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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT 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, 2006
|_| 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 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. |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-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 $1,293,000,000 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 (based solely on filings of such 5%
holders) 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 16, 2007: 31,840,696 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2007 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
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 ......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 29
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 and Corporate Governance 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 and Director
Independence .................................................... 62
Item 14. Principal Accounting Fees and Services .......................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................... 63
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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 Financial Condition and Results of Operations"
section, and other sections of this report, and in our Forms 10-Q for the three
months ended March 31, 2006, June 30, 2006 and September 30, 2006 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.
[This Page Intentionally Left Blank]
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 electrical and mechanical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2006, we had revenues of approximately $5.0 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 throughout the United States, in
Canada and 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, Norwalk, Connecticut 06851-1060, and our telephone number at
those offices is (203) 849-7800.
We specialize in providing construction services relating to electrical
and mechanical 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 Electric power transmission and distribution systems;
o Premises electrical and lighting systems;
o Low-voltage systems, such as fire alarm, security and process
control systems;
o Voice and data communications systems;
o Roadway and transit lighting and fiber optic lines;
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems;
o Fire protection systems;
o Plumbing, process and high-purity piping systems;
o Water and wastewater treatment systems; and
o Central plant heating and cooling 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 Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development, management and maintenance 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 provide construction services and others to which construction services are
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 27,000 employees.
1
Our revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of our
2006 revenues, approximately 81% were generated in the United States and
approximately 19% were generated internationally. In 2006, approximately 48% of
revenues were derived from new construction projects, 23% were derived from
renovation and retrofit of customer's existing facilities and 29% 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 - Segment Information of the
notes to consolidated financial statements included in this report.
OPERATIONS
The electrical and mechanical construction services industry has a high
growth rate due principally to the ever increasing content and complexity of
electrical and mechanical 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 electrical and mechanical
services and facilities services businesses.
Electrical and mechanical construction services primarily involve the
design, integration, installation and start-up of: (a) electric power
transmission and distribution systems, including power cables, conduits,
distribution panels, transformers, generators, uninterruptible power supply
systems and related switch gear and controls; (b) premises electrical and
lighting systems, including fixtures and controls; (c) low-voltage systems, such
as fire alarm, security and process control systems; (d) voice and data
communications systems, including fiber-optic and low-voltage copper cabling;
(e) roadway and transit lighting and fiber-optic lines; (f) heating,
ventilation, air conditioning, refrigeration and clean-room process ventilation
systems; (g) fire protection systems; (h) plumbing, process and high-purity
piping systems; (i) water and wastewater treatment systems; and (j) central
plant heating and cooling systems.
Electrical and mechanical 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 electrical and mechanical construction services
operations accounted for about 57% of our 2006 revenues, of which revenues
approximately 65% were related to new construction and approximately 35% were
related to renovation and retrofit projects. Our United Kingdom and Canada
electrical and mechanical construction services operations accounted for
approximately 13% of our 2006 revenues, of which revenues approximately 74% were
related to new construction and approximately 26% were related to renovation and
retrofit projects. We provide electrical and mechanical 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 28% of our construction services revenues in 2006.
Our projects of less than $10.0 million accounted for approximately 72% of
our 2006 electrical and mechanical construction services revenues. These
projects are typically completed in less than one year. They usually involve
electrical and mechanical construction services when an end-user or owner
undertakes construction or modification of a facility to accommodate a specific
use. These projects frequently require electrical and mechanical 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.
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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 employees based at
customer sites.
These facilities services, which generated approximately 29% of our 2006
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 electrical and mechanical services operations,
facilities services activities at our electrical and mechanical contracting
subsidiaries, and our client relationships, as well as acquisitions, to expand
the scope of services being offered and to develop packages of services for
customers on a regional, national and global basis.
Our United States facilities services division now offers a broad range of
facilities services, including maintenance and service of electrical and
mechanical systems, which we have historically provided to customers following
completion of construction projects, and site-based operations and maintenance,
mobile maintenance and services, facilities management, installation and support
for building systems, technical consulting and diagnostic services, small
modification and retrofit projects and program development, management and
maintenance of 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, customers' programs to reduce costs, 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
electrical and mechanical 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.
In Washington D.C., we are the second largest facilities services provider
to the federal government behind the General Services Administration and
currently provide services to such preeminent buildings as the Ronald Reagan
Building, the second largest federal government facility after the Pentagon.
This division of our facilities services business pursuant to which we provide
facilities services to the federal government at military bases or government
buildings is subject to renegotiation of profit, termination by the government
prior to the expiration of the term and non-renewal by the U.S. government.
We currently provide facilities services in 28 states and as part of our
operations are 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 that focuses on
facilities services. This division currently provides a full range of facilities
services to public and private sector customers under multi-year agreements.
Our EMCOR Energy Services business designs, constructs and operates
energy-related projects and facilities on a turn-key basis. Currently, we
operate 18 central heating and cooling plants/power and cogeneration facilities
and provide maintenance services for high-voltage and boiler systems under
multi-year contracts. In addition, we provide consulting and national program
energy management services under multi-year agreements. Our energy services
business' recent projects include: (a) engineering, procurement and construction
of two waste-to-energy projects; (b) construction of a 1.5 megawatt cogeneration
facility for Johnson & Johnson; and (c) provision of evaluation, engineering,
project development, and construction management services for the San Francisco
Public Utilities Commission, Pacific Gas & Electric Company, Southern California
Edison, and Long Island Power Authority for self generation and alternative
generation projects and a wide range of conservation and efficiency projects.
Over the past five years, we have completed more than 90 energy-related projects
ranging from basic life safety standby systems to complete utility grade peaking
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.
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We believe that our electrical and mechanical construction services,
facilities services and energy services activities are complementary, permitting
us to offer customers a comprehensive package of services. The ability to offer
construction services, facilities services and energy 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 electrical and mechanical 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 electrical and mechanical 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 electrical
and mechanical construction services. Competitive factors in the electrical and
mechanical 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., CB Richard Ellis Group, Inc., Jones
Lang LaSalle, ABM Facility Services and Linc Facility Services, LLC are engaged
in this field, as are large original equipment manufacturers such as Carrier
Corp. and Trane Air Conditioning. The key competitive factors in the facilities
services business include price, service, quality, technical expertise,
geographic scope and the availability of qualified personnel and managers. 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 27,000 people, approximately 69% of whom
are represented by various unions pursuant to more than 400 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 backlog as of December 31, 2006 of approximately $3.50 billion,
compared with backlog of approximately $2.76 billion as of December 31, 2005.
Backlog is not a term recognized under United States generally accepted
accounting principles; 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.
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, which includes guidelines regarding related party transactions, a
Code of Ethics for our 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.
4
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 06851-1060, 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 and market conditions 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 Financial Condition and Results of Operations" 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, economic downturns in the past have led to
increased bankruptcies and pricing pressures. These factors contribute to the
delay and cancellation of projects, especially with respect to more profitable
private sector work, and impact our operations and ability to continue to grow
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 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 6,000 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 necessary 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 profitability.
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.
5
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 at 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
rebid;
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; and
o increase the number of projects performed for existing customers.
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
grow and 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 many 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 clean-up 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 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.
6
OPPORTUNITIES WITHIN THE GOVERNMENT SECTOR COULD LEAD 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 are to be successful in being awarded additional government
contracts, a significant amount of costs could be required before any revenues
are 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 are
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. Government
contracts are also subject to renegotiation of profit, termination by the
government prior to the expiration of the term and non-renewal by the
government.
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 have in the last few years become more difficult
as a result of significant losses incurred by many surety companies, both in the
construction industry as well as in certain large corporate bankruptcies.
Consequently, less overall bonding capacity is available in the market than in
the past, and surety bonds 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 letters 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 accrued expenses and
liabilities" and "Other long-term obligations." 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 profitablilty could be adversely affected.
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 No. 141, "Business Combinations" 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. FASB Statement No. 142, "Goodwill
and Other Intangible Assets" ("Statement 142") 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. Statement 142 also provides specific guidance for testing goodwill and
other non-amortized intangible assets for impairment. Statement 142 requires
management to make certain esti-
7
mates 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 THE MAJORITY OF OUR CONSTRUCTION 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 Application of Critical Accounting Policies in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations. 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 US, OR A SUBSTANTIAL INTEREST IN US, 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 our 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 our
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
our 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
Our operations 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
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 8/14/11
825 Howe Road
Martinez, California (c) ..................... 109,800 12/31/12
8670 Younger Creek Drive
Sacramento, California (a) ................... 54,135 1/13/12
9505 and 9525 Chesapeake Drive
San Diego, California (c) .................... 25,124 12/31/11
4405 and 4420 Race Street
Denver, Colorado (b) ......................... 31,340 9/30/16
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 3/30/12
3100 Woodcreek Drive
Downers Grove, Illinois (c) .................. 55,551 7/31/17
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
2655 Garfield Road
Highland, Indiana (c) ........................ 45,816 6/30/11
3100 Brinkerhoff Road
Kansas City, Kansas (b) ...................... 42,836 11/30/07
2118 W. Harry
Wichita, Kansas (b) .......................... 25,600 8/31/07
9
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
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
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) ...................... 30,000 7/31/11
2900 Newpark Drive
Barberton, Ohio (b) .......................... 88,131 9/30/13
10,14,15,17 and 21 West Voorhees Street
Cincinnati, Ohio (a) ......................... 34,189 9/30/11
3976 Southern Avenue
Cincinnati, 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 (a) ....................... 36,000 8/28/07
5550 Airline Drive
Houston, Texas (b) ........................... 78,483 12/31/09
512 Norwood Drive
Houston, Texas (b) ........................... 28,000 12/31/09
515 Norwood Drive
Houston, Texas (b) ........................... 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ..................... 120,904 12/31/07
320 23rd Street
Arlington, Virginia (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
6950 Gisholt Drive
Madison, Wisconsin (b) ....................... 32,000 5/30/09
400 Parkdale Avenue N
Hamilton, Ontario, Canada (d) ................ 48,826 5/24/11
10
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 and 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 investigating, among other
things, public corruption and fraud in the use of minority and woman-owned
business enterprises. On April 26, 2004, Poole & Kent was identified as a target
of that investigation. Poole & Kent has cooperated with investigators from the
time it first learned of the investigation, has responded to various subpoenas
and requests for documents and other information, and, in the course of its
cooperation with investigators, has waived its attorney client privilege and
other client/lawyer confidentiality protections. In connection with such
investigation, on September 6, 2005, a former employee of Poole & Kent and his
wife pled guilty to federal mail fraud charges that they used a fraudulent
woman's owned business enterprise ("WBE") in order to enrich themselves, to help
Poole & Kent qualify for certain public construction projects and to corrupt a
former Maryland state senator. The former employee also pled guilty to filing a
false federal personal income tax return as a result of his failure to report on
his federal income tax return the value of free work that was done at his home
by Poole & Kent. On October 17, 2005, the grand jury returned an indictment
charging W. David Stoffregen ("Stoffregen"), the former President and Chief
Executive Officer of Poole & Kent, and a former Maryland state senator and his
wife with racketeering, mail fraud and related offenses, related to the
fraudulent WBE and corruption schemes. On October 26, 2005, a former Poole &
Kent project manager pled guilty to making false statements to federal
investigators during the grand jury investigation. More recently, on October 20,
2006, Stoffregen's former administrative assistant pled guilty to a charge of
misprision of a felony for deliberately withholding from investigators and the
grand jury a scheme by Stoffregen to defraud Poole & Kent. On December 4, 2006,
Stoffregen entered a plea of guilty to racketeering conspiracy, mail fraud and
tax charges, related to the fraudulent WBE scheme, his efforts to corrupt the
Maryland state senator and his defrauding of Poole & Kent. Poole & Kent had
terminated Stoffregen prior to his indictment in October 2005 because of his
refusal to cooperate with federal investigators.
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
electrical and mechanical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $77.3 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 $22.7 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
A civil action (the "First Anti-Trust Action") is pending 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 from at least 1996 through 2002, conspired
to prevent competition and to monopolize the market for telecommunications
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 $50.0 million after
trebling plus attorney's fees and unspecified compensatory and punitive damages
on their common law claims. However, plaintiffs' damages expert has stated in
his pre-trial deposition that he estimates plaintiffs' total damages of $8.7
million before trebling. Forest has denied the allegations of wrongdoing set
forth in the complaint, and pre-trial discovery has been completed. No trial
date has been set by the Court. Defendants are scheduled to move for summary
judgment dismissing all claims in February 2007. 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.
Another civil action (the "Second Anti-Trust Action") is pending against
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 a
competitor, who is one of the plaintiffs in the First Anti-Trust Action
described above, and whose employees are not members of the IBEW. The Second
Anti-Trust Action alleges, among other things, that Forest, six other electrical
contractors (four of whom were named as defendants in the First Anti-Trust
Action) and the IBEW conspired from at least January 2003 to prevent competition
in the market for telecommunications wiring services in the New York City area
thereby excluding plaintiffs from wiring jobs in that market. Plaintiff alleges
that it lost profits as a result of the concerted activity and seeks an
undetermined amount of damages for its anti-trust claims, which it seeks to have
trebled, plus attorneys' fees and alleges $30.0 million in compensatory damages
and unspecified punitive damages for its common law claims. Forest has not yet
answered the complaint.
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 any significant liabilities will result.
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,
2006.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 60; 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 42; 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 67 ; 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.
MARK A. POMPA, Age 42; Executive Vice President and Chief Financial
Officer of the Company since April 3, 2006. From June 2003 to April 2, 2006, Mr.
Pompa was Senior Vice President - Chief Accounting Officer of the Company, and
from June 2003 to January 2007, Mr. Pompa was also Treasurer of the Company.
From September 1994 to June 2003, Mr. Pompa was Vice President and Controller of
the Company.
R. KEVIN MATZ, Age 48; 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.
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 our 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:
2006 HIGH LOW
---- ---- ---
First Quarter ................................ $49.96 $33.75
Second Quarter ............................... $52.65 $42.22
Third Quarter ................................ $57.70 $42.66
Fourth Quarter ............................... $63.89 $53.26
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
HOLDERS. As of February 16, 2007, there were 106 stockholders of record
and, as of that date, we estimate there were approximately 10,900 beneficial
owners holding our common stock in nominee or "street" name.
DIVIDENDS. We did not pay dividends on our common stock during 2006 or
2005, 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, 2006, 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
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN A)
- --------------------- -------------------------- -------------------- -----------------------
Equity Compensation
Plans Approved
by Security Holders 1,355,189 $23.77 916,560(2)
Equity Compensation
Plans Not Approved
by Security Holders 1,911,084(1) $18.94 51,058(3)
---------- ----------
Total 3,266,273 $20.94 967,618
========== ==========
- ----------
(1) 34,666 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"), 1,785,866 shares relate to outstanding
options to purchase shares of our common stock which were granted to our
executive officers (the "Executive Options"), 24,000 shares relate to
outstanding options to purchase shares of our common stock which were
granted to our Directors (the "Director Options"), and 66,552 shares
relate to restricted common stock units ("RSUs") described below under
"Restricted Share Units."
(2) Includes 95,862 shares of our common stock available for future issuance
under our 1997 Non-Employee Directors' Non-Qualified Stock Option Plan
(the "1997 Directors' Plan"), 600 shares of our common stock available for
future issuance under our 2003 Management Stock Incentive Plan, 772,238
shares of our common stock available for future issuance under our 2005
Management Stock Incentive Plan and 47,860 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
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.
15
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.
180,000 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") and have since expired. 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.
1,205,866 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 have since expired, 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 275,800 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 231,400 of such Executive Options were
granted on January 2, 2002 with an exercise price of $23.18 per share, (iii) an
aggregate amount of 253,870 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. 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 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. Michael T. Yonker, upon his election to the
Board on October 25, 2002, which have an exercise price of $25.88 per share. All
of these options became exercisable commencing with the grant date and have a
term of ten years from the grant date.
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;
16
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 was 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 had to 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."
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 of the notes to
consolidated financial statements for additional information. The results of
operations for all years presented reflect discontinued operations accounting
due to the sale of a subsidiary in 2006 and in 2005.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Revenues ........................................... $5,021,036 $4,696,603 $4,698,126 $4,477,046 $3,943,504
Gross profit ....................................... 567,677 498,415 443,059 476,311 479,140
Operating income ................................... 118,044 80,895 42,222 47,926 115,974
Net income ......................................... $ 86,634 $ 60,042 $ 33,207 $ 20,621 $ 62,902
========== ========== ========== ========== ==========
Basic earnings per share - continuing operations ... $ 2.76 $ 1.96 $ 1.09 $ 0.70 $ 2.13
Basic earnings per share - discontinued operations . (0.02) (0.03) (0.00) (0.01) (0.01)
---------- ---------- ---------- ---------- ----------
$ 2.74 $ 1.93 $ 1.09 $ 0.69 $ 2.12
========== ========== ========== ========== ==========
Diluted earnings per share - continuing operations . $ 2.67 $ 1.92 $ 1.07 $ 0.68 $ 2.05
Diluted earnings per share - discontinued operations (0.02) (0.03) (0.00) (0.01) (0.01)
---------- ---------- ---------- ---------- ----------
$ 2.65 $ 1.89 $ 1.07 $ 0.67 $ 2.04
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Stockholders' equity (1) ........................... $ 710,309 $ 615,436 $ 562,361 $ 521,356 $ 489,870
Total assets ....................................... $2,089,023 $1,778,941 $1,817,969 $1,795,247 $1,758,491
Goodwill ........................................... $ 288,165 $ 283,412 $ 279,432 $ 277,994 $ 290,412
Notes payable ...................................... $ -- $ -- $ -- $ -- $ 21,815
Borrowings under working capital credit lines ...... $ -- $ -- $ 80,000 $ 139,400 $ 112,000
Other long-term debt, including current maturities . $ 332 $ 387 $ 476 $ 589 $ 1,015
Capital lease obligations .......................... $ 1,566 $ 1,570 $ 1,662 $ 339 $ 351
- ----------
(1) 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 FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are one of the largest electrical and mechanical 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 throughout the
United States, in Canada and in the United Kingdom. In the United Arab Emirates,
we carry on business through two joint ventures.
17
OVERVIEW
The following table presents selected financial data for the fiscal years
ended December 31, 2006, 2005 and 2004 (in millions, except percentages and
earnings per share):
2006 2005 2004
--------- --------- ---------
Revenues ................................................... $ 5,021.0 $ 4,696.6 $ 4,698.1
Revenues increase from prior year .......................... 6.9% -- 4.9%
Operating income ........................................... $ 118.0 $ 80.9 $ 42.2
Operating income as a percentage of revenues ............... 2.4% 1.7% 0.9%
Net income ................................................. $ 86.6 $ 60.0 $ 33.2
Diluted earnings per share ................................. $ 2.65 $ 1.89 $ 1.07
Cash flows provided by operating activities ................ $ 209.3 $ 145.7 $ 43.6
Our results of operations for 2006 benefited from a strong commercial
construction business cycle and a greater availability of generally higher gross
margin work in the United States than was the case in 2005. All of our operating
segments reported positive operating income for 2006 for the first time since
2002, exclusive of our Other international construction and facilities services
segment that consisted of two small joint ventures in the Middle East during
this time period. In particular, the commercial, hospitality, high-tech, food
and pharmaceutical sectors contributed to the general improvement in our United
States construction profits. Our United States facilities services segment
benefited from the addition of new site-based facilities services contracts and
strong demand for mobile services. Our United States mechanical construction and
facilities services segment also benefited from the absence of an $11.7 million
non-cash expense recorded in 2005 with respect to a civil action. Included in
net income from continuing operations were favorable income tax adjustments of
$16.1 million and $17.5 million for 2006 and 2005, respectively. The general
market improvements in results for 2006 were partially offset by fewer
transportation infrastructure and financial services projects, which had
produced higher operating margins in 2005 than in 2006 and had increased the
reported operating income as a percentage of revenues for 2005, and by larger
than usual losses on certain contracts particularly within the United States
electrical construction and facilities services segment. Additionally, our 2006
results, when compared to 2005, were negatively impacted by the absence of a
$5.6 million favorable insurance settlement, which primarily affected the United
States electrical construction and facilities services segment. 2006 results
also were negatively impacted by a $4.0 million expense, or $0.07 per basic and
diluted share after income tax, relating to the effect of the adoption of
Statement No. 123(R) "Share-Based Payment" ("Statement 123(R)") issued by the
Financial Accounting Standards Board ("FASB").
Cash flows provided by operating activities were $209.3 million for 2006,
compared to $145.7 million for 2005. Our 2006 year ending cash and cash
equivalents balance was $273.7 million compared to $103.8 million at the end of
2005. This improvement was primarily attributable to improved billing and
collection practices and settlement of certain large contract claims and
disputes. We continued to restructure parts of our business during 2006
resulting in $1.6 million of restructuring expense, which was primarily related
to the reduction of personnel and leased facilities in our United States
facilities services segment.
Our 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 United States and United Kingdom
commercial construction industry; and (f) reduced losses in our 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 that were 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 of uncertainty at the time if the
segment would have sufficient taxable income in the future to realize the income
tax benefit of such deferred tax assets. The 2004 results also included
favorable income tax adjustments of $13.9 million (see discussion below).
Results for 2005 were negatively impacted by a non-cash expense of $11.7 million
as a result of the UOSA Action.
We have share-based compensation plans and programs. With the adoption of
Statement 123(R) on January 1, 2006, all share-based payments to our employees
and non-employee directors, including grants of stock options, have been
recognized in the income statement based on their fair values utilizing the
modified prospective method of accounting. The impact of the adoption of
Statement 123(R) resulted in the recognition of $4.0 million of compensation
expense in 2006. As a result, on an after income tax basis, net income was
adversely impacted by $2.4 million, and basic and diluted earnings per share was
adversely impacted by $0.07. Approximately $1.2 million of compensation expense,
net of income taxes, will be recognized over the approximate 15 month remaining
vesting period for stock options outstanding at December 31, 2006. Prior to
January 1, 2006, we applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25") and related
interpretations in accounting for stock options. Accordingly,
18
no compensation expense had been recognized in the accompanying Consolidated
Statements of Operations for 2005 and 2004 as permitted by Opinion 25 in respect
of stock options vesting during those periods inasmuch as we granted stock
options at fair market value. Compensation awards for which the liabilities
fluctuate with changes in the market price of our common stock increased
incentive-based compensation expense by $2.8 million for 2006 compared to 2005.
A civil action ("the UOSA Action") was brought by a joint venture ("the
JV") between our subsidiary Poole and Kent Corporation ("Poole & Kent") and an
unrelated company against the Upper Occoquan Sewage Authority ("UOSA"), based on
a material breach by UOSA of a construction contract. As a result of a jury
decision on March 11, 2005 and subsequent rulings of the trial judge in the
action, it was determined that the JV is entitled to be paid approximately $18.0
million in connection with the UOSA project in addition to the amounts it has
already received from UOSA. UOSA has paid approximately $16.6 million of the
$18.0 million, but is seeking to have a determination of the trial court
reversed on appeal to the Virginia Supreme Court regarding its obligation to pay
the balance. There is no assurance that the Virginia Supreme Court will hear the
appeal or, if the appeal is heard, that it will be resolved in favor of the JV.
Inasmuch as the jury decision and the trial judge's subsequent ruling did not
reflect the amount sought by the JV following 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 a ruling
by the trial judge 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 another trial
between the JV and UOSA is scheduled to commence in September 2007 in which the
JV seeks damages in excess of $22.0 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 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.
OPERATING SEGMENTS
We have the following reportable segments which provide services
associated with the design, integration, installation, start-up, operation and
maintenance of various systems: (a) United States electrical construction and
facilities services (involving systems for electrical power transmission and
distribution; central plant heating and cooling; premises electrical and
lighting systems; low-voltage systems, such as fire alarm, security and process
control; voice and data communication; and roadway and transit lighting and
fiber optic lines); (b) United States mechanical construction and facilities
services (involving systems for heating, ventilation, air conditioning,
refrigeration and clean-room process ventilation; fire protection; plumbing,
process and high-purity piping; water and wastewater treatment); (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 maintenance and services; site-based operations and
maintenance services; facilities management; installation and support for
building systems; technical consulting and diagnostic services; small
modification and retrofit projects; and program development, management and
maintenance for energy systems, 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 in the Middle East). In August of 2004, we sold our interest in a
South African joint venture.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Our reportable segments reflect, for all years presented, discontinued
operations accounting due to the sale of one subsidiary in 2006 and one in 2005
and certain reclassifications of prior years amounts among the segments due to
changes in our internal reporting structure.
REVENUES
As described in more detail below, revenues for 2006 were $5.0 billion
compared to $4.7 billion for 2005 and 2004. The increased revenue for 2006
compared to 2005 was primarily attributable to a strong commercial construction
business cycle and to increased work for the hospitality, high-tech, food and
pharmaceutical sectors. Although our total revenues in 2005 and 2004 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 planned curtailment of work on certain types of public
sector and certain other longer-term projects by certain of our subsidiaries.
As of December 31, 2006, our backlog was $3.50 billion, an all-time high,
and as of December 31, 2005, backlog was $2.76 billion. This increase was
primarily attributable to the strong United States commercial and hospitality
construction market and continued sales efforts that have resulted in additional
site-based service contracts for our United States facilities services segment.
Backlog is not a term recognized under United States generally accepted
accounting principles; however, it is a common measurement used in our industry.
19
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 backlog are limited to only
12 months of revenues.
The following table presents our revenues by each of our operating
segments and the approximate percentages that each segment's revenues were of
total revenues for the years ended December 31, 2006, 2005 and 2004 (in
millions, except for percentages):
% OF % OF % OF
2006 TOTAL 2005 TOTAL 2004 TOTAL
-------- ----- -------- ----- -------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services $1,280.2 25% $1,224.6 26% $1,235.3 26%
United States mechanical construction and facilities services 1,820.9 36% 1,671.6 36% 1,778.3 38%
United States facilities services ........................... 960.7 19% 785.2 17% 725.2 15%
-------- -------- --------
Total United States operations .............................. 4,061.8 81% 3,681.4 78% 3,738.8 80%
Canada construction and facilities services ................. 287.8 6% 342.1 7% 280.8 6%
United Kingdom construction and facilities services ......... 671.4 13% 673.1 14% 678.5 14%
Other international construction and facilities services .... -- -- -- -- -- --
-------- -------- --------
Total worldwide operations .................................. $5,021.0 100% $4,696.6 100% $4,698.1 100%
======== ======== ========
Revenues of our United States electrical construction and facilities
services segment for 2006 increased $55.6 million compared to 2005. The increase
in revenues was primarily attributable to increased commercial work as a result
of a stronger commercial construction market and greater availability of
government project work. Revenues for 2005 decreased $10.7 million compared to
2004. This decrease in revenues was 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 of our United States mechanical construction and facilities
services segment for 2006 increased $149.3 million compared to 2005. The
increase in revenues was primarily attributable to increased commercial work as
a result of an overall stronger commercial construction market, including
greater availability of work in the hospitality, high-tech, food and
pharmaceutical sectors. Revenues for 2005 decreased $106.7 million compared to
2004. The revenues decrease was primarily attributable to a planned decrease in
activities of certain subsidiaries related to the reduction in bidding for
certain types of public sector projects and certain other long-term projects,
partially offset by increased water and 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.
United States facilities services revenues, which include those operations
that principally provide maintenance and consulting services, increased $175.5
million in 2006 compared to 2005. This increase was primarily related to an
increased number of site-based services contracts, the addition of a mobile
services company acquired in November 2005, that accounted for $64.3 million of
this increase in revenues in 2006, and greater demand in 2006 for mobile
services work. The site-based revenues increase was related to an increase in
the outsourcing of facilities services work, augmented by our own efforts to
pursue opportunities in the government and commercial sectors. The increase in
demand for mobile services was primarily due to the strong commercial
construction business cycle which resulted in an increase in our small project
work, and increased demand for maintenance caused by energy cost awareness.
Revenues in this segment increased by $60.0 million in 2005 compared to 2004.
This 2005 increase was primarily attributable to an increase 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 in the
summer of 2004 and increases in the number of site-based operations contracts as
a result of increased sales efforts.
Revenues of the Canada construction and facilities services segment
decreased $54.3 million in 2006 compared to 2005. The decrease in revenues
primarily reflected a reduction in awards to us of oil and gas industry work and
a more selective bidding process on our part, offset by $18.2 million of
additional revenues related to changes in the rate of exchange of Canadian
dollars for United States dollars due to strengthening of the Canadian dollar.
Revenues increased by $61.3 million for 2005 compared to 2004. This increase in
revenues was 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 increase 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.
United Kingdom construction and facilities services revenues decreased
$1.7 million in 2006 compared to 2005, principally due to a refocus of our
facilities services strategy. However, revenues from our commercial and
transportation infrastructure construction businesses increased due to an
improvement in the commercial construction market and significant transportation
projects awarded to us. The decrease in revenues would have been greater except
for $9.5 million of additional revenues related to the strengthening of
20
the British pound as compared to the United States dollar. Revenues decreased
$5.4 million for 2005 compared to 2004, principally due to a $7.3 million
decrease related to the weakening of the British pound as compared to the United
States dollar, partially offset by increased small discretionary project work.
Other international construction and facilities services activities
consist of operations primarily in the Middle East. Until August 2004, when it
was sold, we also had an interest in a joint venture in South Africa. During
each of 2006, 2005 and 2004, all of the projects in these markets were performed
by joint ventures that were accounted for under the equity method of accounting.
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, 2006, 2005 and 2004
(in millions, except for percentages):
2006 2005 2004
-------- -------- --------
Cost of sales .................. $4,453.4 $4,198.2 $4,255.1
Gross profit ................... $ 567.7 $ 498.4 $ 443.1
Gross profit margin ............ 11.3% 10.6% 9.4%
Our gross profit (revenues less cost of sales) increased by $69.3 million
for 2006 compared to 2005. Gross profit margin (gross profit as a percentage of
revenues) was 11.3% for 2006 compared to 10.6% for 2005. The increase in gross
profit margin was primarily due to: (a) generally improved performance on United
States mechanical construction and facilities services contracts for commercial,
hospitality, high-tech, food and pharmaceutical sector work; (b) the increased
availability of generally higher margin work in the United States; (c) increases
in the number of site-based contracts in the United States facilities services
segment; (d) increased demand for mobile services in the United States; (e) the
addition of a mobile services company acquired in November 2005; (f)
improvements in Canada construction and facilities services profitability; and
(g) the absence of an $11.7 million non-cash expense recorded in 2005 in
connection with the UOSA Action. These improvements were partially offset by the
following items in the United States electrical construction and facilities
services segment: (a) unusually large losses on certain 2006 contracts, (b)
reduced profits from transportation infrastructure and financial services
projects compared to 2005; and (c) the absence of $4.5 million from a favorable
insurance settlement recorded in 2005.
Gross profit increased $55.4 million for 2005 compared to 2004. Gross
profit margin (gross profit as a percentage of revenues) was 10.6% in 2005
compared to 9.4% in 2004. This increase in gross profit was primarily
attributable to: (a) improvements in United States and United Kingdom
construction contract performance compared to the prior year primarily relating
to an increase in generally more profitable commercial construction work; (b)
the greater availability of generally higher margin small discretionary project
work (including mobile services work); (c) a reduction in contracts taken for
certain types of public sector work, which is generally less profitable; (d) an
improvement in gross profit in the Canada construction and facilities services
segment; and (e) a favorable settlement of an insurance coverage related dispute
of approximately $5.6 million. The resulting improvement in gross profit was
partially offset by the results of the UOSA Action which gave rise to an $11.7
million non-cash expense during 2005.
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, 2006, 2005 and 2004 (in millions, except for
percentages):
2006 2005 2004
------- ------- -------
Selling, general and administrative expenses ........................... $ 448.0 $ 415.8 $ 395.4
Selling, general and administrative expenses as a percentage of revenues 8.9% 8.9% 8.4%
Our selling, general and administrative expenses for 2006 increased $32.2
million to $448.0 million compared to $415.8 million for 2005. Selling, general
and administrative expenses as a percentage of revenues were 8.9% for 2006 and
2005. The increase in expenses for 2006 compared to 2005 was primarily related
to: (a) increased administration and sales expenses required to support
increased revenues; (b) increased compensation expense attributable to improved
operating performance; (c) $4.0 million of compensation expense resulting from
the adoption of Statement 123(R) on January 1, 2006; and (d) compensation awards
for which the liabilities fluctuate with changes in the market price of our
common stock, which increased compensation expense by $2.8 million for 2006
compared to 2005.
Our selling, general and administrative expenses for 2005 increased $20.4
million to $415.8 million compared to $395.4 million for 2004. Selling, general
and administrative expenses as a percentage of revenues were 8.9% 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.
21
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance
obligations and reduction of leased facilities, were $1.6 million, $1.8 million
and $8.3 million for 2006, 2005 and 2004, respectively. As of December 31, 2006
and 2005, the balance of these obligations was $0.2 million at each date,
respectively. The December 31, 2005 obligation was paid during 2006.
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. There were no other sales of assets in 2006, 2005 or 2004 other
than the disposal of property, plant and equipment in the normal course of
business.
OPERATING INCOME
The following table presents our operating income (gross profit less
selling, general and administrative expenses and restructuring expenses plus
gain on sale of assets) by segment, and each segment's operating income as a
percentage of such segment's revenues, for the years ended December 31, 2006,
2005 and 2004 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2006 REVENUES 2005 REVENUES 2004 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services $ 46.7 3.6% $ 79.8 6.5% $ 81.2 6.6%
United States mechanical construction and facilities services 82.1 4.5% 20.2 1.2% (1.5) --
United States facilities services ........................... 39.0 4.1% 26.3 3.3% 14.4 2.0%
------ ------ ------
Total United States operations .............................. 167.8 4.1% 126.3 3.4% 94.1 2.5%
Canada construction and facilities services ................. 1.0 0.4% (7.9) -- (11.9) --
United Kingdom construction and facilities services ......... 6.8 1.0% 7.5 1.1% 0.0 --
Other international construction and facilities services .... (0.1) -- 0.0 -- 0.5 --
Corporate administration .................................... (55.9) -- (43.2) -- (35.0) --
Restructuring expense ....................................... (1.6) -- (1.8) -- (8.3) --
Gain on sale of assets ...................................... -- -- -- -- 2.8 --
------ ------ ------
Total worldwide operations .................................. 118.0 2.4% 80.9 1.7% 42.2 0.9%
Other corporate items:
Interest expense ............................................ (2.3) (8.3) (8.9)
Interest income ............................................. 6.2 2.7 1.9
Gain on sale of equity investment ........................... -- -- 1.8
Minority interest ........................................... (4.2) (4.5) (3.8)
Income from continuing operations before income taxes ....... $117.7 $ 70.8 $ 33.3
As described in more detail below, our operating income was $118.0 million
for 2006, $80.9 million for 2005, and $42.2 million for 2004. The $37.1 million
increase in 2006 operating income compared to 2005 was primarily due to: (a)
generally improved performance on United States mechanical construction and
facilities services contracts for commercial, hospitality, high-tech, food and
pharmaceutical sector work; (b) the increased availability of generally higher
margin work in the United States; (c) the absence of an $11.7 million non-cash
expense recorded in 2005 relating to the UOSA Action; (d) an increase in the
number of site-based contracts in the United States facilities services segment;
(e) the addition of a mobile services company acquired in November 2005; (f)
increased demand for mobile services in the United States; and (g) improvements
in Canada construction and facilities services profitability. These improvements
were partially offset by the following items in the United States electrical
construction and facilities services segment: (a) unusually large losses on
certain 2006 contracts; (b) reduced profits from transportation infrastructure
and financial services projects compared to 2005; and (c) the absence of a $4.5
million favorable insurance settlement recorded in 2005. Additionally, selling,
general and administrative expenses increased for 2006 compared to 2005
primarily due to: (a) increased administration and sales expense required to
support increased revenues; (b) increased compensation expense related to
improved operating performance; and (c) $4.0 million of compensation expense
resulting from the adoption of Statement 123(R) on January 1, 2006.
2005 operating income increased $38.7 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) generally improved economic conditions,
particularly for the United States and United Kingdom commercial construction
22
industries; and (e) reduced losses in the Canada construction and facilities
services segment. In addition, as a consequence of effective risk management and
safety programs, operating income was favorably impacted by reductions of $3.6
million and $9.8 million in 2005 and 2004, respectively, of insurance
liabilities previously established for insurance exposures.
Our United States electrical construction and facilities services
operating income decreased by $33.1 million in 2006 compared to 2005. The
decrease was primarily due to: (a) unusually large losses on certain contracts;
(b) reduced profits due to a further decrease in generally more profitable work
related to transportation infrastructure and financial services projects; and
(c) the absence of $4.5 million from a favorable insurance settlement recorded
in 2005. This reduction in operating income was partially offset by profits
earned on commercial, high-tech and hospitality projects. Operating income was
$79.8 million for 2005, a $1.4 million decrease compared to operating income of
$81.2 million for 2004. This 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 2005 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 as a result of reduced profitability.
Our United States mechanical construction and facilities services
operating income for 2006 was $82.1 million, a $61.9 million improvement
compared to operating income of $20.2 million for 2005. This improvement was
primarily attributable to generally improved performance and an increase in the
number of contracts for commercial, hospitality, high-tech, food and
pharmaceutical sector work, the increased availability of generally higher
margin work in the United States, and the absence of an $11.7 million non-cash
expense recorded in 2005 related to the UOSA Action. The improvement was
partially offset by the absence of a $1.1 million favorable insurance settlement
recorded in 2005. Operating income for 2005 was $20.2 million, a $21.7 million
improvement, when compared to an operating loss of $1.5 million in 2004. The
2005 operating income figure reflected an approximately $11.7 million reduction
in gross profit as a result of the write-off of unrecovered costs related to the
UOSA Action when compared to 2004. Notwithstanding the impact of the UOSA
Action, this segment had generally improved results for 2005 as a consequence of
(a) improved construction contract performance 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 the summer of
2004. In addition, operating income in this segment for 2005 included
approximately $1.1 million of income resulting from the settlement of the
insurance coverage related dispute referred to earlier. The 2005 improvement in
performance was partially attributable to a planned curtailment of certain
public sector work and certain other longer-term contracts of certain of our
subsidiaries, which work has generally been less profitable than private sector
work. Increased selling, general and administrative expenses related to
increased incentive compensation expense due to this segment's improved
profitability was partially offset by personnel reductions during 2005, which
reductions also contributed to the improvement in operating income.
Our United States facilities services segment operating income increased
by $12.7 million for 2006 compared to 2005. The increase was primarily due to
the increase in the number of site-based contracts, improved contract
performance under existing contracts, increased demand for mobile services, the
addition of a mobile services company purchased in November 2005 and the
increased availability of generally higher margin work. Operating income for
2005 increased by $11.9 million compared to 2004. During 2005, operating income
compared to 2004 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 the summer of 2004. This increase in 2005 operating income was
partially offset by increased selling, general and administrative expenses for
2005 related to increased incentive compensation as a result of improved
financial performance. 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.
Operating income for our Canada construction and facilities services
segment for 2006 was $1.0 million, an $8.9 million improvement compared to an
operating loss of $7.9 million for 2005. This improvement was attributable to
our improved performance on hospital, mining and auto manufacturing construction
contracts and the absence of a loss recorded in 2005 associated with a large
power transmission project, partially offset by costs associated with
investments in certain facilities and staff to support future business. The
impact of the rate of exchange from Canadian dollars to United States dollars
was not material to operating income reported for 2006 compared to 2005. The
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.
Our United Kingdom construction and facilities services segment operating
income for 2006 was $6.8 million compared to $7.5 million for 2005. The decrease
in operating income was primarily due to reduced income from rail projects as a
result of lower gross profit than for 2005, partially offset by improvement in
profits from facilities services and commercial construction work and $0.6
million of additional operating income related to the rate of exchange of
British pounds for United States dollars, due to strengthening of the British
pound as compared to the United States dollar. Operating income for 2005 was
$7.5 million compared to breakeven in 2004. This improve-
23
ment in 2005 operating income over 2004 results 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.
Other international construction and facilities services operating income
was approximately breakeven for 2006 and 2005 compared to operating income of
$0.5 million for 2004.
Our corporate administration expenses for 2006 were $55.9 million, a $12.7
million increase compared to 2005. The increase in expense was primarily due to
$4.0 million of compensation expense as a result of the adoption of Statement
123(R) on January 1, 2006, $3.5 million of compensation expense related to
increased compensation awards based on achievement of earnings, $1.5 million of
expense related to share-based compensation awards and increases in
incentive-based compensation expense of $0.6 million due to deferred
compensation awards for which the liabilities fluctuate with changes in the
market price of our common stock. Corporate administration expense for 2005 was
$43.2 million compared to $35.0 million for 2004. This increase in expense was
primarily due to increased incentive compensation awards, and to a lesser
extent, increased professional fees and the absence of a non-recurring benefit
attributable to expense reimbursement that occurred in 2004.
NON-OPERATING ITEMS
Interest expense was $2.3 million for 2006 compared to $8.3 million for
2005 due to a reduction in borrowing levels. Interest expense was $8.9 million
for 2004. Reduced borrowings under the revolving credit facility for 2005,
compared to 2004, was partially offset by the impact of increases in interest
rates during 2005 and 2004.
Interest income for 2006 increased $3.5 million compared to 2005 primarily
due to increased cash available for investment and higher rates of return on
investments. Interest income increased by $0.8 million for 2005 compared to 2004
due primarily to interest earned on cash provided by the United Kingdom
construction 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 our joint
venture partners who either have a minority-ownership interest in joint ventures
or are not at risk for the majority of losses of the joint venture, which joint
ventures have been accounted for by us using the consolidation method of
accounting.
The 2006 income tax provision was comprised of: (a) $46.6 million of
income tax provision in respect of pre-tax earnings of $117.7 million; (b) $8.4
million of income tax benefit related to the reversal of a valuation allowance
based on the determination that sufficient taxable income existed in the past
and will continue in the future to realize the related United Kingdom tax
assets; (c) a $3.9 million income tax benefit related to the realization of net
operating losses for which valuation allowances had previously been recorded in
Canada; (d) an income tax benefit of $1.9 million for income tax reserves no
longer required based on a current analysis of probable exposures; and (e)
income tax benefits related to items aggregating approximately $1.9 million
principally due to the deductibility of certain compensation arrangements for
income tax purposes. For 2005, the income tax provision was $9.6 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) $27.1 million of income tax
provision in respect of pre-tax earnings of $70.8 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 was uncertainty as to whether the segment would 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 approximately $0.01
million for 2004 was comprised of: (a) $13.9 million of income tax provision on
pre-tax earnings of $33.3 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 was
uncertainty of sufficient 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 2006, 2005 and 2004 was recorded at an effective income tax
rate of approximately 40%, 38% and 42%, respectively, excluding the items
discussed above.
On January 31, 2006, we sold a subsidiary that had been part of our United
States mechanical construction and facilities services segment. On September 30,
2005, we sold a subsidiary that had been part of our United States facilities
services segment. Results of these operations for all periods presented in our
consolidated financial statements reflect discontinued operations accounting.
Included in the results of discontinued operations for the year ended December
31, 2006 was a loss of $0.6 million (net of income taxes) which relates to the
January 2006 sale of the subsidiary that had been part of our United States
mechanical construction and facilities services segment. Included in the $1.1
million loss (net of income taxes) from discontinued operations for the year
ended December 31, 2005 is a loss of $1.0 million (net of
24
income taxes) which relates to the September 2005 sale of a subsidiary that had
been part of our United States facilities services segment. An aggregate of $1.7
million and $4.4 million in cash and notes was received as consideration for
both of these sales in 2006 and 2005, respectively. As of December 31, 2006 and
2005, the notes in respect of each year had been paid in full. We will not have
any future involvement with these subsidiaries.
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, 2006 and 2005 (in millions):
2006 2005
------- -------
Net cash provided by operating activities .................. $ 209.3 $ 145.7
Net cash used in investing activities ...................... $ (64.4) $ (18.5)
Net cash provided by (used in) financing activities ........ $ 16.5 $ (78.5)
Effect of exchange rate changes on cash and cash equivalents $ 8.5 $ (4.0)
Our consolidated cash and cash equivalents balance increased by
approximately $170.0 million to $273.7 million at December 31, 2006 from $103.8
million at December 31, 2005. The increase in net cash provided by operating
activities for 2006 compared to 2005 was primarily due to an increase in working
capital as a result of an increase in net over-billings related to improved
billing and collection practices and settlement of certain large contract claims
and disputes. Net cash used in investing activities of $64.4 million for 2006
increased $45.9 million compared to $18.5 million for 2005 primarily due to an
increase in the purchase of property, plant and equipment of $7.3 million, of
which $3.9 million in purchases of equipment related to the start-up of certain
site-based contracts in our United States facilities services segment, a $30.0
million increase in payments for acquisitions of businesses and earn-out
agreements and an increase in net disbursements from other investing activities,
partially offset by $1.7 million of proceeds from the sale of discontinued
operations and sale of assets. Net cash provided by financing activities of
$16.5 million for 2006 increased $95.0 million compared to net cash used in
financing activities of $78.5 million for 2005. This increase was primarily
attributable to the absence of net borrowings under the working capital credit
line for 2006 compared to borrowings needed in 2005, to an increase in the
proceeds from the exercise of stock options of $8.7 million and to the excess
tax benefit from share-based compensation of $6.8 million for 2006.
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 ......................... $ 0.3 $ 0.1 $ 0.1 $ 0.1 $ --
Capital lease obligations .................... 1.6 0.7 0.8 0.1 --
Operating leases ............................. 175.2 43.7 65.6 36.9 29.0
Open purchase obligations (1) ................ 774.1 665.6 103.3 5.2 --
Other long-term obligations, including current
portion (2) ................................ 171.8 23.5 116.8 14.0 17.5
-------- -------- -------- -------- --------
Total Contractual Obligations ................ $1,123.0 $ 733.6 $ 286.6 $ 56.3 $ 46.5
======== ======== ======== ======== ========
AMOUNT OF COMMITMENT EXPIRATIONS BY PERIOD
--------------------------------------------------------------------
TOTAL LESS
OTHER COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
---------------- --------- -------- -------- -------- --------
Revolving Credit Facility (3) ................ $ -- $ -- $ -- $ -- $ --
Letters of credit ............................ 55.6 -- 55.6 -- --
Guarantees ................................... 25.0 -- -- -- 25.0
-------- -------- -------- -------- --------
Total Commercial Commitments ................. $ 80.6 $ -- $ 55.6 $ -- $ 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 and a pension plan
liability, 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 our consolidated balance
sheet because of our intent and ability to repay the amounts on a
short-term basis. As of December 31, 2006, there were no borrowings
outstanding.
25
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 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. 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 Nesbitt
from time to time (8.25% at December 31, 2006) plus 0.0% to 0.5%, based on
certain financial tests or (2) United States dollar LIBOR (5.35% at December 31,
2006) plus 1.0% to 2.25%, based on certain financial tests. The interest rates
in effect at December 31, 2006 were 8.25% and 6.35% 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 for 2005. As of December 31,
2006 and 2005, we had approximately $55.6 million and $53.3 million of letters
of credit outstanding, respectively. There were no borrowings under the 2005
Revolving Credit Facility as of December 31, 2006 and 2005.
Our Canadian subsidiary, Comstock Canada Ltd., has 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 6.0% at December 31, 2006. There were no
borrowings outstanding under this credit agreement at December 31, 2006 or 2005.
One of our subsidiaries has guaranteed $25.0 million of borrowings 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 in borrowings.
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, 2006, based on our percentage-of-completion of our
projects covered by Surety Bonds, our aggregate estimated exposure, had there
been defaults on all our existing contractual obligations, would have been
approximately $1.0 billion. The Surety Bonds are issued by Surety Companies in
return for premiums, which vary depending on the size and type of bond.
In recent years there has been a reduction in the aggregate surety 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. If we experience
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.
26
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 that we experienced from 2001 through 2004 in the commercial
construction industry, there were typically fewer small discretionary projects
from the private sector, and companies like us 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 $264.2 million and $144.6 million as of December 31, 2006 and
2005, 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.
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 $77.0
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, 2006, we utilized approximately $51.6 million of
letters of credit issued pursuant to our 2005 Revolving Credit Facility as
collateral for insurance obligations.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2006, we adopted FASB Statement No. 123(R), "Share-Based
Payment" ("Statement 123(R)"). Statement 123(R) is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25")
and amends FASB Statement No. 95, "Statement of Cash Flows". With the adoption
of Statement 123(R), all share-based payments to our employees and non-employee
directors, including grants of stock options, have been recognized in the income
statement based on their fair values, utilizing the modified prospective method
of accounting.
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Post Retirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158").
Statement 158 requires that a company recognize the overfunded or underfunded
status of its defined benefit post retirement plans (other than multi-employer
plans) as an asset or liability in its statement of financial position and that
it recognize changes in the funded status in the year in which the changes occur
through other comprehensive income. Statement 158 also requires the measurement
of the fair value of plan assets and benefit obligations as of the date of the
fiscal year-end statement of financial position and to provide additional
disclosures. On December 31, 2006, we adopted the recognition and disclosure
provisions of Statement 158. The effect of adopting Statement 158 on our
financial position at December 31, 2006 has been included in the accompanying
consolidated financial statements and increased Accumulated other comprehensive
loss by $31.0 million, net of a deferred tax benefit. Statement 158 did not have
an effect on our financial position as of December 31, 2005 or 2004. We measure
the fair value of plan assets and benefit obligations on December 31 of each
year. See Note J - Retirement Plans of the notes to consolidated financial
statements for more information on the impact of adoption and the related
disclosures.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("FIN 48"), to create a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for
income taxes, by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and
27
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We will adopt FIN
48 as of January 1, 2007, as required. The impact upon adoption is expected to
result in an immaterial reduction of retained earnings and an increase in the
accrual for income taxes. We will disclose the cumulative effect of the change
in retained earnings in the consolidated financial statements in the first
quarter of 2007.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("Statement 157"). Statement 157 provides guidance for using fair
value to measure assets and liabilities. The statement applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The statement does not expand the use of fair value in any new
circumstances. Statement 157 is effective for our financial statements beginning
with the first quarter of 2008. Early adoption is permitted. We have not
determined the effect, if any, the adoption of Statement 157 will have on our
financial position and results of operations.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Statement 159 is effective for our financial statements beginning with
the first quarter of 2008. We have not determined the effect, if any, the
adoption of Statement 159 will have on our financial position and results of
operations.
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. Financial Statements and Supplementary
Data of this Form 10-K. 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 our ability to bill unbilled revenues and
collect amounts after billing. No profit is recognized in connection with claim
amounts. As of December 31, 2006 and 2005, costs and estimated earnings in
excess of billings on uncompleted contracts included unbilled revenues for
unapproved change orders of approximately $48.2 million and $56.3 million,
respectively, and claims of approximately $22.4 million and $36.6 million,
respectively. In addition, accounts receivable as of December 31, 2006 and 2005
include claims of approximately $6.7 million and $4.7 million, respectively,
plus unapproved change orders and contractually billed amounts related to such
contracts of approximately $76.9 million and $76.2 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 facilities 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 facilities
28
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 likelihood of
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
2006, 2005 and 2004 amounted to approximately $1.1 million, $8.5 million and
$7.0 million, respectively. At December 31, 2006 and 2005, our accounts
receivable of $1,184.4 million and $1,046.4 million, respectively, included
allowances for doubtful accounts of $25.0 million and $30.0 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 loss payment 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 $28.2 million and $12.3 million at December 31, 2006
and 2005, 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, 2006
and 2005, the total valuation allowance on net deferred tax assets was
approximately $12.9 million and $18.7 million, respectively. The primary reason
for the decrease in the valuation allowance for 2006 was related to an $8.4
million reversal of a United Kingdom valuation allowance based on the
determination that sufficient taxable income existed in the past and will
continue in the future to realize the related United Kingdom tax assets.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
As of December 31, 2006, we had goodwill and net identifiable intangible
assets (primarily the market value of our backlog, customer relationships,
non-competition agreements and trademarks and trade names) of $288.2 million and
$38.3 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. FASB Statement No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142") requires goodwill and other intangible assets that
have indefinite useful lives not be amortized, but instead must be tested at
least annually for impairment (which we test each October 1), and be written
down when impaired, rather than amortized as previous standards required.
Furthermore, Statement 142 requires that identifiable intangible assets with
finite lives be amortized over their useful lives. Changes in strategy and/or
market conditions may result in adjustments to recorded intangible asset
balances. As of December 31, 2006, 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 Statement 142
and FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("Statement 144"). See Note B - Summary of Significant
Accounting Policies of the notes to consolidated financial statements for
additional discussion of the provisions of Statement 142 and Statement 144.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used any material derivative financial instruments during the
years ended December 31, 2006 and 2005, including trading or speculating on
changes in interest rates or commodity prices of materials used in our business.
29
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 borrowings are not affected by
changes in market interest rates. As of December 31, 2006, there were no
borrowings outstanding under the facility. For further information on borrowing
rates, refer to the Liquidity and Capital Resources discussion in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
We are also exposed to construction market risk and its potential related
impact on accounts receivable or costs and estimated earnings in excess of
billings on uncompleted contracts. The amounts recorded may be at risk if our
customers' ability to pay these obligations are negatively impacted by economic
conditions. We continually monitor the creditworthiness 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 Application of Critical Accounting Policies in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 (loss), 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.
In addition, 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 6,000 vehicles. While we believe we can increase our prices to
adjust for some price increases in commodities, there can be no assurance that
continued price increases of commodities, if they were to occur, would be
recoverable.
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,
--------------------------
2006 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ......................................................................... $ 273,735 $ 103,785
Accounts receivable, less allowance for doubtful accounts of $25,021 and $29,973, respectively .... 1,184,418 1,046,380
Costs and estimated earnings in excess of billings on uncompleted contracts ....................... 147,848 185,634
Inventories ....................................................................................... 18,015 10,175
Prepaid expenses and other ........................................................................ 38,397 43,829
----------- -----------
Total current assets ............................................................................ 1,662,413 1,389,803
Investments, notes and other long-term receivables .................................................. 29,630 28,659
Property, plant and equipment, net .................................................................. 52,780 46,443
Goodwill ............................................................................................ 288,165 283,412
Identifiable intangible assets, less accumulated amortization of $14,460 and $10,209, respectively .. 38,251 16,990
Other assets ........................................................................................ 17,784 13,634
----------- -----------
Total assets ........................................................................................ $ 2,089,023 $ 1,778,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ...................................................... $ -- $ --
Current maturities of long-term debt and capital lease obligations ................................ 659 551
Accounts payable .................................................................................. 496,407 452,709
Billings in excess of costs and estimated earnings on uncompleted contracts ....................... 412,069 330,235
Accrued payroll and benefits ...................................................................... 177,490 154,276
Other accrued expenses and liabilities ............................................................ 121,723 107,545
----------- -----------
Total current liabilities ....................................................................... 1,208,348 1,045,316
Long-term debt and capital lease obligations ........................................................ 1,239 1,406
Other long-term obligations ......................................................................... 169,127 116,783
----------- -----------
Total liabilities ................................................................................... 1,378,714 1,163,505
----------- -----------
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, 33,648,036 and 33,266,154 shares issued,
respectively ...................................................................................... 336 333
Capital surplus ..................................................................................... 355,242 325,232
Accumulated other comprehensive loss ................................................................ (28,189) (5,370)
Retained earnings ................................................................................... 399,804 313,170
Treasury stock, at cost 1,820,046 and 2,162,388 shares, respectively ................................ (16,884) (17,929)
----------- -----------
Total stockholders' equity .......................................................................... 710,309 615,436
----------- -----------
Total liabilities and stockholders' equity .......................................................... $ 2,089,023 $ 1,778,941
=========== ===========
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)
2006 2005 2004
----------- ----------- -----------
Revenues .................................................. $ 5,021,036 $ 4,696,603 $ 4,698,126
Cost of sales ............................................. 4,453,359 4,198,188 4,255,067
----------- ----------- -----------
Gross profit .............................................. 567,677 498,415 443,059
Selling, general and administrative expenses .............. 448,011 415,771 395,400
Restructuring expenses .................................... 1,622 1,749 8,276
Gain on sale of assets .................................... -- -- 2,839
----------- ----------- -----------
Operating income .......................................... 118,044 80,895 42,222
Interest expense .......................................... (2,340) (8,315) (8,884)
Interest income ........................................... 6,235 2,729 1,886
Gain on sale of equity investment ......................... -- -- 1,844
Minority interest ......................................... (4,201) (4,515) (3,814)
----------- ----------- -----------
Income from continuing operations before income taxes ..... 117,738 70,794 33,254
Income tax provision (benefit) ............................ 30,484 9,641 (11)
----------- ----------- -----------
Income from continuing operations ......................... 87,254 61,153 33,265
Loss from discontinued operations, net of income tax effect (620) (1,111) (58)
----------- ----------- -----------
Net income ................................................ $ 86,634 $ 60,042 $ 33,207
=========== =========== ===========
Net income (loss) per common share - Basic
From continuing operations .............................. $ 2.76 $ 1.96 $ 1.09
From discontinued operations ............................ (0.02) (0.03) (0.00)
----------- ----------- -----------
$ 2.74 $ 1.93 $ 1.09
=========== =========== ===========
Net income (loss) per common share - Diluted
From continuing operations .............................. $ 2.67 $ 1.92 $ 1.07
From discontinued operations ............................ (0.02) (0.03) (0.00)
----------- ----------- -----------
$ 2.65 $ 1.89 $ 1.07
=========== =========== ===========
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)
2006 2005 2004
----------- ----------- -----------
Cash flows from operating activities:
Net income ........................................................................... $ 86,634 $ 60,042 $ 33,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 17,059 19,439 20,939
Amortization of identifiable intangible assets ..................................... 4,251 3,192 3,444
Provisions for doubtful accounts ................................................... 1,112 8,457 7,026
Minority interest .................................................................. 4,201 4,515 3,814
Deferred income taxes .............................................................. (6,169) 5,002 13,704
Loss (gain) on sale of discontinued operations, sale of assets and equity investment 620 1,250 (4,683)
(Gain) loss on sale of property, plant and equipment ............................... (360) 263 (196)
Excess tax benefits from share-based compensation .................................. (6,768) -- --
Equity income from unconsolidated entities ......................................... (4,306) (2,066) (2,230)
Non-cash expense for amortization of debt issuance costs ........................... 786 2,589 1,925
Non-cash compensation expense ...................................................... 5,868 -- --
Distributions from unconsolidated entities ......................................... 9,660 616 2,843
----------- ----------- -----------
112,588 103,299 79,793
Changes in operating assets and liabilities excluding effect of businesses acquired:
(Increase) decrease in accounts receivable ......................................... (101,322) 9,998 (54,544)
Decrease in inventories and contracts in progress, net ............................. 100,612 28,409 20,876
Increase (decrease) in accounts payable ............................................ 31,359 (8,107) 7,732
Increase in accrued payroll and benefits and other accrued expenses and liabilities 42,833 14,814 10,522
Changes in other assets and liabilities, net ....................................... 23,272 (2,674) (20,759)
----------- ----------- -----------
Net cash provided by operating activities ............................................ 209,342 145,739 43,620
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations, sale of assets and equity investment 1,661 4,413 10,061
Proceeds from sale of property, plant and equipment ................................ 714 3,577 5,478
Purchase of property, plant and equipment .......................................... (19,733) (12,445) (16,134)
Investment in and advances to unconsolidated entities and joint ventures ........... (4,752) (3,449) (237)
Payments for acquisitions of businesses, net of cash acquired, and related earn-out
agreements ....................................................................... (40,732) (10,690) (1,568)
Net (disbursements) proceeds for other investments ................................. (1,573) 58 (1,188)
----------- ----------- -----------
Net cash used in investing activities ................................................ (64,415) (18,536) (3,588)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit line .......................................... 149,500 899,552 1,365,950
Repayments of working capital credit line .......................................... (149,500) (979,552) (1,425,350)
Borrowings for long-term debt ...................................................... 2,420 -- 31
Repayments for long-term debt ...................................................... (2,475) (89) (144)
Repayments for capital lease obligations ........................................... (615) (182) (458)
Proceeds from exercise of stock options ............................................ 10,400 1,742 1,590
Excess tax benefits from share-based compensation .................................. 6,768 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities .................................. 16,498 (78,529) (58,381)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents ......................... 8,525 (3,998) 1,749
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ..................................... 169,950 44,676 (16,600)
Cash and cash equivalents at beginning of year ....................................... 103,785 59,109 75,709
----------- ----------- -----------
Cash and cash equivalents at end of year ............................................. $ 273,735 $ 103,785 $ 59,109
=========== =========== ===========
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)
ACCUMULATED
TOTAL OTHER
STOCK- COMPREHENSIVE COMPRE-
HOLDERS' COMMON CAPITAL (LOSS) RETAINED TREASURY HENSIVE
EQUITY STOCK SURPLUS INCOME (1) EARNINGS STOCK INCOME
--------- -------- --------- --------- --------- --------- ---------
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 tax benefit
of $0 ............................ (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 .... 1,358 -- 1,358 -- -- --
--------- -------- --------- --------- --------- ---------
Balance, December 31, 2005 ........... 615,436 333 325,232 (5,370) 313,170 (17,929)
Net income ......................... 86,634 -- -- -- 86,634 -- $ 86,634
Foreign currency translation
adjustments ...................... 7,270 -- -- 7,270 -- -- 7,270
Pension plan reduction of minimum
liability, net of tax provision
of $0.4 million .................. 880 -- -- 880 -- -- 880
---------
Comprehensive income ............... $ 94,784
=========
Effect of adopting Statement 158,
net of tax benefit of
$13.4 million .................... (30,969) -- -- (30,969) -- --
Issuance of treasury stock
for restricted stock units (2) ... -- -- (551) -- -- 551
Treasury stock, at cost (3) ........ (1,587) -- -- -- -- (1,587)
Common stock issued under
stock option plans, net (5) ...... 25,539 3 23,455 -- -- 2,081
Value of restricted stock units .... 1,238 -- 1,238 -- -- --
Share-based compensation expense ... 5,868 -- 5,868 -- -- --
--------- -------- --------- --------- --------- ---------
Balance, December 31, 2006 ........... $ 710,309 $ 336 $ 355,242 $ (28,189) $ 399,804 $ (16,884)
========= ======== ========= ========= ========= =========
- ----------
(1) As of December 31, 2006, represents cumulative foreign currency
translation and pension liability adjustments of $18.8 million and $(47.0)
million, respectively. As of December 31, 2005, 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, 2004, represents cumulative foreign currency translation and
net of tax minimum pension liability adjustments of $12.7 million and
$(5.0) million, respectively.
(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 of $15.1 million in
2006 and $3.4 million in 2005. The 2006 amount includes an adjustment for
stock option exercises of $4.5 million from prior periods.
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 electrical and mechanical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. We specialize in providing services relating to electrical and
mechanical 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 electrical and mechanical 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. Electrical and mechanical 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 services, facilities management, remote
monitoring, small modification and retrofit projects, technical consulting and
diagnostic services, installation and support for building systems, 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. Additionally, we
participate in a joint venture with another company, and we have consolidated
this joint venture as we have determined that through our participation we have
a variable interest and are the primary beneficiary as defined by FASB
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities".
Minority interest represents the allocation of earnings to our joint
venture partners who either have a minority-ownership interest in joint ventures
or are not at risk for the majority of losses of the joint venture, 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 of the notes to consolidated
financial statements for additional information.
The results of operations for all years presented reflect discontinued
operations accounting due to the sale of a subsidiary in 2006 and in 2005.
The results of operations of acquisitions in 2006 and 2005 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
(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 facilities 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 arise in the consolidated balance sheets 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 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, 2006 and 2005 were as follows (in thousands):
2006 2005
----------- -----------
Costs incurred on uncompleted contracts .... $ 7,983,614 $ 8,927,230
Estimated earnings ......................... 519,164 546,394
----------- -----------
8,502,778 9,473,624
Less: billings to date ..................... 8,766,999 9,618,225
----------- -----------
$ (264,221) $ (144,601)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets
at December 31, 2006 and 2005 under the following captions (in thousands):
2006 2005
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts ..... $ 147,848 $ 185,634
Billings in excess of costs and estimated earnings on uncompleted contracts ..... (412,069) (330,235)
--------- ---------
$(264,221) $(144,601)
========= =========
As of December 31, 2006 and 2005, costs and estimated earnings in excess
of billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $48.2 million and $56.3 million, respectively,
and for claims of approximately $22.4 million and $36.6 million, respectively.
In addition, accounts receivable as of December 31, 2006 and 2005 includes
claims of approximately $6.7 million and $4.7 million, respectively, plus
unapproved change orders and contractually billed amounts related to such
contracts of $76.9 million and $76.2 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
$8.2 million and $18.2 million as of December 31, 2006 and 2005, respectively,
related to projects of our Poole & Kent subsidiary, which projects had commenced
prior to our acquisition of Poole & Kent in 1999. The Poole & Kent claims amount
principally relate to a civil action in which Poole & Kent is a participant. See
Note O - Legal Proceedings of the notes to consolidated financial statements for
additional information.
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, 2006 and 2005
included $216.1 million and $209.5 million, respectively, of retainage billed
under terms of these contracts. We estimate that approximately 86% of retainage
recorded at December 31, 2006 will be collected during 2007. Accounts payable at
December 31, 2006 and 2005 included $43.7 million and $43.1 million,
respectively, of retainage withheld under terms of the contracts. We estimate
that approximately 89% of retainage withheld at December 31, 2006 will be paid
during 2007. 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 $29.6 million and
$28.7 million at December 31, 2006 and 2005, 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 $16.7 million and $18.3 million as of December 31, 2006 and 2005,
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 vehicles, furniture and fixtures and computer
hardware/software 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, 2006, no material
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, 2006 and 2005 (in
thousands):
2006 2005
--------- ---------
Machinery and equipment ........................ $ 43,723 $ 31,921
Vehicles ....................................... 31,047 28,015
Furniture and fixtures ......................... 19,640 20,974
Computer hardware/software ..................... 63,047 44,557
Land, buildings and leasehold improvements ..... 46,693 43,934
--------- ---------
204,150 169,401
Accumulated depreciation and amortization ...... (151,370) (122,958)
--------- ---------
$ 52,780 $ 46,443
========= =========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2006 and 2005 was approximately $288.2 million
and $283.4 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 No. 141, "Business Combinations" ("Statement 141") and
Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142").
Statement 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. Statement 142
requires goodwill and other identifiable intangible assets that have indefinite
useful lives not be amortized, but instead must be tested at least annually for
impairment (which we test each October 1). Furthermore, Statement 142 requires
identifiable intangible assets with finite lives be amortized over their useful
lives. Statement 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. Our
annual impairment review is performed in accordance with the provisions of
Statement 142 and FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
The changes in the carrying amount of goodwill during the year ended
December 31, 2006 were as follows (in thousands):
Balance at beginning of period .................................. $ 283,412
Earn-out payments/accruals on prior year acquisitions ........... 3,502
Goodwill recorded for acquisition of businesses ................. 1,890
Goodwill allocated to the sale of assets and other items, net ... (639)
---------
Balance at end of period ........................................ $ 288,165
=========
38
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
As of December 31, 2006, there are remaining contingent payments of
approximately $5.0 million related to prior acquisitions.
Identifiable intangible assets are comprised of $14.7 million of customer
backlog, $21.9 million of customer relationships, $2.1 million of
non-competition agreements and $13.8 million of trademarks and tradenames, all
acquired as a result of acquisitions in 2002, 2005 and 2006. The amounts
attributable to backlog, customer relationships and non-competition agreements
are being amortized on a straight-line method over periods from one to fifteen
years. The backlog, customer relationships and non-competition agreements are
presented in the consolidated balance sheets net of accumulated amortization of
$14.5 million and $10.2 million at December 2006 and 2005, respectively. The
$13.8 million attributable to trademarks and tradenames is not being amortized
as trademarks and tradenames have indefinite lives, but are subject to an annual
review for impairment in accordance with Statement 142. See Note C -
Acquisitions of Businesses and Disposition of Assets of the notes to
consolidated financial statements for additional information. The following
table presents the estimated future amortization expense of identifiable
intangible assets as of December 31, 2006 (in thousands):
2007 ................................................................. $ 6,147
2008 ................................................................. 4,970
2009 ................................................................. 2,830
2010 ................................................................. 1,744
2011 ................................................................. 1,671
Thereafter ........................................................... 6,812
-------
$24,174
=======
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, 2006
and 2005, the estimated current portion of undiscounted insurance liabilities of
$16.5 million and $13.0 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, 2006 and 2005 were $80.9
million and $76.9 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 FASB Statement No. 52, "Foreign Currency Translation".
Translation adjustments have been recorded as "Accumulated other comprehensive
loss", a separate component of "Stockholders' equity".
INCOME TAXES
We account for income taxes in accordance with the provisions of FASB
Statement No. 109, "Accounting for Income Taxes" ("Statement 109"). Statement
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, 2006, 2005 and 2004, we did not have any material
derivative instruments.
VALUATION OF SHARE-BASED COMPENSATION PLANS
We have various types of share-based compensation plans and programs which
are administered by our Board of Directors or its Compensation and Personnel
Committee. See Note I - Stock Options and Stock Plans for additional information
regarding the share-based compensation plans and programs.
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
On January 1, 2006, we adopted FASB Statement No. 123(R), "Share-Based
Payment" ("Statement 123(R)"). With the adoption of Statement 123(R), all
share-based payments to our employees and non-employee directors, including
grants of stock options, have been recognized in the income statement based on
their fair values, on a straight-line basis over the requisite service period,
which is generally the vesting period, utilizing the modified prospective method
of accounting. The impact of the adoption of Statement 123(R) resulted in $4.0
million of compensation expense for the year ended December 31, 2006. As a
result, net income was adversely impacted in this period by $2.4 million, and
basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted
EPS") were both adversely impacted by $0.07. Approximately $1.2 million of
compensation expense, net of income taxes, will be recognized over the
approximate 15 month remaining vesting period for stock options outstanding at
December 31, 2006. Prior to January 1, 2006, we applied 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 expense has been recognized in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2005 and 2004 in
respect of stock options granted during that period inasmuch as we granted stock
options at fair market value. Had compensation expense for the options for the
years ended December 31, 2005 and 2004 been determined consistent with FASB
Statement No. 123, "Accounting for Stock-Based Compensation" and FASB Statement
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure",
our net income, Basic EPS and Diluted EPS would have been reduced from the "as
reported amounts" below to the "pro forma amounts" below (in thousands, except
per share amounts):
2005 2004
---------- ----------
Income from continuing operations:
As reported .......................................................................... $ 61,153 $ 33,265
Less: Total stock-based compensation expense determined under fair value based method,
net of related tax effects ......................................................... 2,112 2,981
---------- ----------
Pro Forma ............................................................................ $ 59,041 $ 30,284
========== ==========
Basic EPS:
As reported .......................................................................... $ 1.96 $ 1.09
Pro Forma ............................................................................ $ 1.90 $ 1.00
Diluted EPS:
As reported .......................................................................... $ 1.92 $ 1.07
Pro Forma ............................................................................ $ 1.85 $ 0.97
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Post Retirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158").
Statement 158 requires that a company recognize the overfunded or underfunded
status of its defined benefit post retirement plans (other than multi-employer
plans) as an asset or liability in its statement of financial position and that
it recognize changes in the funded status in the year in which the changes occur
through other comprehensive income. Statement 158 also requires the measurement
of the fair value of plan assets and benefit obligations as of the date of the
fiscal year-end statement of financial position and to provide additional
disclosures. On December 31, 2006, we adopted the recognition and disclosure
provisions of Statement 158. The effect of adopting Statement 158 on our
financial position at December 31, 2006 has been included in the accompanying
consolidated financial statements and increased Accumulated other comprehensive
loss by $31.0 million, net of a deferred tax benefit. Statement 158 did not have
an effect on our financial position as of December 31, 2005 or 2004. We measure
the fair value of plan assets and benefit obligations on December 31 of each
year. See Note J - Retirement Plans of the notes to consolidated financial
statements for more information on the impact of adoption and the related
disclosures.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("FIN 48"), to create a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for
income taxes, by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. We will adopt
FIN 48 as of January 1, 2007, as required. The impact upon adoption is expected
to result in an immaterial reduction of retained earnings and an increase in the
accrual for income taxes. We will disclose the cumulative effect of the change
in retained earnings in the consolidated financial statements in the first
quarter of 2007.
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("Statement 157"). Statement 157 provides guidance for using fair
value to measure assets and liabilities. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances. Statement 157 is effective for our financial statements beginning
with the first quarter of 2008. Early adoption is permitted. We have not
determined the effect, if any, the adoption of Statement 157 will have on our
financial position and results of operations.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No 115" ("Statement 159"). Statement 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Statement 159 is effective for our financial statements beginning with
the first quarter of 2008. We have not determined the effect, if any, the
adoption of Statement 159 will have on our financial position and results of
operations.
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS
During 2006, we acquired three companies, which were not individually or
in the aggregate material, for $41.1 million in cash. Goodwill and Identifiable
intangible assets, representing the excess purchase price over the fair value of
amounts assigned to the net tangible assets acquired (primarily current assets
and current liabilities), was preliminarily valued at $5.1 million and $20.0
million, respectively. In November 2005, we acquired one company for cash of
$13.6 million. Goodwill and Identifiable intangible assets were valued at $5.2
million and $7.1 million, respectively, after completion of the final valuation
and purchase price adjustments.
We believe the additions of these companies further our goal of market and
geographic diversification, expansion of our fire protection and our facilities
services operations and overall expansion of our service offerings.
Additionally, these acquisitions create more opportunities for our subsidiaries
to collaborate on national facilities services contracts. See Note B - Summary
of Significant Accounting Policies of the notes to consolidated financial
statements for a discussion of Goodwill and Identifiable intangible assets.
During 2006 and 2005, we recorded an aggregate of $3.5 million and $0.7
million, respectively, by reason of earn-out obligations in respect of prior
year acquisitions.
On January 31, 2006, we sold a subsidiary that had been part of our United
States mechanical construction and facilities services segment. On September 30,
2005, we sold a subsidiary that had been part of our United States facilities
services segment. Results of these operations for all periods presented in our
consolidated financial statements reflect discontinued operations accounting.
Included in the results of discontinued operations for the year ended December
31, 2006 was a loss of $0.6 million (net of income taxes) which relates to the
January 2006 sale of the subsidiary that had been part of our United States
mechanical construction and facilities services segment. Included in the $1.1
million loss (net of income taxes) from discontinued operations for the year
ended December 31, 2005 is a loss of $1.0 million (net of income taxes) which
relates to the September 2005 sale of a subsidiary that had been part of our
United States facilities services segment. An aggregate of $1.7 million and $4.4
million in cash and notes was received as consideration for both of these sales
in 2006 and 2005, respectively. As of December 31, 2006 and 2005, the notes in
respect of each year had been paid in full. We will not have any future
involvement with these subsidiaries. The components of the results of operations
for the discontinued operations are not presented as they are not material to
the consolidated results of operations.
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. 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, 2006,
2005 and 2004 other than the disposal of property, plant and equipment in the
normal course of business.
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2006, 2005 and 2004:
2006 2005 2004
------------ ------------ ------------
NUMERATOR:
Income before discontinued operations ...................................... $ 87,254,000 $ 61,153,000 $ 33,265,000
Loss from discontinued operations .......................................... (620,000) (1,111,000) (58,000)
------------ ------------ ------------
Net income available to common stockholders ................................ $ 86,634,000 $ 60,042,000 $ 33,207,000
============ ============ ============
DENOMINATOR:
Weighted average shares outstanding used to compute basic earnings per share 31,607,715 31,143,363 30,395,810
Effect of diluted securities - Share-based awards .......................... 1,132,482 691,518 737,664
------------ ------------ ------------
Shares used to compute diluted earnings per share .......................... 32,740,197 31,834,881 31,133,474
============ ============ ============
Basic earnings (loss) per share:
Continuing operations .................................................... $ 2.76 $ 1.96 $ 1.09
Discontinued operations .................................................. (0.02) (0.03) (0.00)
------------ ------------ ------------
Total .................................................................... $ 2.74 $ 1.93 $ 1.09
============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .................................................... $ 2.67 $ 1.92 $ 1.07
Discontinued operations .................................................. (0.02) (0.03) (0.00)
------------ ------------ ------------
Total .................................................................... $ 2.65 $ 1.89 $ 1.07
============ ============ ============
The number of options granted to purchase shares of our common stock that
were excluded from the computation of Diluted EPS for the years ended December
31, 2006, 2005 and 2004 because they would be antidilutive were zero, 365,940
and 1,773,294, respectively.
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 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. 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 Nesbitt
from time to time (8.25% at December 31, 2006) plus 0.0% to 0.5%, based on
certain financial tests or (2) United States dollar LIBOR (5.35% at December 31,
2006) plus 1.0% to 2.25%, based on certain financial tests. The interest rates
in effect at December 31, 2006 were 8.25% and 6.35% 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 for 2005. As of December 31,
2006 and 2005, we had approximately $55.6 million and $53.3 million of letters
of credit outstanding, respectively. There were no borrowings under the 2005
Revolving Credit Facility as of December 31, 2006 and 2005.
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT -- (CONTINUED)
FOREIGN BORROWINGS
Our Canadian subsidiary, Comstock Canada Ltd., has 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 6.0% at December 31, 2006. There were no
borrowings outstanding under this credit agreement at December 31, 2006 or 2005.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted
of the following amounts as of December 31, 2006 and 2005 (in thousands):
2006 2005
------ ------
Capitalized Lease Obligations at weighted average interest rates from 5.0% to 6.0%
payable in varying amounts through 2011 .......................................... $1,566 $1,570
Other, at weighted average interest rates of approximately 10.0%, payable in varying
amounts through 2012 ............................................................. 332 387
------ ------
1,898 1,957
Less: current maturities ........................................................... 659 551
------ ------
$1,239 $1,406
====== ======
CAPITALIZED LEASE OBLIGATIONS
See Note K - Commitments and Contingencies of the notes to consolidated
financial statements for additional information.
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
The 2006 income tax provision was $30.5 million compared to $9.6 million
for 2005 and a benefit of approximately $0.01 million for 2004.
The 2006 income tax provision was comprised of: (a) $46.6 million of
income tax provision in respect of pre-tax earnings of $117.7 million; (b) $8.4
million of income tax benefit related to the reversal of a valuation allowance
based on the determination that sufficient taxable income existed in the past
and will continue in the future to realize the related United Kingdom tax
assets; (c) a $3.9 million income tax benefit related to the realization of net
operating losses for which valuation allowances had previously been recorded in
Canada; (d) an income tax benefit of $1.9 million for income tax reserves no
longer required based on a current analysis of probable exposures; and (e)
income tax benefits related to items aggregating approximately $1.9 million
principally due to the deductibility of certain compensation arrangements for
income tax purposes.
The income tax provision for 2005 was comprised of: (a) $27.1 million of
income tax provision in respect of pre-tax earnings of $70.8 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 approximately $0.01 million for 2004 was
comprised of: (a) $13.9 million of income tax provision on pre-tax earnings of
$33.3 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 sufficient
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 2006, 2005
and 2004 each was recorded at an effective income tax rate of approximately 40%,
38% and 42%, respectively, excluding the items discussed above.
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
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, 2006 and 2005, we had income tax reserves of $5.6 million and $7.5 million
(included in "Other accrued expenses and liabilities"), 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, 2006, we had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $7.0 million, which
expire in the year 2009. In addition, at December 31, 2006, we had non-trade and
capital losses for United Kingdom tax purposes of approximately $0.8 million,
which have no expiration date and NOLs for Canadian income tax purposes of
approximately $7.1 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, 2006, 2005 and 2004
consisted of the following (in thousands):
2006 2005 2004
-------- -------- --------
Current:
Federal provision (benefit) ..... $ 29,546 $ (237) $(16,397)
State and local ................. 9,917 5,628 4,988
Foreign benefit ................. (2,810) (752) (2,306)
-------- -------- --------
36,653 4,639 (13,715)
-------- -------- --------
Deferred ........................ (6,169) 5,002 13,704
-------- -------- --------
$ 30,484 $ 9,641 $ (11)
======== ======== ========
Factors accounting for the variation from U.S. statutory income tax rates
for the years ended December 31, 2006, 2005 and 2004 were as follows (in
thousands):
2006 2005 2004
-------- -------- --------
Federal income taxes at the statutory rate ............... $ 41,207 $ 24,778 $ 11,639
State and local income taxes, net of federal tax benefits 5,596 1,641 3,244
Foreign income taxes ..................................... (6,122) (1,673) (2,086)
Adjustments to valuation allowance for deferred tax assets (8,446) 5,181 7,387
Reversal of tax reserves ................................. (1,881) (22,745) (22,083)
Other .................................................... 130 2,459 1,888
-------- -------- --------
$ 30,484 $ 9,641 $ (11)
======== ======== ========
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
The components of the net deferred income tax asset are included in
"Prepaid expenses and other" of $19.9 million and "Other assets" of $8.3 million
at December 31, 2006 and "Prepaid expenses and other" of $22.0 million and
"Other long-term liabilities" of $9.7 million at December 31, 2005 in the
accompanying Consolidated Balance Sheets. The amounts recorded for the years
ended December 31, 2006 and 2005 were as follows (in thousands):
2006 2005
-------- --------
Deferred income tax assets:
Net operating loss carryforwards ....................................................... $ 4,974 $ 9,486
Excess of amounts expensed for financial statement purposes over amounts deducted
for income tax purposes:
Insurance liabilities .............................................................. 22,622 27,357
Pension liability .................................................................. 17,953 5,070
Other liabilities .................................................................. 33,744 20,715
-------- --------
Total deferred income tax assets ....................................................... 79,293 62,628
Valuation allowance for deferred tax assets ............................................ (12,893) (18,738)
-------- --------
Net deferred income tax assets ......................................................... 66,400 43,890
-------- --------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes:
Depreciation of property, plant and equipment ...................................... (27,505) (23,442)
Other .............................................................................. (10,741) (8,134)
-------- --------
Total deferred income tax liabilities .................................................. (38,246) (31,576)
-------- --------
Net deferred income tax asset .......................................................... $ 28,154 $ 12,314
======== ========
As of December 31, 2006 and 2005, the total valuation allowance on net
deferred tax assets was approximately $12.9 million and $18.7 million,
respectively. The primary reason for the decrease in the valuation allowance for
2006 was related to an $8.4 million reversal of a United Kingdom valuation
allowance based on the determination that sufficient taxable income existed in
the past and will continue in the future to realize the related United Kingdom
tax assets.
Income (loss) from continuing operations before income taxes for the years
ended December 31, 2006, 2005 and 2004 consisted of the following (in
thousands):
2006 2005 2004
-------- -------- --------
United States .............. $107,651 $ 68,162 $ 39,696
Foreign .................... 10,087 2,632 (6,442)
-------- -------- --------
$117,738 $ 70,794 $ 33,254
======== ======== ========
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,
2006 and 2005, 31,827,990 and 31,103,766 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 $16.9 million paid for those shares has been
classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at
December 31, 2006, 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.
45
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
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.
46
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 restricted stock unit
activity since December 31, 2003:
STOCK OPTIONS RESTRICTED STOCK UNITS
- --------------------------------------------------------------- ----------------------------------------------------------
WEIGHTED
AVERAGE
SHARES PRICE SHARES
------ ----- ------
Balance, December 31, 2003 ........ 3,298,394 $13.48 Balance, December 31, 2003 .................. 261,212
Granted ......................... 556,096 $21.65 Granted ................................... 85,276
Forfeited ....................... (14,000) $12.03 Forfeited ................................. --
Exercised ....................... (342,982) $ 4.69 Issued .................................... (113,414)
---------- ----------
Balance, December 31, 2004 ........ 3,497,508 $15.65 Balance, December 31, 2004 .................. 233,074
Granted ......................... 762,904 $22.84 Granted ................................... 31,276
Forfeited ....................... -- -- Forfeited ................................. --
Exercised ....................... (610,484) $ 4.45 Issued .................................... (98,138)
---------- ----------
Balance, December 31, 2005 ........ 3,649,928 $19.03 Balance, December 31, 2005 .................. 166,212
Granted ......................... 79,060 $42.77 Granted ................................... 148,141
Forfeited ....................... -- -- Forfeited ................................. (15,284)
Exercised ....................... (662,124) $15.92 Issued .................................... (99,660)
---------- ----------
Balance, December 31, 2006 ........ 3,066,864 $20.31 Balance, December 31, 2006 .................. 199,409
========== ==========
In addition, 4,140 shares were issued to certain non-employee directors
pursuant to annual retainer arrangements. As a result of stock option exercises,
$10.4 million of proceeds were received during the year ended December 31, 2006.
The income tax benefit derived in 2006 as a result of such exercises and
share-based compensation was $8.9 million, of which $6.8 million represented
excess tax benefits. This compares to $1.7 million of proceeds from stock option
exercises for the year ended December 31, 2005. The income tax benefit from the
stock option exercises and other share-based compensation for the year ended
December 31, 2005 was $3.9 million.
The director shares and restricted stock units were awarded to directors
and employees pursuant to non-employee director and key-person long-term
incentive plans and a separation agreement for which $1.9 million and $0.9
million of compensation expense was recognized for the years ended December 31,
2006 and 2005, respectively. We also have outstanding phantom equity units for
which $2.8 million of expense was recognized for the year ended December 31,
2006 due to changes in the market price of our common stock from the award date.
The total intrinsic value of options (the amounts by which the stock price
exceeded the exercise price of the option on the date of exercise)that was
exercised during 2006, 2005 and 2004 was $23.7 million, $12.3 million and $5.5
million, respectively.
At December 31, 2006, 2005 and 2004 approximately 2,620,000, 2,700,000 and
2,920,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2006, 2005 and 2004 was
approximately $19.93, $17.73 and $14.17, respectively.
The following table summarizes information about our stock options at
December 31, 2006 (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
--------------- ------ -------------- -------------- ------ --------------
$8.10 - $10.00 610,666 1.28 Years $ 9.57 610,666 $ 9.57
$10.97 - $13.57 170,000 3.68 Years $12.48 170,000 $12.48
$18.93 - $21.15 388,466 5.40 Years $20.63 368,466 $20.71
$21.92 - $23.18 1,312,968 6.72 Years $22.43 926,037 $22.39
$23.63 - $27.75 505,702 6.28 Years $26.64 466,369 $26.86
$35.58 - $45.05 79,062 8.14 Years $42.77 79,062 $42.77
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The total aggregate intrinsic value of options outstanding as of December
31, 2006, 2005 and 2004 was approximately $112.1 million, $53.8 million and
$24.4 million, respectively. The total aggregate intrinsic value of options
exerciseable as of December 31, 2006, 2005 and 2004 was approximately $96.8
million, $43.3 million and $24.7 million, respectively.
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 Statement No. 123, is presented in Note B -
Summary of Significant Accounting Policies. The associated pro forma
compensation costs related to the provisions of Statement No. 123, net of tax
effects, were $2.1 million and $3.0 million for the years ending December 31,
2005 and 2004, respectively.
The fair value on the date of grant was calculated using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants during the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005 2004
-------- -------- --------
Dividend yield .......................... 0% 0% 0%
Expected volatility ..................... 34.0% 36.8% 28.4%
Risk-free interest rate ................. 4.9% 3.9% 3.2%
Expected life of options in years ....... 5.8 6.3 4.5
Weighted average grant date fair value .. $ 18.72 $ 9.97 $ 6.33
Forfeitures of stock options have been historically insignificant to the
calculation and are estimated to be zero in all periods presented.
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 "Valuation of Share-Based
Compensation Plans" in Note B - Summary of Significant Accounting Policies of
the notes to consolidated financial statements for additional information).
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.
On December 31, 2006, we adopted the recognition and provisions of
Statement 158. Statement 158 requires us to recognize the funded status (i.e.,
the difference between the fair value of plan assets and the projected benefit
obligations) of the UK Plan in the December 31, 2006 statement of financial
position, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax. The adjustment to accumulated other comprehensive
income (loss) at adoption represents the net unrecognized actuarial losses
remaining from the initial adoption of Statement No. 87, "Employers' Accounting
for Pensions" ("Statement 87"), all of which were previously netted against the
plan's funded status in our statement of financial position pursuant to the
provisions of Statement 87. These amounts will be subsequently recognized as net
periodic pension cost pursuant to our historical accounting policy for
amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic pension cost in the
same periods will be recognized as a component of accumulated other
comprehensive income (loss). Those amounts will be subsequently recognized as a
component of net periodic pension cost on the same basis as the amounts
recognized in accumulated other comprehensive income (loss) at the adoption of
Statement 158.
The incremental effects of adopting the provisions of Statement 158 for
the UK Plan on our consolidated statement of financial position at December 31,
2006 are presented in the following table. The adoption of Statement 158 had no
effect on our consolidated statement of operations for the year ended December
31, 2006, or for any prior period presented, and it will have no effect on our
future operating results. Had we not been required to adopt Statement 158 at
December 31, 2006, we would have recognized a minimum pension liability pursuant
to the provisions of Statement 87 of $15.6 million.
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The effect of recognizing the additional minimum liability for the UK Plan
is included in the table below in the column labeled "Prior to Adopting
Statement 158" (in thousands):
AT DECEMBER 31, 2006
-----------------------------------------------------
PRIOR TO EFFECT OF AS REPORTED
ADOPTING ADOPTING AT
STATEMENT 158 STATEMENT 158 DECEMBER 31, 2006
------------- ------------- -----------------
Intangible asset (pension) .................. $ -- $ -- $ --
Accrued pension liability ................... $ 16,592 $ 43,250 $ 59,842
Net deferred income tax asset ............... $ 15,179 $ 12,975 $ 28,154
Accumulated other comprehensive income (loss) $ 2,086 $(30,275) $(28,189)
The change in benefit obligations and assets of the UK Plan for the years
ended December 31, 2006 and 2005 consisted of the following components (in
thousands):
2006 2005
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year .............................. $ 206,460 $ 192,360
Service cost ......................................................... 4,285 3,896
Interest cost ........................................................ 10,484 9,701
Plan participants' contributions ..................................... 2,794 3,226
Actuarial loss ....................................................... 20,224 24,314
Benefits paid ........................................................ (7,970) (5,313)
Foreign currency exchange rate changes ............................... 30,359 (21,724)
--------- ---------
Benefit obligation at end of year .................................... $ 266,636 $ 206,460
========= =========
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year ....................... $ 163,630 $ 150,533
Actual return on plan assets ......................................... 18,195 25,365
Employer contributions ............................................... 6,349 6,933
Plan participants' contributions ..................................... 2,794 3,226
Benefits paid ........................................................ (7,970) (5,313)
Foreign currency exchange rate changes ............................... 23,796 (17,114)
--------- ---------
Fair value of plan assets at end of year ............................. $ 206,794 $ 163,630
--------- ---------
Funded status at end of year ......................................... $ (59,842) $ (42,830)
========= =========
AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
2006
---------
Unrecognized losses .................................................. $ 58,888
=========
RECONCILIATION OF FUNDED STATUS TO NET AMOUNTS RECOGNIZED IN
THE CONSOLIDATED BALANCE SHEETS
2006 2005
--------- ---------
Funded status ........................................................ $ (59,842) $ (42,830)
Unrecognized prior service cost ...................................... -- 67
Unrecognized losses .................................................. -- 40,984
--------- ---------
Net amount recognized .............................................. $ (59,842) $ (1,779)
========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
2006 2005
--------- ---------
Intangible asset ..................................................... $ -- $ 67
Current liability .................................................... -- (1,846)
Non-current liability ................................................ (59,842) (16,897)
Accumulated other comprehensive loss ................................. -- 16,897
--------- ---------
Net amount recognized .............................................. $ (59,842) $ (1,779)
========= =========
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The assumptions used as of December 31, 2006, 2005 and 2004 in determining
pension cost and liability shown above were as follows:
2006 2005 2004
------ ------ ------
Discount rate .............................. 5.1% 4.8% 5.4%
Annual rate of salary provision ............ 3.8% 3.1% 3.1%
Annual rate of return on plan assets ....... 6.5% 6.3% 6.8%
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, the annual rates of inflation of covered pension
benefits assumed for 2006 and 2005 were 2.8% and 2.5%, respectively.
The components of net periodic pension benefit cost for the years ended
December 31, 2006, 2005 and 2004 were as follows (in thousands):
2006 2005 2004
-------- -------- --------
Service cost ............................................ $ 4,285 $ 3,896 $ 4,906
Interest cost ........................................... 10,484 9,701 8,891
Expected return on plan assets .......................... (11,175) (9,890) (8,933)
Net amortization of prior service cost and actuarial loss 72 85 19
Amortization of unrecognized loss ....................... 1,675 1,351 1,402
-------- -------- --------
Net periodic pension benefit cost ....................... $ 5,341 $ 5,143 $ 6,285
======== ======== ========
The estimated net loss for the UK Plan that will be amortized from
Accumulated other comprehensive loss into net periodic benefit cost over the
next year is $2.7 million.
UK PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 2006 were as follows:
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 2006 ALLOCATION
- -------------- ------------ ----------
Equity securities .................... 71.6% 70.0%
Debt securities ...................... 27.8 30.0
Other ................................ 0.6 --
------- -------
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 approximately $7.0
million to its UK Plan in 2007.
50
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
--------
2007 ............................................................. $6,853
2008 ............................................................. 7,343
2009 ............................................................. 7,832
2010 ............................................................. 8,322
2011 ............................................................. 8,811
Succeeding five years ............................................ 51,398
The accumulated benefit obligation for the UK Plan for the years ended
December 31, 2006 and 2005 was $223.4 million and $182.4 million, respectively.
The following table shows certain information for the UK Plan where the
accumulated benefit obligation is in excess of plan assets as of December 31,
2006 and 2005 (in thousands):
2006 2005
-------- --------
Projected benefit obligation ................. $266,636 $206,460
Accumulated benefit obligation ............... $223,386 $182,373
Fair value of plan assets .................... $206,794 $163,630
We also sponsor two domestic defined benefit plans for which participation
by new individuals is frozen. The benefit obligation associated with these plans
as of December 31, 2006 and 2005 was approximately $5.3 million and $5.2
million, respectively. The estimated fair value of the plan assets as of
December 31, 2006 and 2005 was approximately $5.5 million and $4.9 million,
respectively. The prepaid balances as of December 31, 2006 are classified as
long-term assets on the balance sheet. As a result of adopting Statement 158 as
of December 31, 2006 for these plans, Accumulated other comprehensive loss was
increased by approximately $0.7 million, net of income taxes. The major
assumptions used in the actuarial valuations included a discount rate of 6.0%
and an expected rate of return of 8.5%. The estimated loss for these plans that
will be amortized from Accumulated other comprehensive loss into net periodic
benefit cost over the next year is less than $0.1 million. The future estimated
benefit payments associated with the plans for the next ten years is
approximately $0.3 million per year.
We contribute to various union pension funds based upon wages paid to our
union employees. Such contributions approximated $150.1 million, $133.5 million
and $133.9 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The increase in contributions of $16.6 million for 2006 compared
to 2005 was primarily related to increased hours worked and wages earned and
incremental contributions for acquired companies of approximately $3.0 million.
We have retirement and savings plans that cover U.S. eligible non-union
employees. Contributions to these plans are based on a percentage of the
employee's base compensation. The expenses recognized for the years ended
December 31, 2006, 2005 and 2004 for these plans were $6.4 million, $6.2 million
and $6.2 million, respectively.
Our United Kingdom subsidiary has a defined contribution retirement plan.
The expense recognized for the years ended December 31, 2006, 2005 and 2004 was
$1.9 million, $1.7 million and $1.2 million, respectively.
Our Canadian subsidiary has a defined contribution retirement plan. The
expense recognized was $0.3 million for each of the years ended December 31,
2006, 2005 and 2004, respectively.
51
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2006, were as follows (in
thousands):
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
-------- --------- --------
2007 ...................................... $ 663 $ 43,656 $ 306
2008 ...................................... 506 36,862 168
2009 ...................................... 370 28,734 168
2010 ...................................... 148 22,320 --
2011 ...................................... 11 14,575 --
Thereafter ................................ -- 29,042 --
-------- -------- --------
Total minimum lease payment ............... 1,698 $175,189 $ 642
======== ========
Amounts representing interest ............. (132)
--------
Present value of net minimum lease payments $ 1,566
========
Rent expense for operating leases and other rental items for the years
ended December 31, 2006, 2005 and 2004 was $74.0 million, $61.5 million and
$54.9 million, respectively. Rent expense for the years ended December 31, 2006,
2005 and 2004 included sublease rental income of $0.3 million, $0.5 million and
$0.7 million, respectively.
We have agreements with our executive officers and certain other key
management personnel providing for severance benefits for 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, 2006, based on our percentage-of-completion of our
projects covered by Surety Bonds, our aggregate estimated exposure, had there
been defaults on all our existing contractual obligations, would have been
approximately $1.0 billion. The bonds are issued by our sureties in return for
premiums, which vary depending on the size and type of bond. 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 $25.0 million of borrowings 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
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 in borrowings due December 2031.
We presently employ approximately 27,000 people, approximately 69% of whom
are represented by various unions pursuant to more than 400 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 and reduction of leased facilities, were $1.6 million, $1.8 million
and $8.3 million for 2006, 2005 and 2004, respectively. As of December 31, 2006
and 2005, the balance of these obligations was $0.2 million at each date,
respectively. The December 31, 2005 obligation was paid in 2006.
52
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes for the years ended December 31, 2006, 2005 and 2004 (in thousands):
2006 2005 2004
------- ------- -------
Cash paid during the year for:
Interest ...................................... $ 1,788 $ 8,573 $ 7,486
Income taxes .................................. $29,205 $ 9,858 $ 1,759
Non-cash financing activities:
Assets acquired under capital lease obligations $ 612 $ 412 $ 1,781
Capital lease obligations terminated .......... $ -- $ (322) $ --
Contingent purchase price accrued ............. $ 3,372 $ -- $ --
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 the Middle East)
performing electrical construction, mechanical construction and facilities
services. Our interest in the South African joint venture, which had been
reflected in the "Other international construction and facilities services"
segment, was sold in August 2004. The following tables present information about
industry segments and geographic areas for the years ended December 31, 2006,
2005 and 2004. 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):
53
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
AS REPORTED
----------------------------------
2006 2005 2004
-------- -------- --------
Revenues from unrelated entities:
United States electrical construction and facilities services ............ $1,280.2 $1,224.6 $1,235.3
United States mechanical construction and facilities services ............ 1,820.9 1,671.6 1,778.3
United States facilities services ........................................ 960.7 785.2 725.2
-------- -------- --------
Total United States operations ........................................... 4,061.8 3,681.4 3,738.8
Canada construction and facilities services .............................. 287.8 342.1 280.8
United Kingdom construction and facilities services ...................... 671.4 673.1 678.5
Other international construction and facilities services ................. -- -- --
-------- -------- --------
Total worldwide operations ............................................... $5,021.0 $4,696.6 $4,698.1
======== ======== ========
Total revenues:
United States electrical construction and facilities services ............ $1,284.7 $1,236.9 $1,275.8
United States mechanical construction and facilities services ............ 1,845.8 1,681.8 1,792.0
United States facilities services ........................................ 966.4 787.6 726.5
Less intersegment revenues ............................................... (35.1) (24.9) (55.5)
-------- -------- --------
Total United States operations ........................................... 4,061.8 3,681.4 3,738.8
Canada construction and facilities services .............................. 287.8 342.1 280.8
United Kingdom construction and facilities services ...................... 671.4 673.1 678.5
Other international construction and facilities services ................. -- -- --
-------- -------- --------
Total worldwide operations ............................................... $5,021.0 $4,696.6 $4,698.1
======== ======== ========
Operating income (loss):
United States electrical construction and facilities services ............ $ 46.7 $ 79.8 $ 81.2
United States mechanical construction and facilities services ............ 82.1 20.2 (1.5)
United States facilities services ........................................ 39.0 26.3 14.4
-------- -------- --------
Total United States operations ........................................... 167.8 126.3 94.1
Canada construction and facilities services .............................. 1.0 (7.9) (11.9)
United Kingdom construction and facilities services ...................... 6.8 7.5 0.0
Other international construction and facilities services ................. (0.1) 0.0 0.5
Corporate administration ................................................. (55.9) (43.2) (35.0)
Restructuring expenses ................................................... (1.6) (1.8) (8.3)
Gain on sale of assets ................................................... -- -- 2.8
-------- -------- --------
Total worldwide operations ............................................... 118.0 80.9 42.2
Other corporate items:
Interest expense ......................................................... (2.3) (8.3) (8.9)
Interest income .......................................................... 6.2 2.7 1.9
Gain on sale of equity investment ........................................ -- -- 1.8
Minority interest ........................................................ (4.2) (4.5) (3.8)
Income from continuing operations before income taxes .................... $ 117.7 $ 70.8 $ 33.3
54
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2006 2005 2004
-------- -------- --------
Capital expenditures:
United States electrical construction and facilities services ............ $ 2.8 $ 2.4 $ 1.7
United States mechanical construction and facilities services ............ 3.4 2.5 2.8
United States facilities services ........................................ 9.3 3.9 6.2
-------- -------- --------
Total United States operations ........................................... 15.5 8.8 10.7
Canada construction and facilities services .............................. 2.5 1.3 0.8
United Kingdom construction and facilities services ...................... 1.1 0.3 3.7
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 0.6 2.0 0.9
-------- -------- --------
Total worldwide operations ............................................... $ 19.7 $ 12.4 $ 16.1
======== ======== ========
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services ............ $ 3.1 $ 3.0 $ 3.3
United States mechanical construction and facilities services ............ 5.3 5.6 5.9
United States facilities services ........................................ 4.1 5.8 5.8
-------- -------- --------
Total United States operations ........................................... 12.5 14.4 15.0
Canada construction and facilities services .............................. 1.0 0.9 0.9
United Kingdom construction and facilities services ...................... 2.8 2.8 4.3
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 0.8 1.3 0.7
-------- -------- --------
Total worldwide operations ............................................... $ 17.1 $ 19.4 $ 20.9
======== ======== ========
2006 2005
-------- --------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 49.3 $ 64.2
United States mechanical construction and facilities services ............ 62.8 70.5
United States facilities services ........................................ 11.1 10.3
-------- --------
Total United States operations ........................................... 123.2 145.0
Canada construction and facilities services ............................... 18.3 21.7
United Kingdom construction and facilities services ...................... 6.3 18.9
Other international construction and facilities services ................. -- --
-------- --------
Total worldwide operations ............................................... $ 147.8 $ 185.6
======== ========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 144.8 $ 120.2
United States mechanical construction and facilities services ............ 166.8 135.9
United States facilities services ........................................ 15.9 11.4
-------- --------
Total United States operations ........................................... 327.5 267.5
Canada construction and facilities services .............................. 17.1 13.1
United Kingdom construction and facilities services ...................... 67.5 49.6
Other international construction and facilities services ................. -- --
-------- --------
Total worldwide operations ............................................... $ 412.1 $ 330.2
======== ========
55
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2006 2005
-------- --------
Long-lived assets:
United States electrical construction and facilities services $ 11.1 $ 11.4
United States mechanical construction and facilities services 206.8 183.9
United States facilities services ........................... 145.9 136.7
-------- --------
Total United States operations .............................. 363.8 332.0
Canada construction and facilities services ................. 6.5 4.8
United Kingdom construction and facilities services ......... 6.4 7.1
Other international construction and facilities services .... -- --
Corporate administration .................................... 2.5 2.9
-------- --------
Total worldwide operations .................................. $ 379.2 $ 346.8
======== ========
Goodwill:
United States electrical construction and facilities services $ 3.8 $ 3.8
United States mechanical construction and facilities services 166.9 164.2
United States facilities services ........................... 117.5 115.4
-------- --------
Total United States operations .............................. 288.2 283.4
Canada construction and facilities services ................. -- --
United Kingdom construction and facilities services ......... -- --
Other international construction and facilities services .... -- --
Corporate administration .................................... -- --
-------- --------
Total worldwide operations .................................. $ 288.2 $ 283.4
======== ========
Total assets:
United States electrical construction and facilities services $ 363.7 $ 357.5
United States mechanical construction and facilities services 748.0 673.2
United States facilities services ........................... 370.4 331.5
-------- --------
Total United States operations .............................. 1,482.1 1,362.2
Canada construction and facilities services ................. 83.4 137.2
United Kingdom construction and facilities services ......... 255.1 154.6
Other international construction and facilities services .... 0.5 3.0
Corporate administration .................................... 267.9 121.9
-------- --------
Total worldwide operations .................................. $2,089.0 $1,778.9
======== ========
56
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
----------- ----------- ----------- -----------
2006 QUARTERLY RESULTS
Revenues ............................ $ 1,151,077 $ 1,220,423 $ 1,269,634 $ 1,379,902
Gross profit ........................ $ 114,833 $ 133,528 $ 147,872 $ 171,444
Net income .......................... $ 7,013 $ 16,861 $ 22,553 $ 40,207
Basic EPS - continuing operations ... $ 0.24 $ 0.53 $ 0.71 $ 1.26
Basic EPS - discontinued operations . (0.02) -- -- --
----------- ----------- ----------- -----------
$ 0.22 $ 0.53 $ 0.71 $ 1.26
=========== =========== =========== ===========
Diluted EPS - continuing operations . $ 0.24 $ 0.52 $ 0.69 $ 1.22
Diluted EPS - discontinued operations (0.02) -- -- --
----------- ----------- ----------- -----------
$ 0.22 $ 0.52 $ 0.69 $ 1.22
=========== =========== =========== ===========
2005 QUARTERLY RESULTS
Revenues ............................ $ 1,083,755 $ 1,168,831 $ 1,210,354 $ 1,233,663
Gross profit ........................ $ 99,202 $ 111,971 $ 131,083 $ 156,159
Net income .......................... $ 1,913 $ 7,933 $ 30,864 $ 19,332
Basic EPS - continuing operations ... $ 0.07 $ 0.24 $ 1.02 $ 0.62
Basic EPS - discontinued operations . (0.01) 0.01 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.99 $ 0.62
=========== =========== =========== ===========
Diluted EPS - continuing operations . $ 0.06 $ 0.24 $ 1.00 $ 0.60
Diluted EPS - discontinued operations (0.00) 0.01 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.97 $ 0.60
=========== =========== =========== ===========
NOTE O -- LEGAL PROCEEDINGS
In July 2003, our subsidiary, Poole and 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 investigating, among other
things, public corruption and fraud in the use of minority and woman-owned
business enterprises. On April 26, 2004, Poole & Kent was identified as a target
of that investigation. Poole & Kent has cooperated with investigators from the
time it first learned of the investigation, has responded to various subpoenas
and requests for documents and other information, and, in the course of its
cooperation with investigators, has waived its attorney client privilege and
other client/lawyer confidentiality protections. In connection with such
investigation, on September 6, 2005, a former employee of Poole & Kent and his
wife pled guilty to federal mail fraud charges that they used a fraudulent
woman's owned business enterprise ("WBE") in order to enrich themselves, to help
Poole & Kent qualify for certain public construction projects and to corrupt a
former Maryland state senator. The former employee also pled guilty to filing a
false federal personal income tax return as a result of his failure to report on
his federal income tax return the value of free work that was done at his home
by Poole & Kent. On October 17, 2005, the grand jury returned an indictment
charging W. David Stoffregen ("Stoffregen"), the former President and Chief
Executive Officer of Poole & Kent, and a former Maryland state senator and his
wife with racketeering, mail fraud and related offenses, related to the
fraudulent WBE and corruption schemes. On October 26, 2005, a former Poole &
Kent project manager pled guilty to making false statements to federal
investigators during the grand jury investigation. More recently, on October 20,
2006, Stoffregen's former administrative assistant pled guilty to a charge of
misprision of a felony for deliberately withholding from investigators and the
grand jury a scheme by Stoffregen to defraud Poole & Kent. On December 4, 2006,
Stoffregen entered a plea of guilty to racketeering conspiracy, mail fraud and
tax charges, related to the fraudulent WBE scheme, his efforts to corrupt the
Maryland state senator and his defrauding of Poole & Kent. Poole & Kent had
terminated Stoffregen prior to his indictment in October 2005 because of his
refusal to cooperate with federal investigators.
57
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
electrical and mechanical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $77.3 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 $22.7 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
A civil action, (the "First Anti-Trust Action") is pending 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 from at least 1996 through 2002, conspired
to prevent competition and to monopolize the market for telecommunications
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 $50.0 million after
trebling plus attorney's fees and unspecified compensatory and punitive damages
on their common law claims. However, plaintiffs' damages expert has stated in
his pre-trial deposition that he estimates plaintiffs' total damages of $8.7
million before trebling. Forest has denied the allegations of wrongdoing set
forth in the complaint, and pre-trial discovery has been completed. No trial
date has been set by the Court. Defendants are scheduled to move for summary
judgment dismissing all claims in February 2007. 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.
Another civil action (the "Second Anti-Trust Action") is pending against
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 a
competitor, who is one of the plaintiffs in the First Anti-Trust Action
described above, and whose employees are not members of the IBEW. The Second
Anti-Trust Action alleges, among other things, that Forest, six other electrical
contractors (four of whom were named as defendants in the First Anti-Trust
Action) and the IBEW conspired from at least January 2003 to prevent competition
in the market for telecommunications wiring services in the New York City area
thereby excluding plaintiffs from wiring jobs in that market. Plaintiff alleges
that it lost profits as a result of the concerted activity and seeks an
undetermined amount of damages for its anti-trust claims, which it seeks to have
trebled, plus attorneys' fees and alleges $30.0 million in compensatory damages
and unspecified punitive damages for its common law claims. Forest has not yet
answered the complaint.
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 any significant liabilities will result.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR
Group, Inc. and Subsidiaries as of December 31, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, 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.
As discussed in Note B to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123(R) (revised 2004),
"Share-Based Payment" and Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans" in fiscal year 2006.
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, 2006,
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 20, 2007 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 20, 2007
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To 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, 2006, 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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006 of EMCOR Group, Inc. and our report dated February 20, 2007 expressed
an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 20, 2007
60
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, Mark A. Pompa, 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, 2006, 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, 2006.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 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, 2006.
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, 2006 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.
61
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
REGISTRANT
The information required by this Item 10 with respect to directors is
incorporated herein by reference to the Section of our definitive Proxy
Statement for the 2007 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 sections 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 and Audit Committee
financial experts is incorporated by reference to the section of the Proxy
Statement entitled "Meetings and Committees of the Board of Directors" and
"Corporate Governance". 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 "Compensation
Discussion and Analysis", "Executive Compensation and Related Information",
"Potential Post Employment Payments", "Compensation of Directors", "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 AND DIRECTOR
INDEPENDENCE
The information required by this Item 13 is incorporated herein by
reference to the sections of the Proxy Statement entitled "Related Party
Transactions" and "Corporate Governance".
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".
62
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, 2006 and 2005
Consolidated Statements of Operations -- Years Ended December 31,
2006, 2005 and 2004
Consolidated Statements of Cash Flows -- Years Ended December 31,
2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity and Comprehensive
Income -- Years Ended December 31, 2006, 2005 and 2004
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.
63
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, 2006 ...................... $29,973 1,112 957 (7,021) $25,021
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
- ----------
(1) Amount principally relates to business acquisitions and divestitures.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
64
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
2(a) Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR's Report on Form
Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. 8-K dated February 14, 2002
3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10
December 15, 1994
3(a-2) Amendment dated November 28, 1995 to the Restated 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 of Exhibit 3(a-4) to EMCOR's Annual Report
Incorporation for the year ended December 31, 2006
("2006 Form 10-K")
3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report
on Form 10-K for the year ended
December 31, 1998 ("1998 Form 10-K")
3(c) Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on Form 8-K
Bank of New York dated March 3, 1997
4(a) U.S. $375,000,000 Credit Agreement dated October 14, 2005 by Exhibit 4 to EMCOR's Report on Form 8-K
and among EMCOR Group, Inc and certain of its subsidiaries and (Date of Report October 17, 2005)
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 Exhibit 4(b) to 2006 Form 10-K
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
4(c) Commitment Amount Increase Request dated November 21, 2005 Exhibit 4(c) to 2006 Form 10-K
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 Exhibit 4(d) to 2006 Form 10-K
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 Exhibit 4(e) to 2006 Form 10-K
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 Exhibit 4(f) to 2006 Form 10-K
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
65
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
4(g) Assignment and Acceptance dated November 29, 2005 between Exhibit 4(g) to 2006 Form 10-K
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 of Exhibit 10.1 to the April 2005 Form 8-K
Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz and
Mark A. Pompa
10(c) Letter Agreement dated October 12, 2004 between Anthony Guzzi Exhibit 10.1 to EMCOR's Report on Form
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 each Exhibit F to Guzzi Letter Agreement
of its officers and directors
10(f) Severance Agreement dated October 25, 2005 between Anthony Exhibit D to the Guzzi Letter Agreement
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 Plan Exhibit 10(p) to 2001 Form 10-K
("1995 Option Plan")
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 Plan Exhibit 10(k) to EMCOR's Annual Report
("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 Frank T. Exhibit 10(a) to EMCOR's Quarterly
MacInnis and EMCOR ("MacInnis Continuity Agreement") Report on Form 10-Q for the quarter ended
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 ended June
Agreement 30, 1999 ("June 1999 Form 10-Q")
10(l-1) Continuity Agreement dated as of June 22, 1998 between Sheldon Exhibit 10(c) to the June 1998 Form 10-Q
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 Leicle Exhibit 10(d) to the June 1998 Form 10-Q
E. Chesser and EMCOR ("Chesser Continuity Agreement")
66
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
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 R. Exhibit 10(f) to the June 1998 Form 10-Q
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 Mark A. Exhibit 10(g) to the June 1998 Form 10-Q
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
Agreement 10-Q
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-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Exhibit 4.1 to EMCOR's Registration
Plan") Statement on Form S-8 (No. 333-112940
filed with the Securities and Exchange
Commission on February 18, 2004
("2004 Form S-8")
10(q-2) Form of Certificate Representing Restrictive Stock Units Exhibit 10.1 to EMCOR's Report on Form
("RSU's") issued under the Stock Bonus Plan Manditorily 8-K (Date of Report March 4, 2005) (the
Awarded "March 4, 2005 Form 8-K")
10(q-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(r) 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(s) First Amendment to Incentive Plan for Senior Executives Exhibit 10(t) to 2006 Form 10-K
10(t) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of Report
December 15, 2005)
10(u-1) 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's proxy statement
("2003 Proxy Statement") for its annual
meeting held June 12, 2003
10(u-2) First Amendment to 2003 Non-Employees Director Plan * Page __
10(v-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement
10(v-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")
67
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(v-3) Second Amendment to 2003 Management Stock Incentive Plan * Page __
10(w) Form of Stock Option Agreement evidencing grant of stock Exhibit 10.1 to Form 8-K (Date of Report
options under the 2003 Management Stock Incentive Plan January 5, 2005)
10(x) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for
its annual meeting held June 16, 2005
("2005 Proxy Statement")
10(y) 2005 Management Stock Incentive Plan Exhibit C to EMCOR's 2005 Proxy Statement
10(z) First Amendment to 2005 Management Stock Incentive Plan * Page __
10(a)(a-1) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement
10(a)(a-2) First Amendment to 2005 Stock Plan for Directors * Page __
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis dated Exhibit 4.4 to 2004 Form S-8
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
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 June Exhibit 4.8 to 2004 Form S-8
19, 2002, October 25, 2002 and February 27, 2003
10(g)(g) Form of EMCOR Option Agreement for Executive Officers and Exhibit 10(g)(g) to 2005 Form 10-K
Guzzi dated January 3, 2005
10(h)(h) Release and Settlement Agreement dated February 25, 2004 Exhibit 10 (a)(a) to EMCOR's Annual
between Jeffrey M. Levy and EMCOR Report 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 2006 and 2005*
14 Code of Ethics of EMCOR for Chief Executive Officer and Senior Exhibit 14 to 2003 Form 10-K
Financial Officers
21 List of Significant Subsidiaries * Page __
23.1 Consent of Ernst & Young LLP * Page __
68
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Page __
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 Act Page __
of 2002 by the Executive Vice President and Chief Financial
Officer *
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act Page __
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 Act Page __
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.
69
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 22, 2007 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 22, 2007.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors and
------------------------------ Chief Executive Officer
Frank T. MacInnis (Principal Executive Officer)
/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/ MARK A. POMPA Executive Vice President and
------------------------------ Chief Financial Officer
Mark A. Pompa (Principal Financial and Accounting Officer)
70