rate at the date of the grant); expected dividend yields of
zero percent; expected terms of 3.6 to 6.4 years; and average expected
volatility of 38.29%, 27.2% and 30.3% for options granted during 2005, 2004 and
2003, respectively.
During 2004, 455,854 of out-of-the-money stock options were vested in full
in anticipation of a change in accounting rules requiring the expensing of stock
options beginning as of January 1, 2006 (see New Accounting Pronouncements in
Note B - Summary of Significant Accounting Policies).
NOTE J -- RETIREMENT PLANS
Our United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees (the "UK Plan"). The benefits under the UK Plan are based
on wages and years of service with the subsidiary. Our policy is to fund the
minimum amount required by law. The measurement date of the UK Plan is December
31 of each year.
The change in benefit obligations and assets of the UK Plan for the years
ended December 31, 2005 and 2004 consisted of the following components (in
thousands):
2005 2004
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year ......................... $ 192,360 $ 159,802
Service cost .................................................... 3,896 4,906
Interest cost ................................................... 9,701 8,891
Plan participants' contributions ................................ 3,226 3,656
Actuarial loss .................................................. 24,314 6,988
Benefits paid ................................................... (5,313) (4,674)
Foreign currency exchange rate changes .......................... (21,724) 12,791
--------- ---------
Benefit obligation at end of year ............................... $ 206,460 $ 192,360
========= =========
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year .................. $ 150,533 $ 121,262
Actual return on plan assets .................................... 25,365 13,050
Employer contributions .......................................... 6,933 7,329
Plan participants' contributions ................................ 3,226 3,656
Benefits paid ................................................... (5,313) (4,674)
Foreign currency exchange rate changes .......................... (17,114) 9,910
--------- ---------
Fair value of plan assets at end of year ........................ $ 163,630 $ 150,533
--------- ---------
Funded status ................................................... $ (42,830) $ (41,827)
Unrecognized transition amount .................................. -- --
Unrecognized prior service cost ................................. 67 165
Unrecognized losses ............................................. 40,984 37,787
--------- ---------
Net amount recognized ........................................... $ (1,779) $ (3,875)
========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued benefit liability ....................................... $ (18,743) $ (9,042)
Intangible asset ................................................ 67 165
Accumulated other comprehensive loss ............................ 16,897 5,002
--------- ---------
Net amount recognized ........................................... $ (1,779) $ (3,875)
========= =========
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The assumptions used as of December 31, 2005, 2004 and 2003 in determining
pension cost and liability shown above were as follows:
2005 2004 2003
---- ---- ----
Discount rate ......................................................................... 4.8% 5.4% 5.5%
Annual rate of salary provision ....................................................... 3.1% 3.1% 3.1%
Annual rate of return on plan assets .................................................. 6.3% 6.8% 7.0%
The annual rate of return on plan assets is based on the United Kingdom
Government Bond yield, plus an estimated margin, at each year's measurement
date. This annual rate approximates the historical annual return on plan assets
and considers the expected asset allocation between equity and debt securities.
For measurement purposes, a 2.5% annual rate of inflation of covered pension
benefits was assumed for 2005 and 2004.
The components of net periodic pension benefit cost for the years ended
December 31, 2005, 2004 and 2003 were as follows (in thousands):
2005 2004 2003
-------- -------- --------
Service cost .............................................................. $ 3,896 $ 4,906 $ 4,837
Interest cost ............................................................. 9,701 8,891 8,183
Expected return on plan assets ............................................ (9,890) (8,933) (6,708)
Net amortization of prior service cost and actuarial loss (gain) .......... 85 19 (5)
Amortization of unrecognized loss ......................................... 1,351 1,402 2,280
-------- -------- --------
Net periodic pension benefit cost ......................................... $ 5,143 $ 6,285 $ 8,587
======== ======== ========
UK PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 2005 were as follows:
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 2005 ALLOCATION
- ------------- ------------ ----------
Equity securities ............................................................... 65.2% 70.0%
Debt securities ................................................................. 31.7 30.0
Other ........................................................................... 3.1 --
------------ ----------
Total ........................................................................... 100.0% 100.0%
============ ==========
Plan assets of our UK Plan include marketable equity securities in both
United Kingdom and United States companies. Debt securities consist mainly of
fixed interest bonds.
The investment policies and strategies for plan assets are established to
achieve a reasonable balance between risk, likely return and administration
expense, as well as to maintain funds at a level to meet minimum funding
requirements. In order to ensure that an appropriate investment strategy is in
place, an analysis of the UK Plan's assets and liabilities is completed
periodically.
CASH FLOWS:
CONTRIBUTIONS
Our United Kingdom subsidiary expects to contribute $9.5 million to its UK
Plan in 2006.
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
ESTIMATED FUTURE BENEFIT PAYMENTS
The following estimated benefit payments, which reflect expected future
service, as appropriate, are expected to be paid in the following years (in
thousands):
PENSION
BENEFITS
--------
2006 ............................................. $ 5,900
2007 ............................................. 6,354
2008 ............................................. 6,807
2009 ............................................. 7,261
2010 ............................................. 7,715
Succeeding five years ............................ 38,575
The accumulated benefit obligation for the UK Plan for the years ended
December 31, 2005 and 2004 was $182.4 million and $159.6 million, respectively.
We contribute to various union pension funds based upon wages paid to our
union employees. Such contributions approximated $133.5 million, $133.9 million
and $134.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
We have retirement and savings plans that cover U.S. eligible non-union
employees. Contributions to these profit sharing and voluntary savings plans are
based on a percentage of the employee's base compensation. The expenses
recognized for the years ended December 31, 2005, 2004 and 2003 for these plans
were $6.2 million, $6.2 million and $3.8 million, respectively. The increase in
the 2004 expense compared to 2003 is primarily due to an increase in the number
of participants in these plans.
Our United Kingdom subsidiary has a defined contribution retirement plan
that began in 2002. The expense recognized for the years ended December 31,
2005, 2004 and 2003 was $1.7 million, $1.2 million and $0.7 million,
respectively.
Our Canadian subsidiary has a defined contribution retirement plan. The
expense recognized for the years ended December 31, 2005, 2004 and 2003 was $0.7
million, $0.6 million and $0.4 million, respectively.
NOTE K -- COMMITMENTS AND CONTINGENCIES
We lease land, buildings and equipment under various leases. The leases
frequently include renewal options and require us 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, 2005, were as follows (in
thousands):
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
--------- ---------- -----------
2006 ............................................. $ 505 $ 40,112 $ 10
2007 ............................................. 459 33,754 --
2008 ............................................. 392 26,837 --
2009 ............................................. 256 19,025 --
2010 ............................................. 52 12,906 --
Thereafter ....................................... 21 28,603 --
-------- ---------- -----------
Total minimum lease payment ...................... 1,685 $ 161,237 $ 10
========== ===========
Amounts representing interest .................... (115)
--------
Present value of net minimum lease payments ...... $ 1,570
========
Rent expense for operating leases and other rental items for the years
ended December 31, 2005, 2004 and 2003 was $61.5 million, $54.9 million and
$52.9 million, respectively. Rent expense for the years ended December 31, 2005,
2004 and 2003 included sublease rental income of $0.5 million, $0.7 million and
$1.1 million, respectively.
50
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
We have agreements with our executive officers and certain other key
management personnel providing for severance benefits to such employees upon
termination of their employment under certain circumstances.
We are contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects, which secure our payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain of our employees, bonds are sometimes provided
to secure obligations for wages and benefits payable to or for such employees.
Our bonding requirements typically increase as the amount of public sector work
increases. As of December 31, 2005, sureties had issued bonds for our account in
the aggregate amount of approximately $1.5 billion. The bonds are issued by our
sureties in return for premiums, which vary depending on the size and type of
bond. The largest single bond outstanding for our account is approximately
$170.0 million. We have agreed to indemnify the sureties for amounts, if any,
paid by them in respect of bonds issued on our behalf.
We are subject to regulation with respect to the handling of certain
materials used in construction which are classified as hazardous or toxic by
Federal, State and local agencies. Our practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, when remediation is required as part of our contract performance, we
believe we comply with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
One of our subsidiaries has guaranteed indebtedness of a venture in which
it has a 40% interest; the other venture partner, Baltimore Gas and Electric (a
subsidiary of Constellation Energy), has a 60% interest. The venture designs,
constructs, owns, operates, leases and maintains facilities to produce chilled
water for sale to customers for use in air conditioning commercial properties.
These guarantees are not expected to have a material adverse affect on our
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 our contribution was $14.0 million.
We presently employ approximately 26,000 people, approximately 69% of whom
are represented by various unions pursuant to more than 475 collective
bargaining agreements between our individual subsidiaries and local unions. We
believe that our employee relations are generally good. Only two of these
collective bargaining agreements are national or regional in scope.
Restructuring expenses, primarily relating to employee severance
obligations, were $1.8 million and $8.3 million for 2005 and 2004, respectively.
As of December 31, 2005, the balance of these obligations was $0.2 million,
which we anticipate paying during 2006. There were no restructuring expenses for
the year ended December 31, 2003.
NOTE L -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes for the years ended December 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
-------- -------- --------
Cash paid during the year for:
Interest ....................................... $ 8,573 $ 7,486 $ 7,251
Income taxes ................................... $ 9,858 $ 1,759 $ 17,910
Non-cash financing activities:
Borrowings under capital lease obligations ..... $ 412 $ 1,781 $ 314
Capital lease obligations terminated ........... $ (322) $ -- $ --
51
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION
We have 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 our 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. Our interest in the South African joint
venture was sold in August 2004. The following tables present information about
industry segments and geographic areas for the years ended December 31, 2005,
2004 and 2003. Insignificant reclassifications of certain business units among
the segments have been made for all periods presented due to changes in our
internal reporting structure (in millions):
AS REPORTED
----------------------------------
2005 2004 2003
---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services ...... $ 1,224.6 $ 1,235.3 $ 1,239.5
United States mechanical construction and facilities services ...... 1,718.5 1,825.7 1,715.8
United States facilities services .................................. 756.2 697.7 627.0
---------- ---------- ----------
Total United States operations ..................................... 3,699.3 3,758.7 3,582.3
Canada construction and facilities services ........................ 342.1 280.8 346.8
United Kingdom construction and facilities services ................ 673.1 678.5 571.3
Other international construction and facilities services ........... -- -- --
---------- ---------- ----------
Total worldwide operations ......................................... $ 4,714.5 $ 4,718.0 $ 4,500.4
========== ========== ==========
Total revenues:
United States electrical construction and facilities services ...... $ 1,236.7 $ 1,275.8 $ 1,264.6
United States mechanical construction and facilities services ...... 1,728.8 1,839.4 1,733.3
United States facilities services .................................. 758.6 699.0 631.2
Less intersegment revenues ......................................... (24.8) (55.5) (46.8)
---------- ---------- ----------
Total United State operations ...................................... 3,699.3 3,758.7 3,582.3
Canada construction and facilities services ........................ 342.1 280.8 346.8
United Kingdom construction and facilities services ................ 673.1 678.5 571.3
Other international construction and facilities services ........... -- -- --
---------- ---------- ----------
Total worldwide operations ......................................... $ 4,714.5 $ 4,718.0 $ 4,500.4
========== ========== ==========
Operating income (loss):
United States electrical construction and facilities services ...... $ 79.7 $ 81.2 $ 57.8
United States mechanical construction and facilities services ...... 22.0 (1.2) 25.6
United States facilities services .................................. 24.6 14.1 17.4
---------- ---------- ----------
Total United States operations ..................................... 126.3 94.1 100.8
Canada construction and facilities services ........................ (7.9) (11.9) 2.0
United Kingdom construction and facilities services ................ 7.5 0.0 (22.4)
Other international construction and facilities services ........... 0.0 0.5 0.3
Corporate administration ........................................... (43.0) (35.0) (34.7)
Restructuring expenses ............................................. (1.8) (8.3) --
Gain on sale of assets ............................................. -- 2.8 --
---------- ---------- ----------
Total worldwide operations ......................................... 81.1 42.2 46.0
Other corporate items:
Interest expense ................................................... (8.3) (8.9) (8.9)
Interest income .................................................... 2.7 1.9 0.7
Gain on sale of equity investment .................................. -- 1.8 --
Minority interest .................................................. (4.5) (3.8) (1.9)
Income before taxes ................................................ $ 71.0 $ 33.3 $ 35.9
52
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2005 2004 2003
-------- -------- --------
Capital expenditures:
United States electrical construction and facilities services ................ $ 2.4 $ 1.7 $ 4.6
United States mechanical construction and facilities services ................ 2.5 2.9 4.5
United States facilities services ............................................ 3.9 6.1 3.4
-------- -------- --------
Total United States operations ............................................... 8.8 10.7 12.5
Canada construction facilities services ...................................... 1.3 0.8 0.5
United Kingdom construction and facilities services .......................... 0.3 3.7 4.0
Other international construction and facilities services ..................... -- -- --
Corporate administration ..................................................... 2.0 0.9 0.9
-------- -------- --------
Total worldwide operations ................................................... $ 12.4 $ 16.1 $ 17.9
======== ======== ========
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services ................ $ 3.0 $ 3.3 $ 3.4
United States mechanical construction and facilities services ................ 5.7 5.9 6.5
United States facilities services ............................................ 5.7 5.8 6.4
-------- -------- --------
Total United States operations ............................................... 14.4 15.0 16.3
Canada construction facilities services ...................................... 0.9 0.9 0.7
United Kingdom construction and facilities services .......................... 2.8 4.3 4.0
Other international construction and facilities services ..................... -- -- --
Corporate administration ..................................................... 1.3 0.7 0.7
-------- -------- --------
Total worldwide operations ................................................... $ 19.4 $ 20.9 $ 21.7
======== ======== ========
2005 2004
-------- --------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services ................ $ 64.2 $ 57.4
United States mechanical construction and facilities services ................ 70.6 128.3
United States facilities services ............................................ 10.2 11.4
-------- --------
Total United States operations ............................................... 145.0 197.1
Canada construction facilities services ...................................... 21.7 19.9
United Kingdom construction and facilities services .......................... 18.9 23.7
Other international construction and facilities services ..................... -- --
-------- --------
Total worldwide operations ................................................... $ 185.6 $ 240.7
======== ========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services ................ $ 120.2 $ 129.6
United States mechanical construction and facilities services ................ 136.2 131.1
United States facilities services ............................................ 11.1 6.5
-------- --------
Total United States operations ............................................... 267.5 267.2
Canada construction facilities services ...................................... 13.1 10.1
United Kingdom construction and facilities services .......................... 49.6 82.4
Other international construction and facilities services ..................... -- --
-------- --------
Total worldwide operations ................................................... $ 330.2 $ 359.7
======== ========
53
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2005 2004
-------- --------
Long-lived assets:
United States electrical construction and facilities services ................ $ 11.4 $ 12.1
United States mechanical construction and facilities services ................ 184.6 187.7
United States facilities services ............................................ 136.4 136.4
-------- --------
Total United States operations ............................................... 332.4 336.2
Canada construction facilities services ...................................... 4.8 5.7
United Kingdom construction and facilities services .......................... 7.1 10.6
Other international construction and facilities services ..................... -- --
Corporate administration ..................................................... 2.5 2.2
-------- --------
Total worldwide operations ................................................... $ 346.8 $ 354.7
======== ========
Goodwill:
United States electrical construction and facilities services ................ $ 3.8 $ 3.8
United States mechanical construction and facilities services ................ 164.2 163.5
United States facilities services ............................................ 115.4 112.1
-------- --------
Total United States operations ............................................... 283.4 279.4
Canada construction facilities services ...................................... -- --
United Kingdom construction and facilities services .......................... -- --
Other international construction and facilities services ..................... -- --
Corporate administration ..................................................... -- --
-------- --------
Total worldwide operations ................................................... $ 283.4 $ 279.4
======== ========
Total assets:
United States electrical construction and facilities services ................ $ 357.4 $ 358.1
United States mechanical construction and facilities services ................ 680.1 776.4
United States facilities services ............................................ 324.7 304.5
-------- --------
Total United States operations ............................................... 1,362.2 1,439.0
Canada construction facilities services ...................................... 137.2 108.8
United Kingdom construction and facilities services .......................... 154.6 199.2
Other international construction and facilities services ..................... 3.0 3.9
Corporate administration ..................................................... 121.9 67.1
-------- --------
Total worldwide operations ................................................... $1,778.9 $1,818.0
======== ========
54
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters may not
equal per share amounts for the year.
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
2005 QUARTERLY RESULTS
Revenues .................................... $ 1,088,083 $ 1,173,163 $ 1,215,415 $ 1,237,886
Gross profit ................................ $ 99,564 $ 112,343 $ 131,413 $ 156,444
Net income .................................. $ 1,913 $ 7,933 $ 30,864 $ 19,332
Basic EPS - continuing operations ........... $ 0.07 $ 0.25 $ 1.02 $ 0.62
Basic EPS - discontinued operations ......... (0.01) 0.00 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.99 $ 0.62
=========== =========== =========== ===========
Diluted EPS - continuing operations ......... $ 0.07 $ 0.24 $ 1.00 $ 0.61
Diluted EPS - discontinued operations ....... (0.01) 0.01 (0.03) (0.01)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.97 $ 0.60
=========== =========== =========== ===========
2004 QUARTERLY RESULTS
Revenues .................................... $ 1,099,267 $ 1,183,137 $ 1,211,982 $ 1,223,624
Gross profit ................................ $ 100,604 $ 100,268 $ 115,354 $ 128,374
Net income .................................. $ 5,717 $ 1,445 $ 15,466 $ 10,579
Basic EPS - continuing operations ........... $ 0.20 $ 0.04 $ 0.52 $ 0.34
Basic EPS - discontinued operations ......... (0.01) 0.01 (0.01) 0.01
----------- ----------- ----------- -----------
$ 0.19 $ 0.05 $ 0.51 $ 0.35
=========== =========== =========== ===========
Diluted EPS - continuing operations ......... $ 0.19 $ 0.04 $ 0.51 $ 0.33
Diluted EPS - discontinued operations ....... (0.01) 0.01 (0.01) 0.01
----------- ----------- ----------- -----------
$ 0.18 $ 0.05 $ 0.50 $ 0.34
=========== =========== =========== ===========
NOTE O -- LEGAL PROCEEDINGS
In July 2003, our subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empanelled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.
On September 6, 2005, a former employee of Poole & Kent and the employee's
wife pled guilty to federal fraud charges that they used an alleged woman-owned
business enterprise ("WBE") to help Poole & Kent qualify for public construction
projects. The former employee also pled guilty to filing a false federal
personal income tax return for his failure to report on his tax return the value
of free work done at his home by Poole & Kent. In addition, on October 19, 2005,
W. David Stoffregen, the former President and Chief Executive Officer of Poole &
Kent was indicted by a federal grand jury in Baltimore for racketeering,
conspiracy, fraud and obstruction of justice in connection with his role in
connection with the alleged WBE fraud scheme and for his role in a related
alleged scheme to provide benefits to a former Maryland state senator in
exchange for his help and using his influence on behalf of Poole & Kent. On
October 26, 2005, a former project manager of Poole & Kent pled guilty to giving
false statements to federal investigators in connection with such alleged scheme
to provide benefits to the former state senator. In conjunction with the federal
investigation, others, including present and former employees of Poole & Kent,
may be charged.
55
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS -- (CONTINUED)
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against our United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named 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 39.5 million British pounds sterling (approximately $68.0 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $20.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
We are involved in other proceedings in which damages and claims have been
asserted against us. We believe that we have a number of valid defenses to such
proceedings and claims and intend to vigorously defend ourselves and do not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which we or our
subsidiaries are involved range from a few thousand dollars to over $68.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on our financial position and/or results of operations.
These proceedings include the following: (a) A civil action brought against our
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW conspired to prevent competition and to
monopolize the market for communications wiring services in the New York City
area thereby excluding plaintiffs from wiring jobs in that market. Plaintiffs
allege they have lost profits as a result of this concerted activity and seek
damages in the amount of $50 million after trebling plus attorney's fees.
However, plaintiffs' damages expert has stated in his pre-trial deposition that
he estimates plaintiffs' damages at $8.7 million before trebling. Forest has
denied the allegations of wrongdoing set forth in the complaint, and pre-trail
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. In August 2005, Forest and the other
defendants moved for summary judgment dismissing all claims. The parties do not
know when the motion will be decided and there is no assurance that the motion
will be granted in the action. (b) A civil action brought by a joint venture
(the "JV") between our subsidiary Poole & Kent Corporation and an unrelated
company in the Fairfax, Virginia Circuit Court in which the JV seeks damages
from the Upper Occoquan Sewage Authority ("UOSA") resulting from material
breaches of a construction contract (the "Contract") entered into between the JV
and UOSA for construction of a wastewater treatment facility. As a result of a
jury decision on March 11, 2005 and a subsequent ruling on June 27, 2005 of the
trial judge in the action, it was determined that the JV is entitled to be paid
approximately $17.0 million in connection with the UOSA project in addition to
the amounts it has already received from UOSA. The JV has asserted additional
claims against UOSA relating to the same project which are also pending in the
Fairfax, Virginia Circuit Court and which could result in another trial between
the JV and UOSA to be held at a date not yet determined and in which the JV
would seek damages in excess of $18.0 million. In accordance with the joint
venture agreement establishing the JV, Poole & Kent is entitled to approximately
one-half of the aggregate amounts paid and to be paid by UOSA to the JV. The JV
and UOSA are each seeking to have the determinations in the trial court reversed
on appeal to the Virginia Supreme Court. However, there is no assurance that the
Virginia Supreme Court will hear the appeals or, if the appeals are heard, that
they will be resolved in favor of the JV.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, 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, 2005. Our audits also included the financial statement schedule listed on
Schedule II in Item 15. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the 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 consolidated financial position of EMCOR Group,
Inc. and Subsidiaries at December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of EMCOR
Group, Inc.'s internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 21, 2006 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 21, 2006
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of EMCOR Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report of Internal Control over Financial Reporting, that EMCOR
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). EMCOR Group, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that EMCOR Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, EMCOR Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EMCOR Group, Inc. as of December 31, 2005 and 2004, 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, 2005 of EMCOR Group, Inc. and our report dated February 21, 2006 expressed
an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 21, 2006
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on an evaluation of our disclosure controls and procedures (as
required by Rules 13a-15(b) of the Securities Exchange Act of 1934), our
Chairman of the Board and Chief Executive Officer, Frank T. MacInnis, and our
Chief Financial Officer, Leicle E. Chesser, have concluded that our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934) are effective as of the end of the period covered by this report.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities and Exchange Act of 1934). Our internal control
over financial reporting is a process designed with the participation of our
principal executive officer and principal financial officer or persons
performing similar functions to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.
Our internal control over financial reporting includes policies and
procedures that: (a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of
assets; (b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
Board of Directors; and (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on our financial statements.
Because of its inherent limitations, our disclosure controls and
procedures may not prevent or detect misstatements. A control system, no matter
how well conceived and operated, can only provide reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
As of December 31, 2005, our management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this evaluation, management has determined that EMCOR's internal control over
financial reporting is effective as of December 31, 2005.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in its report
appearing in this Annual Report on Form 10-K, which such report expressed
unqualified opinions on our management's assessment and on the effectiveness of
our internal control over financial reporting as of December 31, 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In addition, our management with the participation of our principal
executive officer and principal financial officer or persons performing similar
functions has determined that no change in our internal control over financial
reporting occurred during the fourth quarter of our fiscal year ended December
31, 2005 that has materially affected, or is (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
59
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 our definitive Proxy
Statement for the 2006 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 our Board of Directors is incorporated by
reference to the Section of the Proxy Statement entitled "Audit Committee."
Information regarding our executive officers is contained in Part I of this Form
10-K following Item 4 under the heading "Executive Officers of the Registrant."
We have adopted a Code of Ethics that applies to our chief executive officer and
our 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 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 II,
Item 5 of this Form 10-K) is incorporated herein by reference to the sections of
the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the section of the Proxy Statement entitled "Other Matters -
Related Transactions.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Except as set forth below, the information required by this Item 14 is
incorporated herein by reference to the section of the Proxy Statement entitled
"Ratification of Appointment of Independent Auditors."
60
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of EMCOR Group, Inc. and
Subsidiaries are included in Part II, Item 8: Financial Statements:
Consolidated Balance Sheets -- December 31, 2005 and 2004
Consolidated Statements of Operations -- Years Ended December 31, 2005,
2004 and 2003
Consolidated Statements of Cash Flows -- Years Ended December 31, 2005,
2004 and 2003
Consolidated Statements of Stockholders' Equity and Comprehensive Income
-- Years Ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(a)(2) The following financial statement schedules are included in this Form
10-K report: Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the consolidated
financial statements or notes thereto.
(a)(3) The exhibits listed on the Exhibit Index are filed herewith in response
to this Item.
61
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, 2005 ...... $ 36,185 8,457 (540) (14,129) $ 29,973
Year Ended December 31, 2004 ...... $ 43,706 7,026 -- (14,547) $ 36,185
Year Ended December 31, 2003 ...... $ 40,611 11,249 376 (8,530) $ 43,706
- ----------
(1) Amount principally relates to business acquisitions and divestitures.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
62
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
2(a) Disclosure Statement and Third Amended Joint Plan of Exhibit 2(a) to EMCOR's
Reorganization (the "Plan of Reorganization") proposed by Registration Statement on Form 10 as
EMCOR Group, Inc. (formerly JWP INC.) (the "Company" or originally filed March 17, 1995 ("Form 10")
"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 September Exhibit 2(b) to Form 10
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 Exhibit 2(d) to Form 10
September 30, 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(g) Purchase Agreement dated as of February 11, 2002 by and Exhibit 2.1 to EMCOR's Report on Form 8-K dated
among Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. February 14, 2002
3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10
December 15, 1994
3(a-2) Amendment dated November 28, 1995 to the Restated Certificate Exhibit 3(a-2) to EMCOR's Annual Report
of Incorporation of EMCOR on Form 10-K for the year ended December 31,
1995 ("1995 Form 10-K")
3(a-3) Amendment dated February 12, 1998 to the Restated Certificate Exhibit 3(a-3) to EMCOR's Annual Report
of Incorporation on Form 10-K for the year ended December 31,
1997 ("1997 Form 10-K")
3(a-4) Amendment dated January 27, 2006 to the Restated Certificate Page ___
of Incorporation*
3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on
Form 10-K for the year ended December 31, 1998
("1998 Form 10-K")
3(c) Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on
Bank of New York Form 8-K dated March 3, 1997
4(a) U.S. $375,000,000 Credit Agreement dated October 14, Exhibit 4 to EMCOR's Report on Form 8-K (Date of
2005 by and among EMCOR Group, Inc and certain of Report October 17, 2005)
its subsidiaries on and Harris N.A. individually and
as Agent for the Lenders which are or become parties
thereto (the "Credit Agreement")
4(b) Assignment and Acceptance dated October 14, 2005 between Page ___
Harris Nesbitt Financing, Inc. ("HNF") as assignor, and Bank of
Montreal, as assignee of 100% interest of HNF in the Credit
Agreement to Bank of Montreal *
63
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
4(c) Commitment Amount Increase Request dated November 21, 2005 Page ___
between EMCOR and the Northern Trust Company effective
November 29, 2005 pursuant to Section 1.10 of the Credit
Agreement *
4(d) Commitment Amount Increase Request dated November 21, 2005 Page ___
between EMCOR and Bank of Montreal effective November 29,
2005 pursuant to Section 1.10 of the Credit Agreement *
4(e) Commitment Amount Increase Request dated November 21, 2005 Page ___
between EMCOR and National City Bank of Indiana effective
November 29, 2005 pursuant to Section 1.10 of the Credit
Agreement *
4(f) Assignment and Acceptance dated November 29, 2005 between Page ___
Bank of Montreal, as assignor, and Fifth Third Bank, as
assignee, of 30% interest of Bank of Montreal in the Credit
Agreement to Fifth Third Bank *
4(g) Assignment and Acceptance dated November 29, 2005 between Page ___
Bank of Montreal, as assignor, and Northern Trust Company,
as assignee, of 20% interest of Bank of Montreal in the Credit
Agreement to Northern Trust Company *
10(a) Severance Agreement between EMCOR and Frank T. MacInnis Exhibit 10.2 to EMCOR's Report on Form
8-K (Date of Report April 25, 2005)
("April 2005 Form 8-K")
10(b) Form of Severance Agreement between EMCOR and each Exhibit 10.1 to the April 2005 Form 8-K
of Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz
and Mark A. Pompa
10(c) Letter Agreement dated October 12, 2004 between Anthony Exhibit 10.1 to EMCOR's Report on Form
Guzzi and EMCOR (the "Guzzi Letter Agreement") 8-K (Date of Report October 12, 2004)
10(d) Form of Confidentiality Agreement Exhibit C to Guzzi Letter Agreement
10(e) Form of Indemnification Agreement between EMCOR and Exhibit F to Guzzi Letter Agreement
each of its officers and directors
10(f) Severance Agreement dated October 25, 2005 between Exhibit D to the Guzzi Letter Agreement
Anthony Guzzi and EMCOR
10(g-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(g-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report on
Form 10-K for the year ended December 31, 2001
("2001 Form 10-K")
10(g-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2001 Form 10-K
10(h-1) 1995 Non-Employee Directors" Non-Qualified Stock Option Exhibit 10(p) to 2001 Form 10-K
Plan ("1995 Option Plan")
64
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- --------------------------------
10(h-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2001 Form 10-K
10(i-1) 1997 Non-Employee Directors' Non-Qualified Stock Option Exhibit 10(k) to EMCOR's Annual Report
Plan ("1997 Option Plan") on Form 10-K for the year ended December 31,
1999 ("1999 Form 10-K")
10(i-2) Amendment to Section 9 of 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 between Exhibit 10(a) to EMCOR's Quarterly
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) for the quarter
Agreement ended June 30, 1999 (June 1999 Form 10-Q)
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 the 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 the June 1999 Form 10-Q
Agreement
10(n-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(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q
Agreement
10(n-3) Amendment dated as of January 1, 2002 to Matz Continuity Exhibit 10(o-3) to Form 10-Q for the
Agreement quarter ended March 31, 2002 ("March 2002
Form 10-Q")
10(o-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form 10-Q
Mark A. Pompa and EMCOR ("Pompa Continuity Agreement")
10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Exhibit 10(n) to the June 1999 Form 10-Q
Agreement
10(o-3) Amendment dated as of January 1, 2002 to Pompa Continuity Exhibit 10(p-3) to the March 2002 Form 10-Q
Agreement
10(p) Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
between Anthony Guzzi ("Guzzi") and EMCOR
10(q) Release and Settlement Agreement dated December 22, 1999 Exhibit 10(q) to 1999 Form 10-K
between Thomas D. Cunningham and EMCOR
65
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(r-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Plan") 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 ("2004 Form S-8")
10(r-2) Form of Certificate Representing Restrictive Stock Units Exhibit 10.1 to EMCOR's Report on
("RSU's") issued under the Stock Bonus Plan Manditorily Awarded Form 8-K (Date of Report March 4, 2005) (the
"March 4, 2005 Form 8-K")
10(r-3) Form of Certificate Representing RSU's issued under the Stock Exhibit 10.2 to March 4, 2005 Form 8-K
Bonus Plan Voluntarily Awarded
10(s) Incentive Plan for Senior Executive Officers of EMCOR Group, Exhibit 10.3 to March 4, 2005 Form 8-K
Inc. ("Incentive Plan for Senior Executives")
10(t) First Amendment to Incentive Plan for Senior Executives* Page ___
10(u) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of Report
December 15, 2005)
10(v) 2003 Non-Employee Directors' Stock Option Exhibit A to EMCOR's proxy statement ("2003
Proxy Statement") Plan for its annual
meeting held June 12, 2003
10(w-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement
10(w-2) Amendments to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report on
Form 10-K for the year ended December 31,
2003 ("2003 Form 10-K")
10(x) Form of Stock Option Agreement evidencing grant of stock Exhibit 10.1 to Form 8-K (Date of
options under the 2003 Management Stock Incentive Plan Report January 5, 2005)
10(y) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for
its annual meeting held June 16, 2005
("2005 Proxy Statement")
10(z) 2005 Management Stock Incentive Plan Exhibit C to EMCOR's 2005 Proxy Statement
10(a)(a) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(c)(c) Form of EMCOR Option Agreement for Messrs. Frank T. Exhibit 4.5 to 2004 Form S-8
MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E.
Chesser, R. Kevin Matz and Mark A. Pompa (collectively the
"Executive Officers") for options granted January 4, 1999,
January 3, 2000 and January 2, 2001
10(d)(d) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.6 to 2004 Form S-8
granted December 14, 2001
66
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(e)(e) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.7 to 2004 Form S-8
granted January 2, 2002, January 2, 2003 and January 2, 2004
10(f)(f) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8
June 19, 2002, October 25, 2002 and February 27, 2003
10(g)(g) Form of EMCOR Option Agreement for Executive Officers and Page ___
Guzzi dated January 3, 2005 *
10(h)(h) Release and Settlement Agreement dated February 25, 2004 Exhibit 10 (a)(a) to EMCOR's Annual Report
between Jeffrey M. Levy and EMCOR on Form 10-K for the year ended December 31,
2004 ("2004 Form 10-K")
10(i)(i) Form of letter agreement between EMCOR and each Executive Exhibit 10(b)(b) to 2004 Form 10-K
Officer with respect to acceleration of options granted
January 2, 2003 and January 2, 2004
11 Computation of Basic EPS and Diluted EPS for the years ended Page ___
December 2005 and 2004*
14 Code of Ethics of EMCOR for Chief Executive Officer and Exhibit 14 to 2003 Form 10-K
Senior Financial Officers
21 List of Significant Subsidiaries * Page ___
23.1 Consent of Ernst & Young 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-Oxley Page ___
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 unfilled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
67
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 23, 2006 by /s/ FRANK T. MACINNIS
----------------------------------
FRANK T. MACINNIS
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON FEBRUARY 23, 2006.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors and
-------------------------------- Chief Executive Officer
Frank T. MacInnis
/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)
68