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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, 2007
[_] 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. [X]
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). Large Accelerated Filer [X] Accelerated Filer [_] Non-Accelerated
Filer [_]
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 $1,824,000,000 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 15, 2008: 65,228,381 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2008 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 ................................................................................................ 5
Backlog .................................................................................................. 5
Available Information .................................................................................... 5
Item 1A. Risk Factors ............................................................................................... 5
Item 1B. Unresolved Staff Comments .................................................................................. 9
Item 2. Properties ................................................................................................. 10
Item 3. Legal Proceedings .......................................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ........................................................ 13
Executive Officers of the Registrant ....................................................................... 14
PART II
Item 5. Market for 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 ................................................. 30
Item 8. Financial Statements and Supplementary Data ............................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 63
Item 9A. Controls and Procedures .................................................................................... 63
Item 9B. Other Information .......................................................................................... 63
PART III
Item 10. Directors, Executive Officers and Corporate Governance ..................................................... 64
Item 11. Executive Compensation ..................................................................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............. 64
Item 13. Certain Relationships and Related Transactions, and Director Independence .................................. 64
Item 14. Principal Accounting Fees and Services ..................................................................... 64
PART IV
Item 15. Exhibits and Financial Statement Schedules ................................................................. 65
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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, 2007, June 30, 2007 and September 30, 2007 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 2007, we had revenues of approximately $5.9 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 Middle East, we carry on business
through a joint venture. 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 principally 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 Industrial maintenance and services;
o Commercial and government site-based operations and maintenance;
o Military base operations support services;
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 29,000 employees.
1
Our revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of our
2007 revenues, approximately 81% were generated in the United States and
approximately 19% were generated internationally. In 2007, approximately 50% of
revenues were derived from new construction projects, 23% were derived from
renovation and retrofit of customer's existing facilities and 27% were derived
from facilities services operations.
The broad scope of our operations is more particularly described below. For
information regarding the revenues, operating income and total assets of each of
our segments with respect to each of the last three fiscal years, and our
revenues and assets attributable to the United States, Canada, the United
Kingdom and all other foreign countries, see Note N - 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 energy savings and environmental
control in individual spaces have created expanded opportunities for our
electrical and mechanical services businesses. The demand for these services is
typically driven by non-residential construction and renovation activity. Total
spending in the United States for non-residential construction exceeded $630.0
billion in 2007, an increase of 15.6% from such spending in 2006, according to
the United States Census Bureau. This increase in spending has been driven by,
among other things, lower office and commercial vacancy rates, higher
manufacturing utilization rates and institutional and governmental
infrastructure spending.
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 60% of our 2007 revenues, of which revenues
approximately 68% were related to new construction and approximately 32% were
related to renovation and retrofit projects. Our United Kingdom and Canada
electrical and mechanical construction services operations accounted for
approximately 13% of our 2007 revenues, of which revenues approximately 73% were
related to new construction and approximately 27% 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, food, 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 35% of our construction services revenues in 2007.
Our projects of less than $10.0 million accounted for approximately 65% of
our 2007 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.
2
We have expanded our United States fire protection systems business through
acquisitions in 2007 and 2006. In 2007, our fire protection systems business
revenues were over $200.0 million, and these revenues are included in
our United States mechanical construction and facilities services segment.
We have a broad customer base with many long-standing relationships. We
perform services pursuant to contracts with owners, such as corporations,
municipalities and other governmental entities, general contractors, systems
suppliers, construction managers, developers, other subcontractors and tenants
of commercial properties. Institutional and public works projects are frequently
long-term complex projects that require significant technical and management
skills and the financial strength to obtain bid and performance bonds, which are
often a condition to bidding for and winning these projects.
We also install and maintain lighting for streets, highways, bridges and
tunnels, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, we manufacture and install sheet metal air
handling systems for both our own mechanical construction operations and for
unrelated mechanical contractors. We also maintain welding and pipe fabrication
shops in support of some of our mechanical operations.
Our United States facilities services segment, as well as our other
segments, provide facilities services to a wide range of commercial, industrial
and institutional facilities, including both those for which we have provided
construction services and those for which construction services were provided by
others. Facilities services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by our employees based at
customer sites.
These facilities services, which generated approximately 27% of our 2007
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. Of our 2007 facilities services revenues,
approximately 80% were generated in the United States and approximately 20% were
generated internationally.
In 1997, we established a subsidiary to expand our facilities services
operations 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 industrial maintenance and services,
commercial and government site-based operations and maintenance, military base
operations support services, 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, refineries, and major
corporations engaged in information technology, telecommunications,
pharmaceuticals, petrochemicals, 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 facilities services to such preeminent buildings as the Ronald
Reagan Building, the second largest federal government facility after the
Pentagon. We also provide facilities services to a number of military bases,
including base operations support services to the Navy Capital Region, which,
among other facilities, includes the Bethesda Naval Hospital, the Naval Research
Laboratory and the Washington Navy Yard. We are also involved in joint ventures
providing facilities services to the Navy, including one providing facilities
services to the Naval Submarine Base in Bangor, Washington and the Naval
Hospital in Bremerton, Washington. The agreements pursuant to which this
division provides services to the federal government are subject to
renegotiation of terms and prices, termination by the government prior to the
expiration of the term and non-renewal.
In September 2007, we expanded our facilities services business in the
industrial sector by acquiring FR X Ohmstede Acquisition Co. ("Ohmstede").
Headquartered in Beaumont, Texas, Ohmstede is the leading North American
provider of aftermarket maintenance and repair services, replacement parts and
fabrication services for highly engineered shell and tube heat exchangers for
refineries and the petrochemical industry. Through Ohmstede, we provide in-shop
repairs and customized design and manufacturing for heat exchangers as well as
related equipment at five facilities on the U.S. Gulf Coast and at a facility in
the Los Angeles, California area and provide cleaning services for heat
exchangers at one of our Texas facilities. In addition, we provide aftermarket
maintenance of shell and tube heat exchangers in the field. These services are
tailored to meet customer needs for scheduled turnarounds or specialty callout
service. We also have embedded multi-year contracts with refineries pursuant to
which our crews and equipment are located at customers' plants, allowing our
employees to perform specialty services for heat exchangers and related
equipment on a daily basis.
3
We currently provide facilities services in a majority of 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; (e) diagnostic and
solution engineering for building systems and their components; and (f) as a
result of our Ohmstede acquisition, on-site field services for refineries.
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 several 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 and energy
efficiency system retrofits. Our energy services business' recent projects
include: (a) engineering, procurement and construction of two renewable energy
facilities to process landfill gas into pipeline quality natural gas; (b)
construction of several multi-megawatt cogeneration projects for Johnson &
Johnson, the University of New Hampshire and Pluma Sierra Rural Electric
Cooperative; and (c) provision of evaluation, engineering, project development,
and construction management services for the San Francisco Public Utilities
Commission, Pacific Gas & Electric Company and Southern California Edison for
self generation and alternative generation projects and a wide range of
conservation and efficiency projects. In addition, we have recently been
selected to design, build and operate three multi-megawatt renewable energy
projects in Connecticut - two for hospitals and one for a municipality. Over the
past five years, we have also completed a number of 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.
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 also 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. However, there are relatively
few significant barriers to entry to several types of our construction services
business.
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 Group International, 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. With respect to our Ohmstede industrial
services operations, Ohmstede is the leading North American provider of
aftermarket maintenance and repair services, replacement parts and fabrication
services for highly engineered shell and tube heat exchangers. 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 29,000 people, approximately 73% 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 one of these
collective bargaining agreements is national or regional in scope.
4
BACKLOG
We had backlog as of December 31, 2007 of approximately $4.49 billion,
compared with backlog of approximately $3.50 billion as of December 31, 2006.
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 include 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.
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 CONSTRUCTION SERVICES.
The demand for construction services from our customers has been, and will
likely continue to be, cyclical in nature and vulnerable to downturn in the
industries we service, as well as the economies we operate in. If the general
level of economic activity slows, it is possible that 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 there is a significant
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, which are
used as components of supplies or materials 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
7,500 vehicles. Most of our construction contracts do not allow us to adjust our
prices and, as a result, increases in material or fuel costs could reduce our
profitability.
5
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 most 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 facilities
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
revenues 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 actual 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 gross profits
from projects to differ from those we originally estimated and could result in
reduced profitability or losses on projects. Depending upon the size of a
particular project, variations from the estimated contract costs can have a
significant impact on our operating results for any fiscal quarter or year.
WE COULD INCUR ADDITIONAL COSTS TO COVER GUARANTEES. In some instances, we
guarantee completion of a project by a specific date, achievement of certain
performance standards or performance of our services 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 revenues, net income and liquidity if any of the following occur:
o customers cancel a significant number of contracts;
o we fail to win a significant number of our existing contracts upon
re-bid;
o we complete a significant number of non-recurring projects and cannot
replace them with similar projects; or
o we fail to reduce operating and overhead expenses consistent with any
decrease in our revenues.
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
are 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.
6
WE MAY BE UNABLE TO ATTRACT AND RETAIN SKILLED 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 are dependent upon our project managers and field supervisors
who are responsible for managing our projects; and there can be no assurance
that any individual will continue in his or her capacity for any particular
period of time. Industry-wide competition for such management talent has
increased and the loss of such qualified employees could have an adverse effect
on our business. 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 UNIONIZED WORKFORCE COULD ADVERSELY AFFECT OUR OPERATIONS. As of
December 31, 2007, approximately 73% of our employees were covered by collective
bargaining agreements. Although the majority of these agreements prohibit
strikes and work stoppages, we cannot be certain that strikes or work stoppages
will not occur in the future. However, only one of our collective bargaining
agreements is national or regional in scope, and our collective bargaining
agreements do not necessarily expire at the same time. Strikes or work stoppages
would adversely impact our relationships with our customers and could have a
material adverse effect on our financial condition, results of operations and
cash flows.
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 AND OTHER LEGAL PROCEEDINGS MAY HARM OUR
OPERATING RESULTS OR FINANCIAL CONDITION. We are a party to lawsuits and other
legal proceedings, most of which are in the normal course of our business.
Litigation and other legal proceedings 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
legal proceeding could have a material adverse effect on our business, operating
results, financial condition, and in some cases, on our reputation or our
ability to obtain projects from governmental entitites. See Item 3. Legal
Proceedings, for more information regarding certain legal proceedings in which
we are involved.
OPPORTUNITIES WITHIN THE GOVERNMENT SECTOR COULD LEAD TO INCREASED
GOVERNMENTAL REGULATION APPLICABLE TO US AND UNRECOVERABLE STARTUP 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 review 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.
7
Surety market conditions have in recent 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 profitability could be adversely affected.
WE MAY INCUR LIABILITIES OR SUFFER NEGATIVE FINANCIAL IMPACT RELATING TO
OCCUPATIONAL, HEALTH AND SAFETY MATTERS. Our operations are subject to extensive
laws and regulations relating to the maintenance of safe conditions in the
workplace. While we have invested, and will continue to invest, substantial
resources in our robust occupational, health and safety programs, our industry
involves a high degree of operational risk, and there can be no assurance that
we will avoid significant liability exposure. These hazards can cause personal
injury and loss of life, severe damage to or destruction of property and
equipment and other consequential damages and could lead to suspension of
operations, large damage claims and, in extreme cases, criminal liability.
Our customers seek to minimize safety risks on their sites and they
frequently review the safety records of outside contractors during the bidding
process. If our safety record were to substantially deteriorate over time, we
might become ineligible to bid on certain work and our customers could cancel
our contracts and not award us future business.
IF WE FAIL TO INTEGRATE FUTURE ACQUISITIONS SUCCESSFULLY, THIS COULD
ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. As part of our growth
strategy, we acquire companies that expand, complement or diversify our
business. Future acquisitions may expose us to operational challenges and risks,
including the diversion of management's attention from our existing business,
the failure to retain key personnel or customers of an acquired business, the
assumption of unknown liabilities of the acquired business for which there are
inadequate reserves and the potential impairment of acquired intangible assets.
Our ability to sustain our growth and maintain our competitive position may be
affected by our ability to identify and acquire desirable business and
successfully integrate any businesses acquired.
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 identifiable
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 estimates and assumptions to
allo-
8
cate 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 REVENUES OR
TRANSLATE INTO PROFITS. Many of our contracts do not require purchase of a
minimum amount of services. In addition, many contracts are cancellable 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 it is
possible that we could experience such delays or cancellations in the future. If
our backlog fails to materialize, we could experience a reduction in revenues
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 revenues
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 revenues recorded on a contract at
a specified point in time is that percentage of total estimated revenues that
incurred costs to date bear to total estimated costs. Accordingly, contract
revenues and total cost estimates are reviewed and revised monthly as the work
progresses. Adjustments are reflected in contract revenues 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 would 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 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; and
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
9
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 6/30/12
20545 Belshaw Avenue
Carson, California (a) ........................ 29,227 8/31/12
1168 Fesler 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
19800 Normandie Avenue
Torrance, California (a) ...................... 36,264 3/31/14
8670 Younger Creek Drive
Sacramento, California (a) .................... 54,135 1/13/12
940 Remillard Court
San Jose, California (a) ...................... 119,560 7/31/17
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 9/30/12
3100 Woodcreek Drive
Downers Grove, Illinois (c) ................... 55,551 7/31/17
1406 Cardinal Court
Urbana, Illinois (b) .......................... 30,500 9/30/12
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ....................... 136,695 10/31/08
10
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
2655 Garfield Road
Highland, Indiana (c) ......................... 45,816 6/30/11
3100 and 3116 Brinkerhoff Road
Kansas City, Kansas (b) ....................... 42,836 11/30/08
4250 Highway 30
St. Gabriel, Louisiana (a) .................... 90,000 Owned
1750 Swisco Road
Sulphur, Louisiana (a) ........................ 112,000 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 12/31/12
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) ........................... 91,831 11/1/17
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 10/31/12
9815 Roosevelt Boulevard
Philadelphia, Pennsylvania (a) ................ 33,405 11/30/11
4067 New Getwell Road
Memphis, Tennessee (a) ........................ 36,000 1/31/08
937 Pine Street
Beaumont, Texas (a) ........................... 78,962 Owned
895 N. Main Street
Beaumont, Texas (a) ........................... 75,000 Owned
410 Flato Road
Corpus Christi, Texas (a) ..................... 57,000 Owned
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
11
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
12415 Highway 225
La Porte, Texas (a) ........................... 78,000 Owned
1574 South West Temple
Salt Lake City, Utah (c) ...................... 120,904 Month-To-Month
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
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 L - 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.
12
ITEM 3. LEGAL PROCEEDINGS
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 $78.5 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $23.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem for work performed through 1996.
On December 17, 2007, one of our subsidiaries, F&G Mechanical Corp.
("F&G"), was served with a grand jury subpoena duces tecum issued by a grand
jury empanelled by the United States District Court for the District of New
Jersey that is investigating allegations of union corruption. Two additional
subpoenas for documents were served on F&G in January 2008. F&G and one of its
vice presidents have been identified as targets of the investigation in
connection with certain payments made to third parties by F&G for services to
F&G at various construction sites. F&G has produced documents in response to the
subpoenas and has cooperated with investigators since learning of the
investigation.
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.
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,
2007.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 61; 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 43; 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 68; 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.
R. KEVIN MATZ, Age 49; Executive Vice President - Shared Services of the
Company since December 2007 and Senior Vice President - Shared Services from
June 2003 to December 2007. From April 1996 to June 2003, Mr. Matz served as
Vice President and Treasurer of the Company and Staff Vice President - Financial
Services of the Company from March 1993 to April 1996. From March 1991 to March
1993, Mr. Matz was Treasurer of Sprague Technologies Inc., a manufacturer of
electronic components.
MARK A. POMPA, Age 43; 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.
14
PART II
ITEM 5. MARKET FOR 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 the 2-for-1 stock splits effected in the form of 100% stock
distributions made on July 9, 2007 and February 10, 2006:
2007 HIGH LOW
---- ---- ---
First Quarter ....................... $31.85 $27.28
Second Quarter ...................... $37.67 $28.60
Third Quarter ....................... $38.69 $27.10
Fourth Quarter ...................... $35.21 $23.29
2006 HIGH LOW
---- ---- ---
First Quarter ....................... $24.98 $16.88
Second Quarter ...................... $26.33 $22.11
Third Quarter ....................... $28.85 $21.33
Fourth Quarter ...................... $31.95 $26.63
HOLDERS. As of February 15, 2008, there were 62 stockholders of record and,
as of that date, we estimate there were approximately 14,405 beneficial owners
holding our common stock in nominee or "street" name.
DIVIDENDS. We did not pay dividends on our common stock during 2007 or
2006, 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, 2007, 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
has been adjusted for the 2-for-1 stock splits effected on July 9, 2007 and
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 2,556,294 $14.48 1,365,000(2)
Equity Compensation
Plans Not Approved
by Security Holders 2,679,016(1) $10.89 --
--------- ---------
Total 5,235,310 $12.64 1,365,000
========= =========
- -------------
(1) 36,000 shares relate to outstanding options to purchase shares of our
common stock which were granted to our employees (other than executive
officers) (the "Employee Options"), 2,554,132 shares relate to outstanding
options to purchase shares of our common stock which were granted to our
executive officers (the "Executive Options"), 40,000 shares relate to
outstanding options to purchase shares of our common stock which were
granted to our Directors (the "Director Options"), and 48,884 shares relate
to restricted stock units ("RSUs") described below under "Restricted Share
Units."
(2) Represents shares of our common stock available for future issuance under
our 2007 Incentive Plan, which 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.
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 splits effected on July 9, 2007 and
February 10, 2006.
260,000 of the Executive Options referred to in note (1) to the Table were
granted to six of our then 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 $4.39 and $6.36
per share. Such Executive Options vested on the first anniversary of the grant
date.
2,294,132 of the Executive Options referred to in note (1) to the Table
were granted to six of our then 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 106,000 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 of 448,000 of such Executive Options were granted on
December 14, 2001 (exercisable in full upon grant) with an exercise price of
$10.43 per share, (ii) an aggregate of 462,800 of such Executive Options were
granted on January 2, 2002 with an exercise price of $11.59 per share, (iii) an
aggregate of 507,740 of such Executive Options were granted on January 2, 2003
with an exercise price of $13.69, (iv) an aggregate of 769,592 of such Executive
Options were granted on January 2, 2004 with an exercise price of $10.96 and (v)
106,000 of such Executive Options were granted to Mr. Guzzi on October 25, 2004
with an exercise price of $9.67 per share. 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 became 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 splits effected on July 9, 2007 and
February 10, 2006.
During 2002, each of our non-employee directors received 8,000 Director
Options. These options were in addition to the 12,000 options to purchase our
common stock that were granted on the same date 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
$13.88 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
$12.94 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 for each of the years 2001 through 2005 has been automatically
credited to him in the form of Restricted Stock Units ("RSUs") to 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 was determined. Issuance of RSUs
under the Stock Bonus Plan was discontinued after issuance of RSUs in respect of
2005. Outstanding RSUs 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 are to be
converted into common stock at a 15% discount from the fair market value of
common stock as of the date the annual bonus was 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 the calendar year in respect of which the bonus was
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 the 2-for-1 stock splits effected in the form of 100% stock
distributions made July 9, 2007 and February 10, 2006. See Note I - 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 an ownership interest in a consolidated
joint venture in 2007 and the sales of subsidiaries in each of 2006 and 2005.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------- ------------- ------------- ------------- -------------
Revenues ........................................... $ 5,927,152 $ 4,901,783 $ 4,592,990 $ 4,615,635 $ 4,411,230
Gross profit ....................................... 702,822 552,400 485,133 432,852 468,405
Operating income ................................... 199,825 111,772 74,671 37,574 45,338
Net income ......................................... $ 126,808 $ 86,634 $ 60,042 $ 33,207 $ 20,621
============= ============= ============= ============= =============
Basic earnings per share - continuing operations ... $ 1.93 $ 1.35 $ 0.95 $ 0.53 $ 0.34
Basic earnings per share - discontinued operations . 0.04 0.02 0.01 0.02 0.00
------------- ------------- ------------- ------------- -------------
` $ 1.97 $ 1.37 $ 0.96 $ 0.55 $ 0.34
============= ============= ============= ============= =============
Diluted earnings per share - continuing operations . $ 1.86 $ 1.30 $ 0.93 $ 0.51 $ 0.33
Diluted earnings per share - discontinued operations 0.04 0.02 0.01 0.02 0.00
------------- ------------- ------------- ------------- -------------
$ 1.90 $ 1.32 $ 0.94 $ 0.53 $ 0.33
============= ============= ============= ============= =============
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
-----------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------- ------------- ------------- ------------- -------------
Stockholders' equity (1) ........................... $ 885,041 $ 710,309 $ 615,436 $ 562,361 $ 521,356
Total assets ....................................... $ 2,871,643 $ 2,089,023 $ 1,778,941 $ 1,817,969 $ 1,795,247
Goodwill ........................................... $ 563,918 $ 288,165 $ 283,412 $ 279,432 $ 277,994
Borrowings under working capital credit lines ...... $ -- $ -- $ -- $ 80,000 $ 139,400
Term loan, including current maturities ............ $ 225,000 $ -- $ -- $ -- $ --
Other long-term debt, including current maturities . $ 93 $ 332 $ 387 $ 476 $ 589
Capital lease obligations, including current
maturities ....................................... $ 2,151 $ 1,566 $ 1,570 $ 1,662 $ 339
- -------------
(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 Middle East, we carry
on business through a joint venture.
17
OVERVIEW
The following table presents selected financial data for the fiscal years ended
December 31, 2007, 2006 and 2005 (in millions, except percentages and earnings
per share):
2007 2006 2005
---------- ---------- ---------
Revenues ............................................ $ 5,927.2 $ 4,901.8 $ 4,593.0
Revenues increase from prior year ................... 20.9% 6.7% --
Operating income .................................... $ 199.8 $ 111.8 $ 74.7
Operating income as a percentage of revenues ........ 3.4% 2.3% 1.6%
Net income .......................................... $ 126.8 $ 86.6 $ 60.0
Diluted earnings per share from continuing operations $ 1.86 $ 1.30 $ 0.93
Cash flows provided by operating activities ......... $ 259.0 $ 210.0 $ 145.4
The results of operations for the year ended December 31, 2007 ("2007")
reflect continuing improvement compared to our historical results. In 2007, we
achieved record highs in revenues, operating income, operating margin (operating
income as a percentage of revenues), net income and diluted earnings per share.
Revenues and operating income increased in 2007 compared to the year ended
December 31, 2006 ("2006") primarily due to: (a) increased awards and improved
performance of United States construction work in the hospitality, high-tech,
healthcare, commercial, institutional, industrial and water/wastewater treatment
markets as these markets have continued to grow, (b) the addition of revenues
and operating income from companies acquired in 2007 and 2006 and (c) increased
demand for maintenance/retrofit work of the type provided by our mobile services
in our United States facilities services segment, in part due to increased
demand for more efficient energy systems. Negatively impacting the 2007 results
of operations was the performance of our United Kingdom construction and
facilities services segment. This segment's operating loss of $12.9 million
primarily reflected the negative results of its rail division.
While our selling, general and administrative expenses increased primarily
due to: (a) companies acquired during 2007 and (b) an increase in
incentive-based compensation as a result of improved profits in 2007 compared to
2006, selling, general and administrative expenses as a percentage of revenues
declined to 8.5% for 2007 from 9.0% for 2006. This decrease as a percentage of
revenues primarily related to our ability to increase revenues without having to
substantially increase overhead costs. The increase in selling, general and
administrative expenses for 2007 when compared to 2006 was partially offset by a
reduction in certain staff and facilities, particularly those associated with
our United States facilities services segment (as a result of restructuring
activities during 2006), and a reduction in deferred compensation expense of
$6.4 million compared to 2006 deferred compensation expense due to a decrease in
our liability corresponding with a reduction in the market price of our common
stock during 2007. For 2007, selling, general and administrative expenses
included amortization expense of $9.2 million attributable to identifiable
intangible assets associated with acquisitions compared to $4.3 million of
amortization expense for 2006.
Our cash and cash equivalents were $251.6 million at December 31, 2007
compared to $273.7 million at December 31, 2006. The decrease in cash and cash
equivalents during 2007 was primarily due to cash flows used for investing
activities of $526.4 million primarily related to the acquisition of five
businesses in 2007. Offsetting the cash used for investing activities was cash
provided by operating activities of $259.0 million in 2007 and cash provided by
financing activities of $243.7 million. Our reported interest income for 2007
was $13.2 million, a $7.0 million improvement over 2006 interest income of $6.2
million, which was mostly offset by $6.9 million of additional interest expense
related to financing activities as noted below. On September 19, 2007, we
financed the acquisition of FR X Ohmstede Acquisition Co. ("Ohmstede") with
$300.0 million from newly incurred term loan debt and $155.4 million from our
own funds. We repaid $75.0 million of the term loan debt on December 31, 2007
(prior to the first scheduled principal payment of $0.75 million due March 31,
2008) and, because of the prepayment, we recorded as interest expense additional
amortization expense related to capitalized debt issuance costs of $0.9 million.
We funded our other 2007 acquisitions with cash on hand.
The 2007 acquisitions increased the geographical markets and industries in
which we offer our services and are a part of our strategic objective to further
diversify our overall business to provide a balance to our typically cyclical
construction services business. Ohmstede's, business, which is largely comprised
of providing maintenance services, has been included in our United States
facilities services segment and expands our industrial services to refineries
and the petrochemical industry. Ohmstede's business primarily provides
aftermarket maintenance and repair services, replacement parts and fabrication
services for highly engineered shell and tube heat exchangers.
On August 6, 2007, we sold our majority ownership interest in a joint
venture with CB Richard Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This sale
followed our purchase, for approximately $0.5 million, of certain of the joint
venture's assets. Included in the results of discontinued operations for 2007
was a gain of $1.2 million (net of income tax benefit of $1.8 million) resulting
from the sale of our joint venture interest. As of December 31, 2007, $5.5
million of purchase price had been received, and the balance is reflected as a
current note receivable on our Consolidated Balance Sheet.
18
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;
premises electrical and lighting systems; low-voltage systems, such as fire
alarm, security and process control; voice and data communication; 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; and central plant heating and cooling); (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
(industrial maintenance and services; commercial and government site-based
operations and maintenance; military base operations support services; 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 for energy systems), which services are not generally related to
customers' construction programs, as well as industrial services operations,
which primarily provide aftermarket maintenance and repair services, replacement
parts and fabrication services for highly engineered shell and tube heat
exchangers for refineries and the petrochemical industry. The Canada, United
Kingdom and Other international segments perform electrical construction,
mechanical construction and facilities services. Our "Other international
construction and facilities services" segment, currently operating only in the
Middle East, represents our operations outside of the United States, Canada and
the United Kingdom.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Our reportable segments reflect, for all years presented, discontinued
operations accounting due to the sale of our CBRE joint venture interest and the
sales of subsidiaries in each of 2006 and 2005, in addition to 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 2007 were $5.9 billion
compared to $4.9 billion for 2006 and $4.6 billion for 2005. Revenues increased
in 2007 compared to 2006 primarily due to: (a) increased awards and performance
of United States construction work in the hospitality, high-tech, healthcare,
commercial, institutional, industrial and water/wastewater treatment markets as
these markets have continued to grow, (b) the addition of revenues from
companies acquired in 2007 and 2006 and (c) increased demand for
mainte-nance/retrofit work of the type provided by our mobile services in our
United States facilities services segment, in part due to increased demand for
more efficient energy systems. The increased revenues for 2006 compared to the
year ended December 31, 2005 ("2005") was primarily attributable to a strong
commercial construction business cycle and to increased work for the
hospitality, high-tech, food and pharmaceutical markets.
As of December 31, 2007, our backlog was $4.49 billion, and as of December
31, 2006, our backlog was $3.50 billion. This increase in backlog was primarily
at the United States reporting segments and was due to increased demand for
hospitality, healthcare, transportation and industrial construction projects,
companies acquired during 2007 and increased awards due to our active pursuit of
opportunities in these and other markets. 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 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.
19
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, 2007, 2006 and 2005 (in millions,
except for percentages):
% OF % OF % OF
2007 TOTAL 2006 TOTAL 2005 TOTAL
---- ----- ---- ----- ---- -----
Revenues from unrelated entities:
United States electrical construction and facilities services $1,433.8 24% $1,280.2 26% $1,224.6 27%
United States mechanical construction and facilities services 2,343.1 40% 1,820.9 37% 1,671.6 36%
United States facilities services ........................... 1,048.1 18% 830.1 17% 681.6 15%
-------- -------- --------
Total United States operations .............................. 4,825.0 81% 3,931.2 80% 3,577.8 78%
Canada construction and facilities services ................. 382.0 6% 299.1 6% 342.1 7%
United Kingdom construction and facilities services ......... 720.2 12% 671.5 14% 673.1 15%
Other international construction and facilities services .... -- -- -- -- -- --
-------- -------- --------
Total worldwide operations .................................. $5,927.2 100% $4,901.8 100% $4,593.0 100%
======== ======== ========
Revenues of our United States electrical construction and facilities
services segment for 2007 increased $153.6 million compared to 2006. The
revenues increase was generally due to increased high-tech, hospitality and
commercial projects as a result of the strong high-tech, hospitality and
commercial construction markets. Revenues for 2006 increased $55.6 million
compared to 2005. This increase was primarily attributable to increased
commercial work as a result of a stronger commercial construction market and
greater availability of government project work.
Revenues of our United States mechanical construction and facilities
services segment for 2007 increased $522.2 million compared to 2006. The
revenues increase was primarily attributable to increased availability of
hospitality, healthcare, commercial, water/waste-water treatment and high-tech
construction projects due to growth in these markets and increased
maintenance/retrofit spending in part as a consequence of the impact of higher
energy costs, and the addition of $14.5 million and $132.5 million of revenues
from companies acquired during 2007 and 2006. Revenues for 2006 increased $149.3
million compared to 2005. This increase was primarily attributable to increased
commercial work as a result of an overall stronger commercial construction
market and greater availability of work in the hospitality, high-tech, food and
pharmaceutical markets.
United States facilities services revenues, which include those operations
that principally provide maintenance and consulting services, increased $218.0
million in 2007 compared to 2006. Companies acquired during 2007 contributed
$151.2 million to this increase in revenues. The increase in revenues was also
primarily attributable to the increased demand for both site-based government
facilities services and small projects and for maintenance/retrofit work of the
type provided by our mobile services group in this segment, in part due to
increased demand for more efficient energy systems. Revenues in this segment
increased by $148.5 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 during 2005, that accounted for
$64.3 million of this increase in revenues in 2006, and greater demand in 2006
for mobile services work. The increase in site-based contracts obtained in 2006
was related to an increase in the outsourcing of facilities services work,
augmented by our increased efforts to pursue opportunities for facilities
services work 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 of the Canada construction and facilities services segment
increased $82.9 million in 2007 compared to 2006. The increase in revenues for
2007 compared to 2006 was primarily related to various large projects obtained
in the industrial and power generation markets and $27.9 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
decreased by $43.0 million for 2006 compared to 2005. This 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.
United Kingdom construction and facilities services revenues increased
$48.7 million in 2007 compared to 2006, principally due to a $57.6 million
increase relating to the rate of exchange for British pounds to United States
dollars as a result of the strengthening of the British pound, additional
facilities services and construction work, partially offset by less rail project
work performed as certain of our rail projects were at or near completion as of
December 31, 2007 and a decision not to pursue significant new projects in the
rail sector. Revenues decreased $1.6 million for 2006 compared to 2005,
principally due to a refocus of our facilities services strategy. However, 2006
revenues from our commercial and transportation infrastructure construction
businesses increased over 2005 revenues due to an improvement in the commercial
construction market and significant transportation projects awarded to us. The
overall decrease in revenues in 2006 compared to 2005 would have been greater
except for $9.5 million of additional revenues related to the strengthening of
the British pound.
Other international construction and facilities services activities consist
of operations currently operating only in the Middle East. During each of 2007,
2006 and 2005, all of the projects in these markets were performed by joint
ventures that were accounted for under the equity method of accounting.
20
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, 2007, 2006 and 2005 (in
millions, except for percentages):
2007 2006 2005
-------- -------- ---------
Cost of sales .............................. $5,224.3 $4,349.4 $4,107.9
Gross profit ............................... $ 702.8 $ 552.4 $ 485.1
Gross profit margin ........................ 11.9% 11.3% 10.6%
The increase in gross profit (revenues less cost of sales) for 2007 when
compared to 2006 was primarily due to: (a) increased awards leading to higher
revenues and improved performance of United States construction work in the
hospitality, high-tech, healthcare, commercial, institutional, industrial and
water/wastewater treatment markets as these markets continued to grow and
increased maintenance/retrofit spending in part as a consequence of the impact
of higher energy costs, (b) the addition of gross profit from companies acquired
in 2007 and 2006 which contributed gross profit of $59.3 million and (c)
increased demand for the type of work provided by our mobile services in our
United States facilities services segment. Negatively impacting gross profit was
the performance of our United Kingdom construction and facilities services
segment. This segment's loss primarily reflected the negative results of its
rail division. Also, negatively impacting gross profit was a $5.5 million
impairment charge related to an other-than-temporary decline in fair value of
our investment in a joint venture in our United States facilities services
segment. The increase in gross profit margin (gross profit as a percentage of
revenues) for 2007 compared to 2006 primarily reflected the continuing trend in
our construction project mix toward higher margin work that is typically
associated with the types of projects referred to in the first sentence of this
paragraph and reduced losses from one company in our United States electrical
construction and facilities services segment. Gross profit margin was negatively
impacted in 2007 compared to 2006 due to losses on the United Kingdom rail
projects and $7.8 million of amortization expense recorded in cost of sales
associated with the contract backlog of companies acquired in 2007.
Gross profit increased by $67.3 million for 2006 compared to 2005. Gross
profit margin was 11.3% for 2006 compared to 10.6% for 2005. This 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 a civil action between one of our subsidiaries and the Upper
Occoquan Sewage Authority (the "UOSA Action"). These 2006 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.
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, 2007, 2006 and 2005 (in millions, except for
percentages):
2007 2006 2005
------- ------- -------
Selling, general and administrative expenses ........................... $ 502.7 $ 439.0 $ 408.7
Selling, general and administrative expenses as a percentage of revenues 8.5% 9.0% 8.9%
While our selling, general and administrative expenses increased for 2007
compared to 2006 primarily due to: (a) companies acquired during 2007 and (b) an
increase in incentive-based compensation as a result of improved profits,
selling, general and administrative expenses as a percentage of revenues
declined to 8.5% for 2007 from 9.0% for 2006. This decrease as a percentage of
revenues primarily related to our ability to increase revenues without having to
substantially increase overhead costs. The increase in selling, general and
administrative expenses for 2007 when compared to 2006 was partially offset by a
reduction in certain staff and facilities, particularly those associated with
our United States facilities services segment (as a result of restructuring
activities during 2006), and a reduction in deferred compensation expense of
$6.4 million compared to 2006 deferred compensation expense due to a decrease in
our liability corresponding with a reduction in the market price of our common
stock during 2007. For 2007, selling, general and administrative expenses
included amortization expense of $9.2 million attributable to identifiable
intangible assets associated with acquisitions compared to $4.3 million of
amortization expense for 2006. Selling, general and administrative expenses
(excluding amortization expense) were approximately $493.5 million (8.3% of
revenues) for 2007 compared to $434.7 million (8.9% of revenues) for 2006. Our
selling, general and administrative expenses for 2006 increased $30.3 million to
$439.0 million compared to $408.7 million for 2005. Selling, general and
administrative expenses as a percentage of revenues was 9.0% for 2006 compared
to 8.9% for 2005. The increase in selling, general and administrative expenses
for 2006 compared to 2005 was primarily related to: (a) increased administration
and sales expenses required to support increased revenues;
21
(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.
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance
obligations and reduction of leased facilities, were $0.3 million, $1.6 million
and $1.8 million for 2007, 2006 and 2005, respectively. As of December 31, 2007
and 2006, the balance of these obligations was $0.2 million. The obligation
outstanding as of December 31, 2006 was paid during 2007, and the obligation
outstanding as of December 31, 2007 is expected to be paid in 2008.
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 from unrelated entities, for the years
ended December 31, 2007, 2006 and 2005 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2007 REVENUES 2006 REVENUES 2005 REVENUES
------- -------- ------- -------- ------- --------
Operating income (loss):
United States electrical construction and facilities services $ 88.2 6.2% $ 46.8 3.7% $ 79.8 6.5%
United States mechanical construction and facilities services 135.7 5.8% 82.1 4.5% 20.2 1.2%
United States facilities services ........................... 43.6 4.2% 33.3 4.0% 20.2 3.0%
------- ------- -------
Total United States operations .............................. 267.5 5.5% 162.2 4.1% 120.2 3.4%
Canada construction and facilities services ................. 6.8 1.8% 0.4 0.1% (7.9) --
United Kingdom construction and facilities services ......... (12.9) -- 6.8 1.0% 7.4 1.1%
Other international construction and facilities services .... (0.5) -- (0.1) -- 0.0 --
Corporate administration .................................... (60.8) -- (55.9) -- (43.2) --
Restructuring expense ....................................... (0.3) -- (1.6) -- (1.8) --
------- ------- -------
Total worldwide operations .................................. 199.8 3.4% 111.8 2.3% 74.7 1.6%
Other corporate items:
Interest expense ............................................ (9.2) (2.3) (8.3)
Interest income ............................................. 13.2 6.2 2.7
Minority interest ........................................... (2.1) (1.1) (1.4)
------- ------- -------
Income from continuing operations before income taxes ....... $ 201.7 $ 114.6 $ 67.7
======= ======= =======
As described in more detail below, our operating income was $199.8 million
for 2007, $111.8 million for 2006, and $74.7 million for 2005.
The $41.4 million increase in United States electrical construction and
facilities services operating income for 2007 compared to 2006 was primarily the
result of increased revenues from higher margin work typically associated with
high-tech, hospitality and commercial construction markets, the profitable
performance of certain water/wastewater treatment construction projects and the
completion of certain high-tech projects. Additionally, we had reduced losses
from one company in this segment for 2007 when compared to 2006. Selling,
general and administrative expenses increased for 2007 compared to 2006
principally due to increases in incentive compensation, partially offset by our
continued focus on overhead cost control that resulted in cost reductions at
certain subsidiaries and a reduction in deferred compensation expense for which
our liability decreased corresponding with a reduction in the market price of
our common stock during 2007. Operating income decreased by $33.0 million in
2006 compared to 2005. This decrease was primarily due to: (a) unusually large
losses on certain contracts; (b) reduced profits due to a 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.
Our United States mechanical construction and facilities services operating
income for 2007 improved by $53.6 million compared to 2006. The improvement was
primarily due to increased awards and improved performance of hospitality,
water/wastewater treatment, commercial and institutional construction projects,
generally improved performance of healthcare construction projects, the addition
of companies acquired in 2006 and higher margin work typically associated with
hospitality, water/wastewater treatment and commercial construction projects.
The increase in selling, general and administrative expenses was primarily
attributable to companies acquired during 2006 and 2007 and increases in
incentive compensation for 2007 as a result of better operating results than in
2006, partially offset by a reduction in deferred compensation expense for which
our liability decreased corresponding with a reduction in the market price of
our common stock during 2007. 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
22
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.
Our United States facilities services operating income for 2007 improved by
$10.3 million compared to 2006. The increase in operating income was primarily
due to more efficient performance on certain site-based contracts, increased
revenues from site-based government facilities services contracts, a continuing
shift toward new site-based contracts with higher margins than had been the case
with some past contracts, increased income from small projects and
maintenance/retrofit work of the type provided by our mobile services group in
this segment and the reduction in staff and facilities effected primarily in the
third and fourth quarters of 2006, offset by a $5.5 million impairment charge
related to an other-than-temporary decline in fair value of our investment in a
joint venture. Companies acquired during 2007 also contributed $21.6 million to
the increase in operating income before amortization expense of $10.4 million.
Operating income increased by $13.1 million for 2006 compared to 2005. This
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.
Our Canada construction and facilities services operating income improved
by $6.4 million for 2007 compared to 2006. Included in the operating income for
2007 was a $1.4 million gain on sale of property. The improvement in operating
income was primarily attributable to the increase in revenues and improved
contract performance compared to 2006. The contract performance improvement was
primarily related to availability of higher margin industrial and power
generation work that was successfully performed. In addition, we continued our
focus on overhead cost control, which kept selling, general and administrative
expenses at approximately the same amount for 2007 as for 2006 despite the
increase in revenues. Operating income was also favorably impacted by $1.0
million relating to the rate of exchange of Canadian dollars to the United
States dollar as a result of the strengthening of the Canadian dollar. Operating
income for 2006 was $0.4 million, an $8.3 million improvement when 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.
Our United Kingdom construction and facilities services operating loss for
2007 was $12.9 million compared to operating income of $6.8 million for 2006.
The operating loss for 2007 compared to 2006 was primarily attributable to
losses on certain rail projects which were at or near completion as of December
31, 2007 and an increase in actuarially determined pension costs associated with
our United Kingdom defined benefit pension plan, partially offset by improved
operating income from facilities services and construction work. These operating
losses were unfavorably impacted by $0.4 million relating to the rate of
exchange for British pounds to United States dollars as a result of the
strengthening of the British pound during 2007. Our United Kingdom construction
and facilities services segment operating income for 2006 was $6.8 million
compared to $7.4 million for 2005. This 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.
Other international construction and facilities services operating loss was
approximately $0.5 million for 2007, and breakeven for 2006 and 2005.
Our corporate administration expenses for 2007 increased by $4.9 million
compared to 2006. The increase in the expenses was primarily due to increases of
$1.9 million of compensation expense related to compensation awards based on
achievement of earnings milestones under our long-term incentive plan, $1.4
million of expenses for recruiting programs, information technology support and
marketing programs, $1.4 million of staffing expenses incurred in order to
support our current and projected business growth and $1.2 million of expense
related to share-based compensation awards under our long-term incentive plan,
partially offset by a reduction in deferred compensation expense of $1.3 million
compared to 2006 due to a decrease in our liability corresponding with a
reduction in the market price of our common stock during 2007. Corporate
administration expenses for 2006 were $55.9 million, a $12.7 million increase
compared to 2005. The increase in these expenses 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 milestones under our
long-term incentive plan, $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 for our common stock.
NON-OPERATING ITEMS
Interest expense was $9.2 million, $2.3 million and $8.3 million for 2007,
2006 and 2005, respectively. The $6.9 million increase in interest expense for
2007 compared to 2006 was primarily due to the $300.0 million of long-term debt
incurred in September 2007 to finance part of the Ohmstede acquisition,
including additional amortization expense related to capitalized debt issuance
costs of $0.9 million as a result of repayment of $75.0 million of the term loan
debt on December 31, 2007 (prior to the first scheduled principal payment of
$0.75 million due March 31, 2008). The reduction in interest expense for 2006
compared to 2005 was due to a reduction in borrowing levels.
23
Interest income was $13.2 million, $6.2 million and $2.7 million for 2007,
2006 and 2005, respectively. The increase in interest income for 2007 compared
to 2006 was primarily related to more cash available to invest combined with
higher rates of return. 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.
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 2007 income tax provision was $77.7 million compared to $29.2 million
for 2006 and $8.4 million for 2005. The provision on income before income taxes
for 2007, 2006 and 2005 was recorded at an effective income tax rate of
approximately 38.5%, 39.5% and 38.3%, respectively, excluding the items
discussed below. The increase in the 2007 income tax provision was primarily due
to increased income from continuing operations, while the effective income tax
rate decreased primarily due to the utilization of net operating loss
carryforwards in Canada. The 2006 income tax provision was comprised of: (a)
$45.3 million of income tax provision in respect of pre-tax earnings of $114.6
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 $8.4 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)
$25.9 million of income tax provision in respect of pre-tax earnings of $67.7
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 Canada 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.
On August 6, 2007, we sold to CBRE our majority ownership interest in a
joint venture with it for $8.0 million. This sale followed our purchase, for
approximately $0.5 million, of certain of the joint venture's assets. Included
in the results of discontinued operations for 2007 was a gain of $1.2 million
(net of income tax benefit of $1.8 million) resulting from the sale of our joint
venture interest. As of December 31, 2007, $5.5 million of purchase price had
been received, and the balance is reflected as a current note receivable on our
Consolidated Balance Sheet. 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 tax
benefit of $0.1 million), 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 $0.7 million gain (net of income
taxes) from discontinued operations for the year ended December 31, 2005 is a
loss of $1.0 million (net of income tax provision of $0.1 million), 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 the sale of
subsidiaries in 2006 and 2005. As of December 31, 2006, the notes 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, 2007 and 2006 (in millions):
2007 2006
-------- -------
Net cash provided by operating activities .................. $ 259.0 $ 210.0
Net cash used in investing activities ...................... $ (526.4) $ (64.4)
Net cash provided by financing activities .................. $ 243.7 $ 16.5
Effect of exchange rate changes on cash and cash equivalents $ 1.5 $ 7.9
Our consolidated cash balance decreased by approximately $22.1 million from
$273.7 million at December 31, 2006 to $251.6 million at December 31, 2007. The
$259.0 million in net cash provided by operating activities for 2007, which
increased $49.0 million when compared to $210.0 million in net cash provided by
operating activities in 2006, was primarily due to an increase in working
capital as a result of an increase in net over-billings related to an increase
in revenues. Net cash used in investing activities of $526.4 million for 2007
increased $462.0 million compared to $64.4 million used in investing activities
for 2006 and was primarily due to a $472.3 million increase in payments for the
acquisition of Ohmstede and other businesses, identifiable intangible assets and
payments pursuant to related earn-out agreements, partially offset by a $3.8
million increase in proceeds from the sale of discontinued operations, a $3.6
million increase
24
in proceeds from sale of property, plant and equipment and a $3.2 million
decrease in investment and advances to unconsolidated entities and joint
ventures. Net cash provided by financing activities of $243.7 million for 2007
compared to $16.5 million provided by financing activities for 2006 was
primarily attributable to the $300.0 million of long-term debt incurred during
2007 to finance part of the Ohmstede acquisition, less the repayment of $75.0
million of the term loan debt on December 31, 2007.
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 the acquisition of businesses and payments
pursuant to related 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
----------- -------- ------- ------ ------- -------
Term Loan ........................................... $ 225.0 $ 3.0 $222.0 $ -- $ --
Other long-term debt ................................ 0.1 0.1 -- -- --
Capital lease obligations ........................... 2.2 0.7 1.2 0.2 0.1
Operating leases .................................... 200.3 50.0 76.0 40.3 34.0
Open purchase obligations (1) ....................... 894.6 735.1 152.8 6.7 --
Other long-term obligations, including current
portion (2) ....................................... 243.6 28.2 193.4 22.0 --
Liabilities related to uncertain income tax positions 12.0 1.7 10.3 -- --
-------- ------- ------ ------- -------
Total Contractual Obligations ....................... $1,577.8 $ 818.8 $655.7 $ 69.2 $ 34.1
======== ======= ====== ======= =======
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 ................................... 53.8 -- 53.8 -- --
Guarantees .......................................... 25.0 -- -- -- 25.0
--------- ------- ------ ------ -------
Total Commercial Commitments ........................ $ 78.8 $ -- $ 53.8 $ -- $ 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 sheets and should not impact
future cash flows, as amounts will be recovered through customer billings.
(2) Represents primarily insurance related liabilities, a pension plan
liability and liabilities for unrecognized income tax benefits, 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 these payments. We provide
funding to our pension plans based on at least the minimum funding required
by applicable regulations. In determining the minimum required funding, we
utilize current actuarial assumptions and exchange rates to forecast
estimates of amounts that may be payable for up to five years in the
future. In our judgment, minimum funding estimates beyond a five year time
horizon cannot be reliably estimated, and therefore, have not been included
in the table.
(3) We classify these borrowings as short-term on our consolidated balance
sheets because of our intent and ability to repay the amounts on a
short-term basis. As of December 31, 2007, there were no borrowings
outstanding under the Revolving Credit Facility.
Effective October 17, 2005, we replaced our pre-existing 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
25
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
(7.25% at December 31, 2007) plus 0.0% to 0.5%, based on certain financial tests
or (2) United States dollar LIBOR (4.80% at December 31, 2007) plus 1.0% to
2.25%, based on certain financial tests. The interest rates in effect at
December 31, 2007 were 7.25% and 5.80% 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
pre-existing revolving credit facility, $0.4 million of prepaid commitment fees
were recorded as interest expense for 2005. As of December 31, 2007 and 2006, we
had approximately $53.8 million and $55.6 million of letters of credit
outstanding, respectively. There were no borrowings under the 2005 Revolving
Credit Facility as of December 31, 2007 and 2006.
On September 19, 2007, we entered into a $300.0 million Term Loan Agreement
("Term Loan"). The proceeds were used to pay a portion of the consideration for
the acquisition of Ohmstede and costs and expenses incident thereto. The Term
Loan contains financial covenants, representations and warranties and events of
default. The Term Loan covenants require, 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. We are required to make principal payments on the Term
Loan in installments on the last day of March, June, September and December of
each year, commencing March 2008 in the amount of $0.75 million, together with
interest on the then outstanding principal amount. A final payment comprised of
all remaining principal and interest is due on October 17, 2010. The Term Loan
is secured by substantially all of our assets and substantially all of the
assets of substantially all of our U.S. subsidiaries. The Term Loan bears
interest at (1) the prime commercial lending rate announced by Bank of Montreal
from time to time (7.25% at December 31, 2007) plus 0.0% to 0.5% based on
certain financial tests or (2) U.S. dollar LIBOR (4.80% at December 31, 2007)
plus 1.0% to 2.25% based on certain financial tests. The interest rate in effect
at December 31, 2007 was 6.3%. The outstanding amount under the Term Loan at
December 31, 2007 was $225.0 million reflecting a prepayment of $75.0 million on
December 31, 2007 and, because of the prepayment, we recorded as interest
expense additional amortization expense related to capitalized debt issuance
costs of $0.9 million. Based on the $225.0 million borrowings outstanding on the
Term Loan, if overall interest rates were to increase by 1.0%, net of tax
interest expense would increase approximately $1.3 million in the next twelve
months. Conversely, if overall interest rates were to decrease by 1.0%, interest
expense, net of income taxes, would decrease by approximately $1.3 million in
the next twelve months.
Our Canadian subsidiary, Comstock Canada Ltd., had a credit agreement with
a bank providing for an overdraft facility of up to Cdn. $0.5 million that was
terminated in November 2007. The facility was secured by a standby letter of
credit and provided 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.
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, 2007, 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 $1.3 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. We continually
monitor our available limits of Surety Bonds and discuss with our current and
other Surety Bond providers the amount of Surety Bonds that may be available to
us based on our financial strength and the absence of any default by us on any
Surety Bond we have previously obtained. However, 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
26
the facilities services segment and/or by refraining from bidding for certain
projects that require Surety Bonds. There can be no assurance that we will be
able to effectuate alternatives to providing Surety Bonds to our customers or to
obtain, on favorable terms, sufficient additional work that does not require
Surety Bonds to replace projects requiring Surety Bonds that we may decline to
pursue. Accordingly, if we were to experience a reduction in the availability of
Surety Bonds, we could experience a material adverse effect on our financial
position, results of operations and/or cash flow.
We do not have any other material financial guarantees or off-balance sheet
arrangements other than those disclosed herein.
Our primary source of liquidity has been, and is expected to continue to
be, cash generated by operating activities. We also maintain the 2005 Revolving
Credit Facility that may be utilized, among other things, to meet short-term
liquidity needs in the event cash generated by operating activities is
insufficient or to enable us to seize opportunities to participate in joint
ventures or to make acquisitions that may require access to cash on short notice
or for any other reason. We may also increase liquidity through an equity
offering or issuance of other debt instruments. Short-term changes in
macroeconomic trends may have an effect, 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; however, we have been successful during the 2006 and 2007
periods of strong demand for non-residential construction services to
substantially increase our net over-billed position. 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 $427.5 million and $264.2 million as
of December 31, 2007 and 2006, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the 2005 Revolving Credit Facility and, if
required, 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 (a) to incur long-term
debt, such as the Term Loan of $300.0 million borrowed in September 2007 to
fund, in part, the purchase of Ohmstede and/or (b) to issue 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 $78.0
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, 2007, we utilized approximately $48.2 million of letters
of credit issued pursuant to our 2005 Revolving Credit Facility as collateral
for insurance obligations.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, we adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN
48"). 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. As a result of the adoption of
FIN 48 and recognition of the cumulative effect of adoption of a new accounting
principle, we recorded a $0.3 million increase in the liability for unrecognized
income tax benefits, with an offsetting reduction in retained earnings. As of
December 31, 2007, the liability on the Consolidated Balance Sheets for
unrecognized income tax benefits was $8.8 million (of which $5.2 million, if
recognized, would favorably affect our effective tax rate). We recognized
interest related to uncertain tax positions in the income tax provision. As of
December 31, 2007, we had approximately $3.2 million of accrued interest related
to uncertain tax positions included in the liability on the Consolidated Balance
Sheets, of which approximately $2.0 million was recorded during 2007. It is
possible that approximately $1.7 million of income tax liability related to
uncertain intercompany transfer
27
pricing items will become a recognized income tax benefit in the next twelve
months due to the closing of open tax years. The tax years 2004 to 2007 remain
open to examination by United States taxing jurisdictions, and the tax years
2001 to 2007 remain open to examination by foreign taxing jurisdictions.
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. However, on
February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP") that amends Statement 157 to delay the
effective date for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually). The FSP defers the
effective date of Statement 157 to fiscal years beginning after November 15,
2008. We have not determined the effect, if any, the adoption of Statement 157
will have on our financial position and results of operations. However, we
believe we will likely be required to provide additional disclosures in future
financial statements beginning after the effective date of the new standard.
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 determined that there will be no effect in adopting
Statement 159 on our financial position and results of operations.
In December 2007, the FASB issued Statement No. 141 (revised 2007),
"Business Combinations" ("Statement 141(R)"). Statement 141(R) changes the
accounting for acquisitions specifically eliminating the step acquisition model,
changing the recognition of contingent consideration from being recognized when
it is probable to being recognized at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisitions can be recognized. The standard is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the accounting for
acquisitions that are made after adoption.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51"
("Statement 160"). This statement is effective for fiscal years beginning on or
after December 15, 2008, with earlier adoption prohibited. This statement
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from our equity.
The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. It also
amends certain of ARB No. 51's consolidation procedures for consistency with the
requirements of Statement 141(R). This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. We have not determined the effect, if any, the adoption
of Statement 160 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.
28
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, 2007 and 2006, costs and estimated earnings in
excess of billings on uncompleted contracts included unbilled revenues for
unapproved change orders of approximately $31.3 million and $48.2 million,
respectively, and claims of approximately $21.3 million and $22.4 million,
respectively. In addition, accounts receivable as of December 31, 2007 and 2006
included claims of approximately $4.8 million and $6.7 million, respectively,
plus unapproved change orders and contractually billed amounts related to such
contracts of approximately $60.5 million and $76.9 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 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 provision for doubtful accounts
during 2007, 2006 and 2005 amounted to approximately $5.0 million, $1.1 million
and $8.5 million, respectively. At December 31, 2007 and 2006, our accounts
receivable of $1,430.1 million and $1,184.4 million, respectively, included
allowances for doubtful accounts of $27.0 million and $25.0 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 reevaluated 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 liabilities resulting from non-deductible
temporary differences of $25.0 million at December 31, 2007 and net deferred tax
assets resulting from deductible temporary differences of $28.2 million at
December 31, 2006, respectively, which will impact our taxable income in future
periods. The change during 2007 in the deductible temporary differences
primarily related to nondeductible goodwill and identifiable intangible assets
from the Ohmstede acquisition and other items reflected as temporary
differences. 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, 2007 and 2006, the total valuation allowance on gross deferred tax
assets was approximately $8.6 million and $12.9 million, respectively, the
decrease in which was attributable to a capital gain recognized on the sale of
our interest in the CBRE joint venture. The tax benefit of this sale was
recorded in results from discontinued operations in the Condensed Consolidated
Statement of Operations.
29
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
As of December 31, 2007, we had $563.9 million and $252.1 million,
respectively, of goodwill and net identifiable intangible assets (primarily
based on the market values of our contract backlog, developed technology,
customer relationships, non-competition agreements and trade names), primarily
arising out of the acquisition of companies. As of December 31, 2006, goodwill
and net identifiable intangible assets were $288.2 million and $38.3 million,
respectively. The increases in the goodwill and net identifiable intangible
assets (net of accumulated amortization) since December 31, 2006 were related to
the acquisition of five companies during 2007, pending completion of final
valuation and purchase price adjustments. During 2007, the purchase price
accounting for our acquisition of a United States mechanical construction
company in October 2006 was finalized. As a result, identifiable intangible
assets ascribed to its goodwill, backlog and customer relationships and to a
non-competition agreement were adjusted with an insignificant impact. 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 that goodwill and other intangible assets
with 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 if 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, 2007, 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.
See Note B - Summary of Significant Accounting Policies of the notes to
consolidated financial statements for additional discussion of the provisions of
Statement 142.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2007, we did not have any derivative instruments. We
have not used any material derivative financial instruments during the year
ended December 31, 2006, including trading or speculating on changes in interest
rates or commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings
under the 2005 Revolving Credit Facility and the Term Loan. Borrowings under the
2005 Revolving Credit Facility and the Term Loan bear interest at variable
rates, and the fair value of borrowings are not affected by changes in market
interest rates. As of December 31, 2007, there were no borrowings outstanding
under the 2005 Revolving Credit Facility and the balance on the Term Loan was
$225.0 million. 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 is 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, which are used as
components of supplies or materials 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
7,500 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,
--------------------------
2007 2006
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................................................................... $ 251,637 $ 273,735
Accounts receivable, less allowance for doubtful accounts of $26,995 and $25,021, respectively . 1,430,052 1,184,418
Costs and estimated earnings in excess of billings on uncompleted contracts .................... 144,919 147,848
Inventories .................................................................................... 52,247 18,015
Prepaid expenses and other ..................................................................... 56,935 38,397
----------- -----------
Total current assets ........................................................................ 1,935,790 1,662,413
Investments, notes and other long-term receivables ............................................... 22,669 29,630
Property, plant and equipment, net ............................................................... 83,963 52,780
Goodwill ......................................................................................... 563,918 288,165
Identifiable intangible assets, less accumulated amortization of $31,143 and $14,131, respectively 252,146 38,251
Other assets ..................................................................................... 13,157 17,784
----------- -----------
Total assets ..................................................................................... $ 2,871,643 $ 2,089,023
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ................................................... $ -- $ --
Current maturities of long-term debt and capital lease obligations ............................. 3,791 659
Accounts payable ............................................................................... 537,314 496,407
Billings in excess of costs and estimated earnings on uncompleted contracts .................... 572,431 412,069
Accrued payroll and benefits ................................................................... 211,849 177,490
Other accrued expenses and liabilities ......................................................... 188,838 121,723
----------- -----------
Total current liabilities .................................................................... 1,514,223 1,208,348
Long-term debt and capital lease obligations ..................................................... 223,453 1,239
Other long-term obligations ...................................................................... 248,926 169,127
----------- -----------
Total liabilities ................................................................................ 1,986,602 1,378,714
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding ....... -- --
Common stock, $0.01 par value, 200,000,000 shares authorized, 67,821,782 and 67,296,072 shares
issued, respectively ........................................................................... 678 673
Capital surplus .................................................................................. 387,288 354,905
Accumulated other comprehensive loss ............................................................. (15,102) (28,189)
Retained earnings ................................................................................ 526,307 399,804
Treasury stock, at cost 2,625,497 and 3,640,092 shares, respectively ............................. (14,130) (16,884)
----------- -----------
Total stockholders' equity ....................................................................... 885,041 710,309
----------- -----------
Total liabilities and stockholders' equity ....................................................... $ 2,871,643 $ 2,089,023
=========== ===========
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)
2007 2006 2005
---------- ---------- ----------
Revenues .......................................................... $5,927,152 $4,901,783 $4,592,990
Cost of sales ..................................................... 5,224,330 4,349,383 4,107,857
---------- ---------- ----------
Gross profit ...................................................... 702,822 552,400 485,133
Selling, general and administrative expenses ...................... 502,654 439,006 408,713
Restructuring expenses ............................................ 343 1,622 1,749
---------- ---------- ----------
Operating income .................................................. 199,825 111,772 74,671
Interest expense .................................................. (9,240) (2,340) (8,315)
Interest income ................................................... 13,215 6,235 2,729
Minority interest ................................................. (2,051) (1,071) (1,409)
---------- ---------- ----------
Income from continuing operations before income taxes ............. 201,749 114,596 67,676
Income tax provision .............................................. 77,706 29,196 8,363
---------- ---------- ----------
Income from continuing operations ................................. 124,043 85,400 59,313
Income from discontinued operations, net of income taxes ......... 2,765 1,234 729
---------- ---------- ----------
Net income ........................................................ $ 126,808 $ 86,634 $ 60,042
========== ========== ==========
Net income per common share - Basic
From continuing operations ....................................... $ 1.93 $ 1.35 $ 0.95
From discontinued operations ..................................... 0.04 0.02 0.01
---------- ---------- ----------
$ 1.97 $ 1.37 $ 0.96
========== ========== ==========
Net income per common share - Diluted
From continuing operations ....................................... $ 1.86 $ 1.30 $ 0.93
From discontinued operations ..................................... 0.04 0.02 0.01
---------- ---------- ----------
$ 1.90 $ 1.32 $ 0.94
========== ========== ==========
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)
2007 2006 2005
--------- --------- ---------
Cash flows from operating activities:
Net income .............................................................................. $ 126,808 $ 86,634 $ 60,042
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ......................................................... 20,659 17,059 19,439
Amortization of identifiable intangible assets ........................................ 17,012 4,251 3,192
Provisions for doubtful accounts ...................................................... 5,025 1,112 8,457
Minority interest ..................................................................... 2,051 1,071 1,409
Deferred income taxes ................................................................. (23,313) (6,169) 5,002
(Gain) loss on sale of discontinued operations ........................................ (1,183) 620 1,250
(Gain) loss on sale of property, plant and equipment .................................. (221) (360) 263
Excess tax benefits from share-based compensation ..................................... (13,392) (6,768) --
Equity income from unconsolidated entities ............................................ (5,164) (4,306) (2,066)
Impairment charge on equity investment ................................................ 5,510 -- --
Non-cash expense for amortization of debt issuance costs .............................. 1,961 786 2,589
Non-cash compensation expense ......................................................... 7,054 5,868 --
Distributions from unconsolidated entities ............................................ 8,199 9,660 616
--------- --------- ---------
151,006 109,458 100,193
Changes in operating assets and liabilities excluding effect of businesses acquired:
(Increase) decrease in accounts receivable .............................................. (179,359) (101,322) 9,998
Decrease in inventories and contracts in progress, net .................................. 148,688 100,612 28,409
Increase (decrease) in accounts payable ................................................. 16,340 31,359 (8,107)
Increase in accrued payroll and benefits and other accrued expenses and liabilities ..... 104,098 42,833 14,814
Changes in other assets and liabilities, net ............................................ 18,248 27,048 101
--------- --------- ---------
Net cash provided by operating activities 259,021 209,988 145,408
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of discontinued operations ......................................... 5,494 1,661 4,413
Proceeds from sale of property, plant and equipment ................................... 4,305 714 3,577
Purchase of property, plant and equipment ............................................. (21,501) (19,733) (12,445)
Investment in and advances to unconsolidated entities and joint ventures .............. (1,534) (4,752) (3,449)
Payments for acquisitions of businesses, net of cash acquired, identifiable intangible
assets and related earn-out agreements .............................................. (513,064) (40,732) (10,690)
Net (disbursements) proceeds for other investments ...................................... (50) (1,573) 58
--------- --------- ---------
Net cash used in investing activities ................................................... (526,350) (64,415) (18,536)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from working capital credit line ............................................. -- 149,500 899,552
Repayments of working capital credit line ............................................. -- (149,500) (979,552)
Borrowings for long-term debt ......................................................... 300,000 2,420 --
Repayments for long-term debt and debt issuance costs ................................. (79,301) (2,475) (89)
Repayments for capital lease obligations .............................................. (655) (615) (182)
Proceeds from exercise of stock options ............................................... 10,310 10,400 1,742
Excess tax benefits from share-based compensation ..................................... 13,392 6,768 --
--------- --------- ---------
Net cash provided by (used in) financing activities ..................................... 243,746 16,498 (78,529)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............................ 1,485 7,879 (3,667)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents ........................................ (22,098) 169,950 44,676
Cash and cash equivalents at beginning of year .......................................... 273,735 103,785 59,109
--------- --------- ---------
Cash and cash equivalents at end of year ................................................ $ 251,637 $ 273,735 $ 103,785
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS)
Total Accumulated
Stock- other
holders' Common Capital comprehensive Retained Treasury Comprehensive
equity stock surplus (loss) income(1) earnings stock income
-------- ------ ------- ---------------- -------- -------- -------------
Balance, December 31, 2004 ............ $562,361 $652 $317,633 $ 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 (4) ....... 5,615 14 6,448 -- -- (847)
Value of restricted stock units ..... 1,358 1,358 -- -- --
-------- ---- -------- -------- -------- --------
Balance, December 31, 2005 ............ 615,436 666 324,899 (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 (4) ....... 25,539 7 23,451 -- -- 2,081
Value of restricted stock units ..... 1,238 -- 1,238 -- -- --
Share-based compensation expense .... 5,868 -- 5,868 -- -- --
-------- ---- -------- -------- -------- --------
Balance, December 31, 2006 ............ 710,309 673 354,905 (28,189) 399,804 (16,884)
Net income .......................... 126,808 -- -- -- 126,808 -- $126,808
Foreign currency translation
adjustments ....................... 9,392 -- -- 9,392 -- -- 9,392
Pension adjustment, net of tax
benefit of $1.4 million ........... 3,695 -- -- 3,695 -- -- 3,695
--------
Comprehensive income ................ $139,895
========
Effect of adopting FIN 48 ........... (305) -- -- -- (305) --
Issuance of treasury stock for
restricted stock units (2) ........ -- -- (311) -- -- 311
Treasury stock, at cost (3) ......... (1,118) -- -- -- -- (1,118)
Common stock issued under
stock option plans, net (4) ....... 29,206 5 25,640 -- -- 3,561
Share-based compensation expense .... 7,054 -- 7,054 -- -- --
-------- ---- -------- -------- -------- --------
Balance, December 31, 2007 ............ $885,041 $678 $387,288 $(15,102) $526,307 $(14,130)
======== ==== ======== ======== ======== ========
- -------------
(1) As of December 31, 2007, represents cumulative foreign currency translation
and pension liability adjustments of $28.2 million and $(43.3) million,
respectively. 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.
(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) Includes the tax benefit of stock option exercises of $15.2 million in 2007,
$13.4 million in 2006 and $3.9 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 principally 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: (a) electric
power transmission and distribution systems; (b) premises electrical and
lighting systems; (c) low-voltage systems, such as fire alarm, security and
process control systems; (d) voice and data communication systems; (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. 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 businesses, which support the operation of a customer's facilities,
include industrial maintenance and services, commercial and government
site-based operations and maintenance, military base operations support
services, mobile maintenance and services, facilities management, installation
and support for building systems, technical consulting and diagnostic services,
small modification and retrofit projects, program development, management and
maintenance for energy systems. 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 July 9, 2007 and February 10, 2006, we effected 2-for-1 stock splits in
the form of stock distributions of one common share for each common share owned
on the respective record dates of June 20, 2007 and January 30, 2006. The
capital stock accounts, all share data and earnings per share data give effect
to the stock splits, applied retroactively, to all periods presented. See Note I
- - 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 an ownership interest in a consolidated
joint venture in 2007 and the sales of subsidiaries in each of 2006 and 2005.
The results of operations of acquisitions in 2007 and 2006 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
materially differ from those estimates.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Reclassifications of prior years data have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
presentation.
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of 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" ("SAB 104"). 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.
Our industrial maintenance and services business recognizes revenue
associated with the engineering, manufacturing and repairing of shell and tube
heat exchangers in accordance with SAB 104 when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, price to the buyer is fixed and determinable and
collectibility is reasonably assured. Delivery is not considered to have
occurred until the customer takes title and assumes the risks and rewards of
ownership, which is generally on the date of shipment. Costs related to this
work are included in inventory until the product is shipped. These costs include
all direct material, labor and subcontracting costs and indirect costs related
to performance such as, supplies, tools and repairs. Revenues from field service
contracts are recognized as services are provided, the duration of which
generally does not exceed one month.
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, 2007 and 2006 were as follows (in thousands):
2007 2006
------------ ------------
Costs incurred on uncompleted contracts ................................... $ 9,186,361 $ 7,983,614
Estimated earnings ........................................................ 675,000 519,164
------------ ------------
9,861,361 8,502,778
Less: billings to date .................................................... 10,288,873 8,766,999
------------ ------------
$ (427,512) $ (264,221)
============ ============
Such amounts were included in the accompanying Consolidated Balance Sheets
at December 31, 2007 and 2006 under the following captions (in thousands):
2007 2006
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts . $ 144,919 $ 147,848
Billings in excess of costs and estimated earnings on uncompleted contracts . (572,431) (412,069)
--------- ---------
$(427,512) $(264,221)
========= =========
As of December 31, 2007 and 2006, costs and estimated earnings in excess of
billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $31.3 million and $48.2 million, respectively,
and claims of approximately $21.3 million and $22.4 million, respectively. In
addition, accounts receivable as of December 31, 2007 and 2006 included claims
of approximately $4.8 million and $6.7 million, respectively, plus unapproved
change orders and contractually billed amounts related to such contracts of
$60.5 million and $76.9 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 $8.1 million and $8.2
million as of December 31, 2007 and 2006, 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.
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, 2007 and 2006
included $249.0 million and $216.1 million, respectively, of retainage billed
under terms of these contracts. We estimate that approximately 82% of retainage
recorded at December 31, 2007 will be collected during 2008. Accounts payable at
December 31, 2007 and 2006 included $43.9 million and $43.7 million,
respectively, of retainage withheld under terms of the contracts. We estimate
that approximately 87% of retainage withheld at December 31, 2007 will be paid
during 2008. 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.
37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally using the average cost method. Inventories as of December 31, 2007
and 2006 consist of the following amounts (in thousands):
2007 2006
-------- --------
Raw materials and construction materials ............... $ 21,116 $ 18,676
Work in progress ....................................... 32,515 --
Reserve for obsolescence ............................... (1,384) (661)
-------- --------
$ 52,247 $ 18,015
======== ========
The 2007 work in process inventories are attributable to the acquisition of
FR X Ohmstede Acquisition Co. ("Ohmstede") on September 19, 2007.
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables were $22.7 million and
$29.6 million at December 31, 2007 and 2006, 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 $11.3 million and $16.7 million as of December 31, 2007 and 2006,
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. During 2007, we recognized a $5.5
million impairment charge related to an other-than-temporary decline in fair
value of our investment in this joint venture, which has been reflected as a
component of cost of sales.
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, 2007, 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, 2007 and 2006 (in
thousands):
2007 2006
--------- ---------
Machinery and equipment .............................. $ 64,340 $ 43,723
Vehicles ............................................. 33,095 31,047
Furniture and fixtures ............................... 18,873 19,640
Computer hardware/software ........................... 66,928 63,047
Land, buildings and leasehold improvements ........... 60,790 46,693
--------- ---------
244,026 204,150
Accumulated depreciation and amortization ............ (160,063) (151,370)
--------- ---------
$ 83,963 $ 52,780
========= =========
38
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2007 and 2006 was approximately $563.9 million and
$288.2 million, respectively, and reflects the excess of cost over fair market
value of net identifiable assets of companies acquired. Goodwill attributable to
companies acquired in 2007 has been preliminarily valued at $274.7 million. 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 that goodwill and other identifiable
intangible assets with 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 if impaired, rather than amortized as previous standards
required. 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, 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.
The changes in the carrying amount of goodwill during the years ended
December 31, 2007 and 2006 were as follows (in thousands):
2007 2006
--------- ---------
Balance at beginning of period .............................. $ 288,165 $ 283,412
Earn-out payments/accruals on prior year acquisitions ....... 3,000 3,502
Goodwill recorded for acquisition of businesses ............. 274,693 1,890
Goodwill allocated to the sale of assets and other items, net (1,940) (639)
--------- ---------
Balance at end of period .................................... $ 563,918 $ 288,165
========= =========
As of December 31, 2007, there are remaining contingent payments of
approximately $20.3 million related to earn-out payments in connection with
acquisitions.
Identifiable intangible assets at December 31, 2007 are comprised of $28.9
million of contract backlog, $85.4 million of developed technology, $76.7
million of customer relationships, $7.3 million of non-competition agreements
and $85.1 million of trade names, all acquired as a result of acquisitions in
2002, 2005, 2006 and 2007. Identifiable intangible assets at December 31, 2006
were comprised of $14.7 million of contract backlog, $21.9 million of customer
relationships, $2.1 million of non-competition agreements and $13.8 million of
trade names, all acquired as a result of acquisitions in 2002, 2005 and 2006.
Identifiable intangible assets attributable to companies acquired in 2007 have
been preliminarily valued at $231.7 million. The $85.1 million attributable to
trade names is not being amortized as trade names have indefinite lives, but are
subject to an annual review for impairment in accordance with Statement 142. See
Note C -Acquisitions of Businesses of the notes to consolidated financial
statements for additional information. Except for Ohmstede's contract backlog,
which is being expensed in a manner consistent with its expected revenue
recognition, the identifiable intangible amounts are subject to amortization on
a straight-line method. The amortization periods range from 4 months to 6 years
for contract backlog, 20 years for developed technology, 5 to 20 years for
customer relationships and 3 to 7 years for non-competition agreements. The
contract backlog, developed technology customer relationships and
non-competition agreements are presented in the consolidated balance sheets net
of accumulated amortization of $31.1 million and $14.1 million at December 31,
2007 and 2006, respectively. The following table presents the estimated future
amortization expense of identifiable intangible assets in the following years
(in thousands):
2008 ............................................................... $ 20,736
2009 ............................................................... 12,540
2010 ............................................................... 10,500
2011 ............................................................... 9,362
2012 ............................................................... 8,968
Thereafter .......................................................... 105,061
--------
$167,167
========
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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, 2007
and 2006, the estimated current portion of undiscounted insurance liabilities of
$18.9 million and $16.5 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, 2007 and 2006 were $89.9
million and $80.9 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. The carrying value of our term loan
approximates the fair value due to the variable rate on such debt.
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, 2007, we did not have any derivative instruments. As of
December 31, 2006, 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 J - Stock Options and Stock Plans for additional information
regarding the share-based compensation plans and programs.
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. 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 year ended December
31, 2005 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 year ended December 31, 2005 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):
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
2005
-------
Income from continuing operations:
As reported .......................................................................... $59,313
Less: Total stock-based compensation expense determined under fair value based method,
net of related tax effects ......................................................... 2,112
-------
Pro Forma ............................................................................ $57,201
=======
Basic EPS from continuing operations:
As reported .......................................................................... $0.95
Pro Forma ............................................................................ $0.92
Diluted EPS from continuing operations:
As reported .......................................................................... $0.93
Pro Forma ............................................................................ $0.90
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, we adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN
48"). 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. As a result of the adoption of
FIN 48 and recognition of the cumulative effect of adoption of a new accounting
principle, we recorded a $0.3 million increase in the liability for unrecognized
income tax benefits, with an offsetting reduction in retained earnings. As of
December 31, 2007, the liability on the Consolidated Balance Sheets for
unrecognized income tax benefits was $8.8 million (of which $5.2 million, if
recognized, would favorably affect our effective tax rate). We recognized
interest related to uncertain tax positions in the income tax provision. As of
December 31, 2007, we had approximately $3.2 million of accrued interest related
to uncertain tax positions included in the liability on the Consolidated Balance
Sheets, of which approximately $2.0 million was recorded during 2007. It is
possible that approximately $1.7 million of income tax liability related to
uncertain intercompany transfer pricing items will become a recognized income
tax benefit in the next twelve months due to the closing of open tax years. The
tax years 2004 to 2007 remain open to examination by United States taxing
jurisdictions, and the tax years 2001 to 2007 remain open to examination by
foreign taxing jurisdictions.
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. However, on
February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP") that amends Statement 157 to delay the
effective date for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually). The FSP defers the
effective date of Statement 157 to fiscal years beginning after November 15,
2008. We have not determined the effect, if any, the adoption of Statement 157
will have on our financial position and results of operations. However, we
believe we will likely be required to provide additional disclosures in future
financial statements beginning after the effective date of the new standard.
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 determined that there will be no effect in adopting
Statement 159 on our financial position and results of operations.
In December 2007, the FASB issued Statement No. 141 (revised 2007),
"Business Combinations" ("Statement 141(R)"). Statement 141(R) changes the
accounting for acquisitions specifically eliminating the step acquisition model,
changing the recognition of contingent consideration from being recognized when
it is probable to being recognized at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisitions can be recognized. The standard is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the accounting for
acquisitions that are made after adoption.
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In December 2007, the FASB issued Statement No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51"
("Statement 160"). This statement is effective for fiscal years beginning on or
after December 15, 2008, with earlier adoption prohibited. This statement
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from our equity.
The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. It also
amends certain of ARB No. 51's consolidation procedures for consistency with the
requirements of Statement 141(R). This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. We have not determined the effect, if any, the adoption
of Statement 160 will have on our financial position and results of operations.
NOTE C -- ACQUISITIONS OF BUSINESSES
During 2007, we acquired four companies, which were not material
individually or in the aggregate, for an aggregate of $53.2 million. Two of the
companies primarily perform facilities services and have been included in our
United States facilities services reporting segment, and the other two primarily
perform mechanical construction work and have been included in our United States
mechanical construction and facilities services reporting segment. Goodwill and
identifiable intangible assets attributable to these companies, representing the
excess purchase price over the fair value of amounts assigned to the net
tangible assets acquired, were preliminarily valued at $14.7 million and $19.3
million, respectively.
Also during 2007, we acquired Ohmstede, which has been included in our
United States facilities services segment. The purchase price paid for Ohmstede
was approximately $455.4 million, net of cash acquired of approximately $1.5
million, and was funded by approximately $155.4 million of our cash on hand and
from $300.0 million of borrowings under our new $300.0 million Term Loan
Agreement (the "Term Loan"). The Term Loan is described further in Note G --
Long-Term Debt. Additionally, approximately $5.4 million was paid for directly
related acquisition costs. Headquartered in Beaumont, Texas, Ohmstede is the
leading North American provider of aftermarket maintenance and repair services,
replacement parts and fabrication services for highly engineered shell and tube
heat exchangers for refineries and the petrochemical industry.
During 2006, we acquired three companies, which were not individually or in
the aggregate material, for an aggregate of $41.1 million in cash. Goodwill and
identifiable intangible assets were valued at $5.1 million and $20.0 million,
respectively, after completion of the final valuation and purchase price
adjustments.
We believe the addition of these companies furthers our goal of service and
geographic diversification and expansion of our facilities services and fire
protection operations, as well as offering industrial services with a focus on
the refinery and petrochemical industries. 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.
The purchase prices of certain acquisitions are subject to finalization
based on certain contingencies provided for in the purchase agreements. These
acquisitions were accounted for by the purchase method, and the purchase prices
have been allocated to the assets acquired and liabilities assumed, based upon
the preliminary estimated fair values of the respective assets and liabilities
at the dates of the respective acquisitions.
The following table summarizes the preliminary purchase price allocation
related to the 2007 acquisitions at the respective dates of acquisition (in
thousands):
OTHER
OHMSTEDE ACQUISITIONS TOTAL
-------- ------------ -----
Current assets, including cash acquired ... $ 78,274 $ 53,952 $132,226
Property, plant and equipment ............. 25,803 3,312 29,115
Goodwill .................................. 259,819 14,874 274,693
Identifiable intangible assets. ........... 212,400 19,326 231,726
Other assets .............................. -- 227 227
-------- -------- --------
Total assets acquired ................... 576,296 91,691 667,987
-------- -------- --------
Current liabilities. ...................... 30,028 37,519 67,547
Deferred income tax liability ............. 89,368 300 89,668
Other long-term obligations ............... -- 660 660
-------- -------- --------
Total liabilities assumed ............... 119,396 38,479 157,875
-------- -------- --------
Net assets acquired ....................... $456,900 $ 53,212 $510,112
======== ======== ========
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES -- (CONTINUED)
The goodwill of $274.7 million was recorded based on preliminary purchase
price allocations primarily to the United States mechanical construction and
facilities services and United States facilities services segments. Goodwill
results from the expected benefits of collaboration and synergies in future
periods. It is expected that approximately $34.0 million of the goodwill and
identifiable intangible assets associated with the companies acquired in 2007
will be deductible for tax purposes. In accordance with FASB Statement No. 141,
"Business Combinations" ("Statement 141") and FASB Statement No. 142, "Goodwill
and Other Intangible Assets" ("Statement 142"), goodwill will not be amortized,
while certain other intangible assets with finite lives that have been
preliminarily identified will be subject to amortization over their useful
lives.
Of the total purchase price paid for all 2007 acquisitions, approximately
$231.7 million has been preliminarily allocated to identifiable intangible
assets, which includes acquired contract backlog, developed technology, customer
relationships, non-competition agreements and trade names. Approximately $70.5
million has been allocated to trade names and is not being amortized as trade
names have indefinite lives. Except for Ohmstede's contract backlog, which is
being expensed in a manner consistent with its expected revenue recognition, the
identifiable intangible amounts are subject to amortization on a straight-line
method. The amortization periods range from four months to twenty years.
During 2007, the purchase price accounting for our acquisition of a United
States mechanical construction company in October 2006 was finalized. As a
result, identifiable intangible assets ascribed to its goodwill, contract
backlog, customer relationships and to a related non-competition agreement were
adjusted with an insignificant impact.
The following table presents unaudited pro forma results of operations
including all companies acquired during 2007 as if the acquisitions had occurred
at the beginning of fiscal 2006. The pro forma results of operations are not
necessarily indicative of the results of operations had the acquisitions
actually occurred at the beginning of fiscal 2006, nor is it necessarily
indicative of future operating results (in thousands, except per share data):
2007 2006
----------- -----------
Revenues ............................................ $ 6,249,243 $ 5,271,200
Operating income .................................... $ 234,979(1) $ 107,534(2)
Income from continuing operations ................... $ 132,900(1) $ 61,977(2)
Net income .......................................... $ 135,665 $ 63,211
Diluted earnings per share from continuing operations $ 1.99 $ 0.95
Diluted earnings per share .......................... $ 2.03 $ 0.97
(1) Includes compensation related expenses of $18.7 million associated with
certain share-based payments made to certain members of management of an
acquired company prior to the acquisition date. These amounts were recorded
in the pre-acquisition financial statements.
(2) Includes compensation related expenses of $26.6 million associated with
certain contractual payments and vesting of stock options related to a
prior acquisition involving the company we acquired. These amounts were
recorded in the pre-acquisition financial statements.
The above pro forma balances include additional interest expense associated
with the Term Loan, the loss of interest income related to the use of cash for
the acquisition and the amortization expense associated with the preliminary
value placed on the identifiable intangible assets related to companies acquired
in the third and fourth quarters of 2007.
During 2007 and 2006, we recorded an aggregate of $3.0 million and $3.5
million, respectively, by reason of earn-out obligations in respect of prior
year acquisitions.
NOTE D -- DISPOSITION OF ASSETS
Results of these operations for all periods presented in our consolidated
financial statements reflect discontinued operations accounting. On August 6,
2007, we sold our majority ownership interest in a joint venture with CB Richard
Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This sale followed our purchase,
for approximately $0.5 million, of certain of the joint venture's assets.
Included in the results of discontinued operations for 2007 was a gain of $1.2
million (net of income tax benefit of $1.8 million) resulting from the sale of
our joint venture interest. As of December 31, 2007, $5.5 million of purchase
price had been received, and the balance is reflected as a current note
receivable on our Consolidated Balance Sheet. The components of the results of
discontinued operations for CBRE are as follows (in thousands):
2007(1) 2006 2005
---------- ---------- ----------
Revenues .............................................. $ 79,095 $ 119,253 $ 103,613
Income from discontinued operation .................... $ 1,582 $ 1,854 $ 1,840
Gain on sale of discontinued operation ................ $ 1,183 $ -- $ --
Net income from discontinued operation ................ $ 2,765 $ 1,854 $ 1,840
Diluted earnings per share from discontinued operation $ 0.04 $ 0.03 $ 0.03
- ----------
(1) Through date of sale, August 6, 2007.
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- DISPOSITION OF ASSETS -- (CONTINUED)
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. Included in the results of discontinued operations for the
year ended December 31, 2006 was a loss of $0.6 million (net of income tax
benefit of $0.1 million), which related 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 $0.7 million gain (net of income
taxes) from discontinued operations for the year ended December 31, 2005 is a
loss of $1.0 million (net of income tax provision of $0.1 million), which
related 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, the notes had been paid
in full. We will not have any future involvement with these subsidiaries. The
components of the results of operations for these discontinued operations are
not presented as they are not material to the consolidated results of
operations.
NOTE E -- EARNINGS PER SHARE
The following tables summarize our calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 2007, 2006 and 2005
as adjusted for the July 9, 2007 and January 10, 2006 2-for-1 stock splits (in
thousands, except share and per share data):
2007 2006 2005
------------ ------------ ------------
NUMERATOR:
Income before discontinued operations ............................. $ 124,043 $ 85,400 $ 59,313
Income from discontinued operations ............................... 2,765 1,234 729
------------ ------------ ------------
Net income available to common stockholders ....................... $ 126,808 $ 86,634 $ 60,042
============ ============ ============
DENOMINATOR:
Weighted average shares outstanding used to
compute basic earnings per share ................................ 64,431,471 63,215,431 62,286,727
Effect of diluted securities -
Share-based awards .............................................. 2,300,465 2,264,962 1,383,035
------------ ------------ ------------
Shares used to compute diluted earnings
per share ....................................................... 66,731,936 65,480,393 63,669,762
============ ============ ============
Basic earnings per share:
Continuing operations ........................................... $ 1.93 $ 1.35 $ 0.95
Discontinued operations ......................................... 0.04 0.02 0.01
------------ ------------ ------------
Total ........................................................... $ 1.97 $ 1.37 $ 0.96
============ ============ ============
Diluted earnings per share:
Continuing operations ........................................... $ 1.86 $ 1.30 $ 0.93
Discontinued operations ......................................... 0.04 0.02 0.01
------------ ------------ ------------
Total ........................................................... $ 1.90 $ 1.32 $ 0.94
============ ============ ============
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, 2007, 2006 and 2005 because they would be anti-dilutive were 120,000, zero
and 365,940, respectively.
NOTE F -- CURRENT DEBT
CREDIT FACILITIES
Effective October 17, 2005, we replaced our pre-existing 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 (7.25% at
December 31,
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- CURRENT DEBT -- (CONTINUED)
2007) plus 0.0% to 0.5%, based on certain financial tests or (2) United States
dollar LIBOR (4.80% at December 31, 2007) plus 1.0% to 2.25%, based on certain
financial tests. The interest rates in effect at December 31, 2007 were 7.25%
and 5.80% 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 our pre-existing revolving credit
facility, $0.4 million of prepaid commitment fees were recorded as interest
expense for 2005. As of December 31, 2007 and 2006, we had approximately $53.8
million and $55.6 million of letters of credit outstanding, respectively. There
were no borrowings under the 2005 Revolving Credit Facility as of December 31,
2007 and 2006.
FOREIGN BORROWINGS
Our Canadian subsidiary, Comstock Canada Ltd., had a credit agreement with
a bank providing for an overdraft facility of up to Cdn. $0.5 million that was
terminated in November 2007. The facility was secured by a standby letter of
credit and provided 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.
NOTE G -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 2007 and 2006 (in thousands):
2007 2006
------------ ------------
Term Loan, interest payable in varying amounts through 2010 ..... $ 225,000 $ --
Capitalized Lease Obligations, at weighted average interest
rates from 5.0% to 9.0% payable in varying amounts through 2014 2,151 1,566
Other, at weighted average interest rates from 8.0% to 13.0%,
payable in varying amounts through 2010 ....................... 93 332
------------ ------------
227,244 1,898
Less: current maturities ........................................ 3,791 659
------------ ------------
$ 223,453 $ 1,239
============ ============
TERM LOAN
On September 19, 2007, we entered into the Term Loan. The proceeds were
used to pay a portion of the consideration for the acquisition of Ohmstede and
costs and expenses incident thereto. The Term Loan contains financial covenants,
representations and warranties and events of default. The Term Loan covenants
require, 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. We are
required to make principal payments on the Term Loan in installments on the last
day of March, June, September and December of each year, commencing March 2008
in the amount of $0.75 million. A final payment comprised of all remaining
principal and interest is due on October 17, 2010. The Term Loan is secured by
substantially all of our assets and substantially all of the assets of
substantially all of our U.S. subsidiaries. The Term Loan bears interest at (1)
the prime commercial lending rate announced by Bank of Montreal from time to
time (7.25% at December 31, 2007) plus 0.0% to 0.5% based on certain financial
tests or (2) U.S. dollar LIBOR (4.80% at December 31, 2007) plus 1.0% to 2.25%
based on certain financial tests. The interest rate in effect at December 31,
2007 was 6.3%. We capitalized approximately $4.0 million of debt issuance costs
associated with the Term Loan. This amount is being amortized over the life of
the loan and is included as part of interest expense. The outstanding amount
under the Term Loan at December 31, 2007 was $225.0 million reflecting a
prepayment of $75.0 million on December 31, 2007 and, because of the prepayment,
we recorded as interest expense additional amortization expense related to
capitalized debt issuance costs of $0.9 million.
CAPITALIZED LEASE OBLIGATIONS
See Note L - 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 payable in varying amounts
over the next three years.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- INCOME TAXES
The 2007 income tax provision was $77.7 million compared to $29.2 million
for 2006 and $8.4 million for 2005. The provision on income before income taxes
for 2007, 2006 and 2005 was recorded at an effective income tax rate of
approximately 38.5%, 39.5% and 38.3%, respectively, excluding the items
discussed below. The increase in the 2007 income tax provision was primarily due
to increased income from continuing operations, while the effective income tax
rate decreased primarily due to the utilization of net operating loss
carryforwards in Canada.
The 2006 income tax provision was comprised of: (a) $45.3 million of income
tax provision in respect of pre-tax earnings of $114.6 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) $25.9 million of
income tax provision in respect of pre-tax earnings of $67.7 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 Canada 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.
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, 2007 and 2006, we had total income tax reserves of $12.0 million (included
in "Other long-term obligations") and $5.6 million (included in "Other accrued
expenses and liabilities"), respectively.
We file income tax returns in the United States federal jurisdiction and
various states and foreign jurisdictions. With few exceptions, we are no longer
subject to United States federal, state and local, or non-United States income
tax examinations by tax authorities for the years before 2004. We are not
currently under Internal Revenue Service audit.
On January 1, 2007, we adopted FIN 48. As a result of the adoption of FIN
48 and recognition of the cumulative effect of adoption of a new accounting
principle, we recorded a $0.3 million increase in the liability for unrecognized
income tax benefits, with an offsetting reduction in retained earnings. As of
December 31, 2007, the liability for unrecognized income tax benefits was $8.8
million (of which $5.2 million, if recognized, would favorably affect our
effective tax rate). At December 31, 2007 and 2006, we had an accrual of $3.2
million and $1.2 million, respectively, for the payment of interest related to
unrecognized tax positions included on the Consolidated Balance Sheets. We
recognized interest related to unrecognized tax benefits in the income tax
provision. During the years ended December 31, 2007 and 2006, we recognized
approximately $2.0 million and $0.3 million in interest expense related to our
unrecognized tax positions, respectively. A reconciliation of the beginning and
end of year unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007 .......................................... $6,707
Additions based on tax positions related to the current year ........ 2,008
Additions attributable to acquisitions of businesses ................ 1,768
Reductions for tax positions of prior years ......................... (1,704)
------
Balance at December 31, 2007 ........................................ $8,779
======
It is possible that approximately $1.7 million of income tax liability,
primarily related to uncertain intercompany transfer pricing items, will become
a recognized income tax benefit in the next twelve months due to the closing of
open tax years.
46
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- INCOME TAXES -- (CONTINUED)
We file a consolidated federal income tax return including all of our U.S.
subsidiaries. At December 31, 2007, we had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $1.8 million, which
expire in the year 2009. In addition, at December 31, 2007, for United Kingdom
tax purposes, we had trading loss carryforwards of approximately $10.7 million
and nontrading and capital loss carryforwards of approximately $0.7 million,
which have no expiration date. These losses and the U.S. 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, 2007, 2006 and 2005
consisted of the following (in thousands):
2007 2006 2005
-------- -------- --------
Current:
Federal provision (benefit) ..................................... $ 81,586 $ 28,447 $ (1,328)
State and local ................................................. 23,337 9,728 5,441
Foreign benefit ................................................. (3,904) (2,810) (752)
-------- -------- --------
101,019 35,365 3,361
-------- -------- --------
Deferred ........................................................ (23,313) (6,169) 5,002
-------- -------- --------
$ 77,706 $ 29,196 $ 8,363
======== ======== ========
Factors accounting for the variation from U.S. statutory income tax rates
for the years ended December 31, 2007, 2006 and 2005 were as follows (in
thousands):
2007 2006 2005
-------- -------- --------
Federal income taxes at the statutory rate ........................ $ 70,612 $ 40,108 $ 23,687
State and local income taxes, net of federal tax benefits ......... 11,656 5,407 1,454
Permanent differences ............................................. (1,680) 2,103 2,498
Foreign income taxes .............................................. (1,350) (6,122) (1,673)
Adjustments to valuation allowance for deferred tax assets ........ (101) (8,446) 5,181
Tax reserves ...................................................... (806) (1,881) (22,745)
Other ............................................................. (625) (1,973) (39)
-------- -------- --------
$ 77,706 $ 29,196 $ 8,363
======== ======== ========
The components of the net deferred income tax asset are included in
"Prepaid expenses and other" of $31.4 million and "Other long-term obligations"
of $56.4 million at December 31, 2007 and "Prepaid expenses and other" of $19.9
million and "Other assets" of $8.3 million at December 31, 2006 in the
accompanying Consolidated Balance Sheets. The amounts recorded for the years
ended December 31, 2007 and 2006 were as follows (in thousands):
2007 2006
--------- ---------
Deferred income tax assets:
Net operating loss carryforwards ................................. $ 3,995 $ 4,974
Excess of amounts expensed for financial
statement purposes over amounts deducted
for income tax purposes:
Insurance liabilities ......................................... 37,239 22,622
Pension liability ............................................. 14,545 17,953
Other liabilities ............................................. 50,186 33,744
--------- ---------
Total deferred income tax assets .................................. 105,965 79,293
Valuation allowance for deferred tax assets ....................... (8,555) (12,893)
--------- ---------
Net deferred income tax assets .................................... 97,410 66,400
--------- ---------
Deferred income tax liabilities:
Costs capitalized for financial statement
purposes and deducted for income tax
purposes:
Amortization of identifiable intangible assets .................. (112,700) (28,454)
Other, primarily depreciation of property,
plant and equipment ........................................... (9,701) (9,792)
--------- ---------
Total deferred income tax liabilities ............................. (122,401) (38,246)
--------- ---------
Net deferred income tax (liabilities) assets ...................... $ (24,991) $ 28,154
========= =========
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- INCOME TAXES -- (CONTINUED)
As of December 31, 2007 and 2006, the total valuation allowance on net
deferred tax assets was approximately $8.6 million and $12.9 million,
respectively. The primary reason for the decrease in the valuation allowance for
2007 was related to a $4.5 million reversal of a valuation allowance related to
the capital loss carryforwards for which future taxable benefit was in doubt,
but was realized as part of the capital gain recognized on the sale of CBRE.
Realization of the deferred tax assets is dependent on our generating sufficient
taxable income. We believe that the deferred tax assets will be realized through
the future reversal of existing taxable temporary differences and projected
future income. Although realization is not assured, we believe it is more likely
than not that the deferred tax asset, with no corresponding valuation allowance,
will be realized. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income are reduced.
Income (loss) from continuing operations before income taxes for the years
ended December 31, 2007, 2006 and 2005 consisted of the following (in
thousands):
2007 2006 2005
--------- --------- ---------
United States ............................. $ 206,500 $ 104,509 $ 65,044
Foreign ................................... (4,751) 10,087 2,632
--------- --------- ---------
$ 201,749 $ 114,596 $ 67,676
========= ========= =========
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 I -- 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 30.0 million shares to 80.0 million shares. On September
18, 2007, our stockholders approved an amendment to our Restated Certificate of
Incorporation authorizing an increase in the number of shares of our common
stock from 80.0 million shares to 200.0 million shares. On July 9, 2007 and
February 10, 2006, we effected 2-for-1 stock splits in the form of stock
distributions of one common share for each common share owned, payable to
shareholders of record on June 20, 2007 and January 30, 2006. As of December 31,
2007 and 2006, 65,196,285 and 63,655,980 shares of our common stock were
outstanding, respectively. Pursuant to a program authorized by our Board of
Directors, we purchased 4,527,940 shares of our common stock prior to January 1,
2000. The aggregate amount of $14.1 million paid for those shares has been
classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at
December 31, 2007, less the value of shares reissued pursuant to the exercise of
stock options or issuance of restricted stock units as described in Note J -
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.
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- STOCK OPTIONS AND STOCK PLANS
We have an incentive plan under which stock options and stock awards may be
granted to officers, non-employee directors and key employees of the Company. We
have outstanding stock options and restricted stock units pursuant to which
shares may be issued under other plans, although no further grants may be made
under these plans. A summary of the general terms of the grants under stock
option plans and programs and stock plans are as follows (adjusted for the July
9, 2007 and February 10, 2006 2-for-1 stock splits):
AUTHORIZED
SHARES VESTING EXPIRATION VALUATION DATE
---------- ------- ---------- --------------
1994 Management Stock Option Plan 4,000,000 Generally, 33% 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' 800,000 100% 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' 1,200,000 (1) Five years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock Option Plan") on grant date
1997 Stock Plan for Directors 600,000 (2) -- Fair market value
(the "1997 Directors' Stock Plan") of common stock
on grant date
2003 Non-Employee Directors' 480,000 100% 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 Incentive Plan 1,320,000 To be determined Ten years from Fair market value
("2003 Management Plan") by the Compensation grant date, in the of common stock
Committee case of options on grant date
Executive Stock Bonus Plan 880,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
2005 Management Stock Incentive Plan 1,800,000 To be determined Ten years from Fair market value
("2005 Management Plan") by the Compensation grant date, in the of common stock
Committee case of options on grant date
2005 Stock Plan for Directors 104,000 50% on grant or -- Fair market value
(the "2005 Directors' Stock Plan") award date, 50% on of common stock
the first anniversary on grant date
of grant date
2007 Incentive Plan 1,495,000 To be determined Eight years from Fair market value
by the Compensation grant date, in the of common stock
Committee case of options on grant date
Other Stock Option Grants Not Generally, either 100% Ten years from Fair market value
applicable on first anniversary of grant date of common stock
grant date or 25% on on grant date
grant and 25% on each
anniversary of grant date
- ----------
(1) All options under this plan become exercisable quarterly over the calendar
year in which they are granted.
(2) 50% of the shares awarded vested on the grant date and 50% one year
thereafter.
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes our stock option and restricted stock unit
activity since December 31, 2004:
STOCK OPTIONS RESTRICTED STOCK UNITS
- ------------------------------------------------------- ------------------------------------------
WEIGHTED
AVERAGE
SHARES PRICE SHARES
------ ----- ------
Balance, December 31, 2004 6,995,016 $7.83 Balance, December 31, 2004 466,148
Granted 1,525,808 $11.42 Granted 62,552
Forfeited -- -- Forfeited --
Exercised (1,220,968) $2.22 Issued (196,276)
---------- --------
Balance, December 31, 2005 7,299,856 $9.51 Balance, December 31, 2005 332,424
Granted 158,120 $21.38 Granted 296,282
Forfeited -- -- Forfeited (30,568)
Exercised (1,324,248) $7.96 Issued (199,320)
---------- --------
Balance, December 31, 2006 6,133,728 $10.16 Balance, December 31, 2006 398,818
Granted 155,624 $34.05 Granted 132,626
Forfeited (13,332) $9.80 Forfeited --
Exercised (1,487,934) $6.93 Issued (84,220)
---------- --------
Balance, December 31, 2007 4,788,086 $11.93 Balance, December 31, 2007 447,224
========== ========
In addition, 3,412 shares and 8,280 shares were issued to certain
non-employee directors pursuant to annual retainer arrangements during the years
ended December 31, 2007 and 2006, respectively. Compensation expense of $4.1
million and $4.0 million for the years ended December 31, 2007 and 2006,
respectively, were recognized due to the vesting of stock option grants. Less
than $0.1 million of compensation expense, net of income taxes, will be
recognized over the approximate 3 month remaining vesting period for stock
options outstanding at December 31, 2007. As a result of stock option exercises,
$10.3 million and $10.4 million of proceeds were received during the years ended
December 31, 2007 and 2006, respectively. The income tax benefit derived in 2007
and 2006 as a result of such exercises and share-based compensation was $15.2
million and $8.9 million, respectively, of which $13.4 million and $6.8 million,
respectively, 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 $3.0 million, $1.9 million
and $0.9 million of compensation expense was recognized for the years ended
December 31, 2007, 2006 and 2005, respectively. We also have outstanding phantom
equity units for which $3.6 million of income was recognized for the year ended
December 31, 2007, compared to $2.8 million of expense recognized for the year
ended December 31, 2006, in both cases 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 2007, 2006 and 2005 was $37.4 million, $23.7 million and $12.3
million, respectively.
At December 31, 2007, 2006 and 2005 approximately 4,420,000, 5,240,000 and
5,400,000 options were exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2007, 2006 and 2005 was
approximately $11.99, $9.96 and $8.86, respectively.
50
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes information about our stock options at
December 31, 2007 (adjusted for the July 9, 2007 and February 10, 2006 2-for-1
stock splits):
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------ -------------- -------------- ------ --------------
$ 4.05 - $ 9.67 606,000 2.83 Years $ 5.98 606,000 $ 5.98
$10.41 - $13.20 3,280,598 5.50 Years $11.21 2,909,267 $11.20
$13.69 - $17.79 625,864 4.81 Years $13.96 625,864 $13.96
$22.53 - $28.13 155,624 7.69 Years $23.63 155,624 $23.63
$36.04 120,000 7.47 Years $36.04 120,000 $36.04
The total aggregate intrinsic value of options outstanding as of December
31, 2007, 2006 and 2005 was approximately $56.0 million, $112.1 million and
$53.8 million, respectively. The total aggregate intrinsic value of options
exercisable as of December 31, 2007, 2006 and 2005 was approximately $51.4
million, $96.8 million and $43.3 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 for the year ending December 31, 2005.
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,
--------------------------------------------
2007 2006 2005
------------ ------------ ------------
Dividend yield ....................... 0% 0% 0%
Expected volatility .................. 30.8% 34.0% 36.8%
Risk-free interest rate .............. 4.9% 4.9% 3.9%
Expected life of options in years .... 5.0 5.8 6.3
Weighted average grant date fair value $12.35 $9.36 $4.98
Forfeitures of stock options have been historically insignificant to the
calculation and are estimated to be zero in all periods presented.
NOTE K -- RETIREMENT PLANS
Our United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees (the "UK Plan"); however, no individuals joining that
company after October 31, 2001 may participate in the plan. The benefits under
the UK Plan are based on wages and years of service with the subsidiary. Our
policy is to fund at least the minimum amount required by law. Currently, we
have agreed to fund additional amounts under an agreement with the pension
trustees. The measurement date of the UK Plan is December 31 of each year.
On December 31, 2006, we adopted the provisions of 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 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
51
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- RETIREMENT PLANS -- (CONTINUED)
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. 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.
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, 2007 and 2006 consisted of the following components (in
thousands):
2007 2006
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year ...... $ 266,636 $ 206,460
Service cost ................................. 6,629 4,285
Interest cost ................................ 13,758 10,484
Plan participants' contributions ............. 2,698 2,794
Actuarial (gain) loss ........................ (10,040) 20,224
Benefits paid ................................ (9,067) (7,970)
Foreign currency exchange rate changes ....... 5,345 30,359
--------- ---------
Benefit obligation at end of year ............ $ 275,959 $ 266,636
========= =========
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year $ 206,794 $ 163,630
Actual return on plan assets ................. 9,183 18,195
Employer contributions ....................... 10,788 6,349
Plan participants' contributions ............. 2,698 2,794
Benefits paid ................................ (9,067) (7,970)
Foreign currency exchange rate changes ....... 4,122 23,796
--------- ---------
Fair value of plan assets at end of year ..... $ 224,518 $ 206,794
--------- ---------
Funded status at end of year ................. $ (51,441) $ (59,842)
========= =========
AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN
ACCUMULATED OTHER COMPREHENSIVE LOSS:
2007 2006
--------- ---------
Unrecognized losses .......................... $ 51,934 $ 58,888
========= =========
The underfunded status of the UK Plan of $51.4 million and $59.8 million at
December 31, 2007 and 2006, respectively, is included in "Other long-term
obligations" in the accompanying Consolidated Balance Sheet. No plan assets are
expected to be returned to us during the year ended December 31, 2008.
52
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- RETIREMENT PLANS -- (CONTINUED)
The assumptions used as of December 31, 2007, 2006 and 2005 in determining
pension cost and liability shown above were as follows:
2007 2006 2005
---- ---- ----
Discount rate ...................... 5.6% 5.1% 4.8%
Annual rate of salary provision .... 4.2% 3.8% 3.1%
Annual rate of return on plan assets 6.8% 6.5% 6.3%
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 2007 and 2006 were 3.2% and 2.8%, respectively.
The components of net periodic pension benefit cost for the years ended
December 31, 2007, 2006 and 2005 were as follows (in thousands):
2007 2006 2005
-------- -------- --------
Service cost ......................... $ 6,629 $ 4,285 $ 3,896
Interest cost ........................ 13,758 10,484 9,701
Expected return on plan assets ....... (13,814) (11,175) (9,890)
Net amortization of prior service cost
and actuarial loss ................... -- 72 85
Amortization of unrecognized loss .... 2,746 1,675 1,351
-------- -------- --------
Net periodic pension benefit cost .... $ 9,319 $ 5,341 $ 5,143
======== ======== ========
The estimated unrecognized loss for the UK Plan that will be amortized from
Accumulated other comprehensive loss into net periodic benefit cost over the
next year is approximately $2.2 million.
UK PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 2007 were as follows:
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 2007 ALLOCATION
- -------------- ------------ ----------
Equity securities .................. 71.6% 70.0%
Debt securities .................... 28.1 30.0
Other .............................. 0.3 --
----- -----
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 $11.0
million to its UK Plan in 2008.
53
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- 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
--------
2008 ............................................................... $ 7,885
2009 ............................................................... 8,389
2010 ............................................................... 8,888
2011 ............................................................... 9,387
2012 ............................................................... 9,887
Succeeding five years .............................................. 56,923
The accumulated benefit obligation for the UK Plan for the years ended
December 31, 2007 and 2006 was $234.9 million and $223.4 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,
2007 and 2006 (in thousands):
2007 2006
-------- --------
Projected benefit obligation ......................... $275,959 $266,636
Accumulated benefit obligation ....................... $234,886 $223,386
Fair value of plan assets ............................ $224,518 $206,794
We also sponsor two domestic defined benefit plans in which participation
by new individuals is frozen. The benefit obligation associated with these plans
as of December 31, 2007 and 2006 was approximately $5.7 million and $5.3
million, respectively. The estimated fair value of the plan assets as of
December 31, 2007 and 2006 was approximately $6.0 million and $5.5 million,
respectively. The prepaid balances as of December 31, 2007 are classified as
long-term assets on the balance sheet. The measurement date for these plans is
December 31 of each year. 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 for 2007 and 2006 included a discount rate of 5.5% and
6.0% and an expected rate of return of 8.0% and 8.5%, respectively. 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
approximately $0.1 million. The future estimated benefit payments expected to be
paid from the plans for the next ten years is approximately $0.3 million to $0.4
million per year.
We contribute to various multi-employer union pension funds based upon
wages paid to our union employees. Such contributions approximated $187.0
million, $150.1 million and $133.5 million for the years ended December 31,
2007, 2006 and 2005, respectively. The increase in contributions of $36.9
million for 2007 compared to 2006 was primarily related to increased hours
worked and wages earned and incremental contributions for companies acquired in
2007 of approximately $2.0 million.
We have defined contribution retirement and savings plans that cover U.S.
eligible 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, 2007, 2006 and 2005 for these plans were $7.7 million, $7.1 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, 2007, 2006 and 2005 was
$2.2 million, $1.9 million and $1.7 million, respectively.
Our Canadian subsidiary has a defined contribution retirement plan. The
expense recognized was $0.4 million for the year ended December 31, 2007 and
$0.3 million for each of the years ended December 31, 2006 and 2005.
54
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- COMMITMENTS AND CONTINGENCIES
We lease land, buildings and equipment under various leases. The leases
frequently include renewal options and escalation clauses 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, 2007, were as follows (in thousands):
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
-------- -------- --------
2008 .................................... $ 746 $ 49,954 $ 515
2009 .................................... 870 43,147 272
2010 .................................... 362 32,888 105
2011 .................................... 159 24,419 104
2012 .................................... 54 15,862 104
Thereafter .............................. 53 34,021 --
-------- -------- --------
Total minimum lease payment ............. 2,244 $200,291 $ 1,100
======== ========
Amounts representing interest ........... (93)
--------
Present value of net minimum lease
payments .............................. $ 2,151
========
Rent expense for operating leases and other rental items for the years
ended December 31, 2007, 2006 and 2005 was $88.0 million, $74.0 million and
$61.5 million, respectively. Rent expense for the years ended December 31, 2007,
2006 and 2005 included sublease rental income of $0.4 million, $0.3 million and
$0.5 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, 2007, based on our percentage-of-completion of our
projects in connection with which surety bonds were issued, our aggregate
estimated exposure, had there been defaults on all our existing contractual
obligations, would have been approximately $1.3 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 29,000 people, approximately 73% 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 one of these
collective bargaining agreements is national or regional in scope.
Restructuring expenses, primarily relating to employee severance
obligations and reduction of leased facilities, were $0.3 million, $1.6 million
and $1.8 million for 2007, 2006 and 2005, respectively. As of December 31, 2007
and 2006, the balance of these obligations was $0.2 million. The obligation
outstanding as of December 31, 2006 was paid in 2007, and the obligation
outstanding as of December 31, 2007 is expected to be paid in 2008.
55
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes for the years ended December 31, 2007, 2006 and 2005 (in thousands):
2007 2006 2005
-------- -------- --------
Cash paid during the year for:
Interest ........................................ $ 11,377 $ 1,788 $ 8,573
Income taxes .................................... $ 85,469 $ 29,205 $ 9,858
Non-cash financing activities:
Assets acquired under capital lease obligations.. $ 491 $ 612 $ 412
Capital lease obligations terminated ............ $ -- $ -- $ (322)
Contingent purchase price accrued ............... $ 3,000 $ 3,372 $ --
NOTE N -- SEGMENT INFORMATION
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;
premises electrical and lighting systems; low-voltage systems, such as fire
alarm, security and process control; voice and data communication; 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 and central plant heating and cooling); (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
(industrial maintenance and services; commercial and government site-based
operations and maintenance; military base operations support services; 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 for energy systems), which services are not generally related to
customers' construction programs, as well as industrial services operations,
which primarily provide aftermarket maintenance and repair services, replacement
parts and fabrication services for highly engineered shell and tube heat
exchangers for the refinery and petrochemical industries. The Canada, United
Kingdom and Other international segments perform electrical construction,
mechanical construction and facilities services. Our "Other international
construction and facilities services" segment, currently operating only in the
Middle East, represents our operations outside of the United States, Canada and
the United Kingdom. The following tables present information about industry
segments and geographic areas for the years ended December 31, 2007, 2006 and
2005. 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):
56
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SEGMENT INFORMATION -- (CONTINUED)
AS REPORTED
--------------------------------------
2007 2006 2005
---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services ............. $ 1,433.8 $ 1,280.2 $ 1,224.6
United States mechanical construction and facilities services ............. 2,343.1 1,820.9 1,671.6
United States facilities services ......................................... 1,048.1 830.1 681.6
---------- ---------- ----------
Total United States operations .......................................... 4,825.0 3,931.2 3,577.8
Canada construction and facilities services ............................... 382.0 299.1 342.1
United Kingdom construction and facilities services ....................... 720.2 671.5 673.1
Other international construction and facilities services .................. -- -- --
---------- ---------- ----------
Total worldwide operations ................................................ $ 5,927.2 $ 4,901.8 $ 4,593.0
========== ========== ==========
Total revenues:
United States electrical construction and facilities services ............. $ 1,442.2 $ 1,284.7 $ 1,236.9
United States mechanical construction and facilities services ............. 2,357.5 1,845.8 1,681.8
United States facilities services ......................................... 1,057.0 835.8 684.0
Less intersegment revenues ................................................ (31.7) (35.1) (24.9)
---------- ---------- ----------
Total United States operations ............................................ 4,825.0 3,931.2 3,577.8
Canada construction and facilities services ............................... 382.0 299.1 342.1
United Kingdom construction and facilities services ....................... 720.2 671.5 673.1
Other international construction and facilities services .................. -- -- --
---------- ---------- ----------
Total worldwide operations ................................................ $ 5,927.2 $ 4,901.8 $ 4,593.0
========== ========== ==========
Operating income (loss):
United States electrical construction and facilities services ............. $ 88.2 $ 46.8 $ 79.8
United States mechanical construction and facilities services ............. 135.7 82.1 20.2
United States facilities services ......................................... 43.6 33.3 20.2
---------- ---------- ----------
Total United States operations ............................................ 267.5 162.2 120.2
Canada construction and facilities services ............................... 6.8 0.4 (7.9)
United Kingdom construction and facilities services ....................... (12.9) 6.8 7.4
Other international construction and facilities services .................. (0.5) (0.1) 0.0
Corporate administration .................................................. (60.8) (55.9) (43.2)
Restructuring expenses .................................................... (0.3) (1.6) (1.8)
---------- ---------- ----------
Total worldwide operations ................................................ 199.8 111.8 74.7
Other corporate items:
Interest expense .......................................................... (9.2) (2.3) (8.3)
Interest income ........................................................... 13.2 6.2 2.7
Minority interest ......................................................... (2.1) (1.1) (1.4)
---------- ---------- ----------
Income from continuing operations before income taxes ..................... $ 201.7 $ 114.6 $ 67.7
========== ========== ==========
57
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SEGMENT INFORMATION -- (CONTINUED)
2007 2006 2005
---------- ---------- ----------
Capital expenditures:
United States electrical construction and facilities services ............ $ 6.6 $ 2.8 $ 2.4
United States mechanical construction and facilities services ............ 4.2 3.4 2.5
United States facilities services ........................................ 6.3 9.1 3.9
---------- ---------- ----------
Total United States operations ........................................... 17.1 15.3 8.8
Canada construction and facilities services .............................. 1.6 2.7 1.3
United Kingdom construction and facilities services ...................... 2.4 1.1 0.3
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 0.4 0.6 2.0
---------- ---------- ----------
Total worldwide operations ............................................... $ 21.5 $ 19.7 $ 12.4
========== ========== ==========
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services ............ $ 3.2 $ 3.1 $ 3.0
United States mechanical construction and facilities services ............ 6.0 5.3 5.6
United States facilities services ........................................ 6.6 4.1 5.8
---------- ---------- ----------
Total United States operations ........................................... 15.8 12.5 14.4
Canada construction and facilities services .............................. 1.3 1.0 0.9
United Kingdom construction and facilities services ...................... 2.6 2.8 2.8
Other international construction and facilities services ................. -- -- --
Corporate administration ................................................. 1.0 0.8 1.3
---------- ---------- ----------
Total worldwide operations ............................................... $ 20.7 $ 17.1 $ 19.4
========== ========== ==========
2007 2006
---------- ----------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 51.2 $ 49.3
United States mechanical construction and facilities services ............ 52.4 62.8
United States facilities services ........................................ 13.5 11.1
---------- ----------
Total United States operations ........................................... 117.1 123.2
Canada construction and facilities services .............................. 19.9 18.3
United Kingdom construction and facilities services ...................... 7.9 6.3
Other international construction and facilities services ................. -- --
---------- ----------
Total worldwide operations ............................................... $ 144.9 $ 147.8
========== ==========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services ............ $ 180.3 $ 144.8
United States mechanical construction and facilities services ............ 264.4 166.8
United States facilities services ........................................ 33.6 15.7
---------- ----------
Total United States operations ........................................... 478.3 327.3
Canada construction and facilities services .............................. 23.3 17.3
United Kingdom construction and facilities services ...................... 70.8 67.5
Other international construction and facilities services ................. -- --
---------- ----------
Total worldwide operations ............................................... $ 572.4 $ 412.1
========== ==========
58
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SEGMENT INFORMATION -- (CONTINUED)
2007 2006
-------- --------
Long lived assets:
United States electrical construction and facilities services $ 16.2 $ 11.1
United States mechanical construction and facilities services 213.0 206.8
United States facilities services ........................... 657.1 145.7
-------- --------
Total United States operations .............................. 886.3 363.6
Canada construction and facilities services ................. 5.9 6.7
United Kingdom construction and facilities services ......... 6.2 6.4
Other international construction and facilities services .... -- --
Corporate administration .................................... 1.6 2.5
-------- --------
Total worldwide operations .................................. $ 900.0 $ 379.2
======== ========
Goodwill:
United States electrical construction and facilities services $ 3.8 $ 3.8
United States mechanical construction and facilities services 168.8 166.9
United States facilities services ........................... 391.3 117.5
-------- --------
Total United States operations .............................. 563.9 288.2
Canada construction and facilities services -- --
United Kingdom construction and facilities services -- --
Other international construction and facilities services -- --
Corporate administration -- --
-------- --------
Total worldwide operations .................................. $ 563.9 $ 288.2
======== ========
Total assets:
United States electrical construction and facilities services $ 400.4 $ 363.7
United States mechanical construction and facilities services 842.3 748.0
United States facilities services ........................... 996.4 366.1
-------- --------
Total United States operations .............................. 2,239.1 1,477.8
Canada construction and facilities services ................. 146.3 87.7
United Kingdom construction and facilities services ......... 268.3 255.1
Other international construction and facilities services .... 0.3 0.5
Corporate administration .................................... 217.6 267.9
-------- --------
Total worldwide operations .................................. $2,871.6 $2,089.0
======== ========
59
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- 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
------------- ------------- ------------- -------------
2007 QUARTERLY RESULTS
Revenues ............................ $ 1,286,766 $ 1,371,955 $ 1,500,798 $ 1,767,633
Gross profit ........................ $ 129,012 $ 164,600 $ 168,911 $ 240,299
Net income .......................... $ 11,992 $ 26,150 $ 38,336 $ 50,330
Basic EPS - continuing operations ... $ 0.18 $ 0.40 $ 0.57 $ 0.77
Basic EPS - discontinued operations . 0.01 0.01 0.02 0.00
------------- ------------- ------------- -------------
$ 0.19 $ 0.41 $ 0.59 $ 0.77
============= ============= ============= =============
Diluted EPS continuing operations ... $ 0.17 $ 0.38 $ 0.55 $ 0.75
Diluted EPS discontinued operations.. 0.01 0.01 0.02 0.00
------------- ------------- ------------- -------------
$ 0.18 $ 0.39 $ 0.57 $ 0.75
============= ============= ============= =============
2006 QUARTERLY RESULTS
Revenues ............................ $ 1,123,362 $ 1,191,573 $ 1,239,400 $ 1,347,448
Gross profit ........................ $ 111,962 $ 129,498 $ 143,988 $ 166,952
Net income .......................... $ 7,013 $ 16,861 $ 22,553 $ 40,207
Basic EPS - continuing operations ... $ 0.12 $ 0.26 $ 0.35 $ 0.62
Basic EPS - discontinued operations . (0.01) 0.01 0.01 0.01
------------- ------------- ------------- -------------
$ 0.11 $ 0.27 $ 0.36 $ 0.63
============= ============= ============= =============
Diluted EPS - continuing operations . $ 0.12 $ 0.25 $ 0.33 $ 0.60
Diluted EPS - discontinued operations (0.01) 0.01 0.01 0.01
------------- ------------- ------------- -------------
$ 0.11 $ 0.26 $ 0.34 $ 0.61
============= ============= ============= =============
During the fourth quarter of 2007, we recognized a $5.5 million impairment
charge related to an other-than-temporary decline in fair value of our
investment in a joint venture in our United States facilities services segment,
which has been reflected as a component of cost of sales. See Note B - Summary
of Significant Accounting Policies of the notes to consolidated financial
statements for additional information.
NOTE P -- LEGAL PROCEEDINGS
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 $78.5 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $23.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem for work performed through 1996.
On December 17, 2007, one of our subsidiaries, F&G Mechanical Corp.
("F&G"), was served with a grand jury subpoena duces tecum issued by a grand
jury empanelled by the United States District Court for the District of New
Jersey that is investigating allegations of union corruption. Two additional
subpoenas for documents were served on F&G in January 2008. F&G and one of its
vice presidents have been identified as targets of the investigation in
connection with certain payments made to third parties by F&G for services to
F&G at various construction sites. F&G has produced documents in response to the
subpoenas and has cooperated with investigators since learning of the
investigation.
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.
60
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 (the "Company") as of December 31, 2007 and 2006,
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, 2007. Our audits also included the financial statement
schedule listed at Item 15(a)(2). 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 that amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles use 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 the Company at
December 31, 2007 and 2006, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2007, 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
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" effective
January 1, 2007 and Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" effective January 1, 2006. Additionally, as discussed in
Note K, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 158, "Employers'Accounting for Defined Benefit Pension and Other
Postretirement Plans" as of December 31, 2006.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company's internal
control over financial reporting as of December 31, 2007, 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 19, 2008 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 19, 2008
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of EMCOR Group, Inc.:
We have audited EMCOR Group, Inc and Subsidiaries' (the "Company") internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company'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 included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, 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, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, 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 the Company as of December 31, 2007 and 2006, 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, 2007 of the Company and our report dated February 19, 2008 expressed an
unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
February 19, 2008
62
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
Executive Vice President and 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, 2007, 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, 2007.
The effectiveness of our internal control over financial reporting as of
December 31, 2007 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 an unqualified opinion
on the effectiveness of our internal control over financial reporting as of
December 31, 2007.
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 (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the
Securities Exchange Act of 1934) occurred during the fourth quarter of our
fiscal year ended December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
63
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2008 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".
64
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, 2007 and 2006
Consolidated Statements of Operations -- Years Ended December 31, 2007,
2006 and 2005
Consolidated Statements of Cash Flows -- Years Ended December 31, 2007,
2006 and 2005
Consolidated Statements of Stockholders' Equity and Comprehensive Income
-- Years Ended December 31, 2007, 2006 and 2005
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.
65
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 (1) DEDUCTIONS (2) END OF YEAR
----------- ---------- --------- ---------- -------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 2007 ..... $25,021 5,025 1,647 (4,698) $26,995
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
- -----------
(1) Amount principally relates to business acquisitions and divestitures.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
66
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- --------------------------------
2(a-1) Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR Group, Inc.'s
Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. ("EMCOR") Report on Form 8-K dated
February 14, 2002
2(a-2) Purchase and Sale Agreement dated as of August 20, 2007 between Exhibit 2.1 to EMCOR's Report on
FR X Ohmstede Holdings LLC and EMCOR Group, Inc. Form 8-K (Date of Report August 20, 2007)
3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to EMCOR's 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 Exhibit 3(a-4) to EMCOR's Annual Report
of Incorporation for the year ended December 31, 2006
("2006 Form 10-K")
3(a-5) Amendment dated September 18, 2007 to the Restated Certificate Exhibit A to EMCOR's Proxy Statement
of Incorporation dated August 17, 2007 for Special Meeting
of Stockholders held September 18, 2007
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")
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
67
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
4(h) Term Loan Agreement dated as of September 19, 2007 among Exhibit 4.1(a) to EMCOR's Form 8-K
EMCOR, Bank of Montreal, as Administrative Agent, and the (Date of Report September 19, 2007)
several financial institutions listed on the signature pages thereof
4(i) Second Amended and Restated Security Agreement dated as of Exhibit 4.1(b) to EMCOR's Form 8-K
September 19, 2007 among EMCOR, certain of its U.S. subsidiaries, (Date of Report September 19, 2007)
and Harris N.A., as Agent
4(j) Second Amended and Restated Pledge Agreement dated as of Exhibit 4.1(c) EMCOR's Form 8-K
September 19, 2007 among EMCOR, certain of its U.S. subsidiaries, (Date of Report September 19, 2007)
and Harris N.A., as Agent
4(k) Guaranty Agreement by certain of EMCOR's U.S. subsidiaries in Exhibit 4.1(d) to EMCOR's Form 8-K
favor of Harris N.A., as Agent (Date of Report September 19, 2007)
4(l) First Amendment dated as of September 19, 2007 to Amended Exhibit 4.1(e) to EMCOR's Form 8-K
and Restated Credit Agreement effective October 14, 2005 (Date of Report September 19, 2007)
among EMCOR, Harris N.A., as Agent, and certain other
lenders party thereto
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, R. Kevin Matz and Mark A. Pompa
10(c) Form of Amendment to Severance Agreement between EMCOR Exhibit 10(c) of EMCOR's Quarterly
and each of Frank T. MacInnis, Sheldon I. Cammaker, Report on Form 10-Q for the quarter ended
R. Kevin Matz and Mark A. Pompa March 31, 2007 ("March 2007 Form 10-Q")
10(d) Letter Agreement dated October 12, 2004 between Anthony Guzzi Exhibit 10.1 to EMCOR's Report on
and EMCOR (the "Guzzi Letter Agreement") Form 8-K (Date of Report October 12, 2004)
10(e) Form of Confidentiality Agreement between Anthony Guzzi Exhibit C to Guzzi Letter Agreement
and EMCOR
10(f) Form of Indemnification Agreement between EMCOR and each Exhibit F to Guzzi Letter Agreement
of its officers and directors
10(g-1) Severance Agreement ("Guzzi Severance Agreement") dated Exhibit D to the Guzzi Letter Agreement
October 25, 2005 between Anthony Guzzi and EMCOR
10(g-2) Amendment to Guzzi Severance Agreement Exhibit 10(g-2) to the March 2007 Form 10-Q
10(h-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(h-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(h-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2001 Form 10-K
68
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- --------------------------------
10(i-1) 1995 Non Employee Directors' Non Qualified Stock Option Plan Exhibit 10(p) to 2001 Form 10-K
("1995 Option Plan")
10(i-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2001 Form 10-K
10(j-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(j-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2001 Form 10-K
10(k) 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
10(l-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(a) to EMCOR's Quarterly Report
Frank T. MacInnis and EMCOR ("MacInnis Continuity Agreement") on Form 10-Q for the quarter ended June 30,
1998 ("June 1998 Form 10-Q")
10(l-2) Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) for the quarter ended
Agreement June 30, 1999 ("June 1999 Form 10-Q")
10(l-3) Amendment dated as of March 1, 2007 to MacInnis Continuity Exhibit 10(l-3) to the March 2007 Form 10-Q
Agreement
10(m-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q
Sheldon I. Cammaker and EMCOR ("Cammaker Continuity
Agreement")
10(m-2) Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to the June 1999 Form 10-Q
Agreement
10(m-3) Amendment dated as of March 1, 2007 to Cammaker Continuity Exhibit 10(m-3) to the March 2007 Form 10-Q
Agreement
10(n-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form 10-Q
R. Kevin Matz and EMCOR ("Matz Continuity Agreement")
10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Agreement Exhibit 10(m) to the June 1999 Form 10-Q
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(n-4) Amendment dated as of March 1, 2007 to Matz Continuity Exhibit 10(n-4) to the March 2007 Form 10-Q
Agreement
10(o-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form 10-Q
Mark A. Pompa and EMCOR ("Pompa Continuity Agreement")
10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Agreement Exhibit 10(n) to the June 1999 Form 10-Q
10(o-3) Amendment dated as of January 1, 2002 to Pompa Continuity Exhibit 10(p-3) to the March 2002 Form 10-Q
Agreement
10(o-4) Amendment dated as of March 1, 2007 to Pompa Continuity Exhibit 10(o-4) to the March 2007 Form 10-Q
Agreement
10(p-1) Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
between Anthony Guzzi ("Guzzi") and EMCOR
("Guzzi Continuity Agreement")
69
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- --------------------------------
10(p-2) Amendment dated as of March 1, 2007 to Guzzi Continuity Exhibit 10(p 2) to the March 2007 Form 10-Q
Agreement
10(q-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Plan") Exhibit 4.1 to EMCOR's Registration
Statement on Form S-8 (No. 333 112940 filed
with the Securities and Exchange Commission
on February 18, 2004 ("2004 Form S-8")
10(q-2) Amendment to Executive Stock Bonus Plan Exhibit 10(s-2) to the March 2007 Form 10-Q
10(q-3) Form of Certificate Representing Restricted Stock Units ("RSU's") Exhibit 10.1 to EMCOR's Report on
issued under the Stock Bonus Plan Mandatorily Awarded Form 8-K (Date of Report March 4, 2005)
(the "March 4, 2005 Form 8-K")
10(q-4) 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, Inc. Exhibit 10.3 to March 4, 2005 Form 8-K
("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-1) EMCOR Group, Inc. Long-Term Incentive Plan ("LTIP") Exhibit 10 to Form 8-K (Date of Report
December 15, 2005)
10(t-2) Form of Certificate Representing Stock Units issued under LTIP Page __
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 Exhibit 10(u-2) to EMCOR's Annual Report
on Form 10-K for the year ended
December 31, 2006 ("2006 Form 10-K")
10(v-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement
10(v-2) Amendment to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report
on Form 10-K for the year ended
December 31, 2003 ("2003 Form 10-K")
10(v-3) Second Amendment to 2003 Management Stock Incentive Plan Exhibit 10(u-3) to 2006 Form 10-K
10(w) Form of Stock Option Agreement evidencing grant of stock options Exhibit 10.1 to Form 8-K (Date of Report
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 Exhibit 10(z) to 2006 Form 10-K
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 Exhibit 10(a)(a-2) to 2006 Form 10-K
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
70
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- --------------------------------
10(c)(c) Form of EMCOR Option Agreement for Messrs. Frank T. MacInnis, Exhibit 4.5 to 2004 Form S-8
Sheldon I. Cammaker, 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 granted Exhibit 4.6 to 2004 Form S-8
December 14, 2001
10(e)(e) Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.7 to 2004 Form S-8
January 2, 2002, January 2, 2003 and January 2, 2004
10(f)(f) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8
June 19, 2002, October 25, 2002 and February 27, 2003
10(g)(g) Form of EMCOR Option Agreement for Executive Officers and Exhibit 10(g)(g) to 2005 Form 10-K
Guzzi dated January 3, 2005
10(h)(h-1) 2007 Incentive Plan Exhibit B to EMCOR's Proxy Statement for
its annual meeting held June 20, 2007
10(h)(h-2) Option Agreement dated December 13, 2007 under 2007 Incentive Page __
Plan between Jerry E. Ryan and EMCOR
10(h)(h-3) Form of Option Agreement under 2007 Incentive Plan between Page __
EMCOR and each non employee director electing to receive
options as part of annual retainer
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 Note E of the Notes to the Consolidated
December 2007 and 2006* Financial Statements
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 __
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of Page __
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 of Page __
2002 by the Executive Vice President and Chief Financial Officer*
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of Page __
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 of Page __
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 under takes to furnish
a copy of any unfiled instrument which defines the rights of holders of long
term debt of the Registrant's subsidiaries.
71
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 21, 2008 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 21, 2008.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors and
- --------------------------- Chief Executive Officer
Frank T. MacInnis (Principal Executive Officer)
/s/ MARK A. POMPA Executive Vice President and
- --------------------------- Chief Financial Officer
Mark A. Pompa (Principal Financial and Accounting 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/ JERRY E. RYAN Director
- ---------------------------
Jerry E. Ryan
/s/ MICHAEL T. YONKER Director
- ---------------------------
Michael T. Yonker
72