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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-------------------
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X|[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
| |2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-23151-8267
EMCOR GROUP, INC.
EXACT(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
301 MERRITT SEVEN CORPORATE PARK 06851-1060
Norwalk, Connecticut (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 849-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark 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)15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|[X] No | |[ ]
Indicate by check mark if disclosure of delinquent filingsfilers 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 as an amendment to this
Form 10-K. |X|[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act). Yes |X|[X] No | |[ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the registrant's voting common equitystock held by non-affiliates of
the registrant on June 30, 2004,was approximately $760,000,000 as of the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$670,000,000 based upon the
closing sale price on that day's closing price.the New York Stock Exchange reported for such date. Shares
of common stock held by each officer and director and by each person who owns 5%
or more of the outstanding common stock have been excluded from such calculation
as such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
Number of shares of the registrant's common stock outstanding as of the
close of business on March 4, 2005: 15,294,118February 17, 2006: 31,127,906 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 20052006 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.III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
PART I
Item 1. Business
General ......................................................................................................................................................................................... 1
Operations ................................................................................................................................................................................... 2
Competition ................................................................................................................................................................................. 4
Employees ..................................................................................................................................................................................... 4
Backlog ......................................................................................................................................................................................... 4
Available Information .................................................................. 4
Item 1A. Risk Factors ............................................................................. 5
Item 1B. Unresolved Staff Comments ................................................................ 8
Item 2. Properties ........................................................................................................ 5............................................................................... 9
Item 3. Legal Proceedings. ................................................................................................ 9Proceedings ........................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders ............................................................... 10...................................... 13
Executive Officers of the Registrant .............................................................................. 11..................................................... 14
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities .. 12......................... 15
Item 6. Selected Financial Data ........................................................................................... 14.................................................................. 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition ............................. 14.................................................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................ 25............................... 30
Item 8. Financial Statements and Supplementary Data ....................................................................... 26.............................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .............................. 54.............................................................. 61
Item 9A. Controls and Procedures ........................................................................................... 54.................................................................. 61
Item 9B. Other Information ................................................................................................. 54........................................................................ 61
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................................ 55....................................... 62
Item 11. Executive Compensation ............................................................................................ 55................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters .................... 55............................................ 62
Item 13. Certain Relationships and Related Transactions .................................................................... 55........................................... 62
Item 14. Principal Accounting Fees and Services ............................................................................ 55................................................... 62
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................ 56............................................... 63
FORWARD-LOOKING STATEMENTS
Certain information included in this report, or in other materials we have
filed or will file with the Securities and Exchange Commission (the "SEC") (as
well as information included in oral statements or other written statements made
or to be made by us) contains or may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995
Act"). Such statements are being made pursuant to the 1995 Act and with the
intention of obtaining the benefit of the "Safe Harbor" provisions of the 1995
Act. Forward-looking statements are based on information available to us and our
perception of such information as of the date of this report and our current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They contain words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "may," "can," "could," "might,"
variations of such wording and other words or phrases of similar meaning in
connection with a discussion of our future operating or financial performance,
and other aspects of our business, including market share growth, gross profit,
project mix, projects with varying profit margins, selling general and
administrative expenses, and trends in our business and other characterizations
of future events or circumstances. From time to time, forward-looking statements
also are included in our other periodic reports on Forms 10-Q and 8-K, in press
releases, in our presentations, on our web site and in other material released
to the public. Any or all of the forward-looking statements included in this
report and in any other reports or public statements made by us are only
predictions and are subject to risks, uncertainties and assumptions, including
those identified below in the "Risk Factors" section, the Management's
Discussion and Analysis of Results of Operations and Financial Condition"
section, and other sections of this report, and in our Forms 10-Q for the three
months ended March 31, 2005, June 30, 2005 and September 30, 2005 and in other
reports filed by us from time to time with the SEC as well as in press releases,
in our presentations, on our web site and in other material released to the
public. Such risks, uncertainties and assumptions are difficult to predict,
beyond our control and may turn out to be inaccurate causing actual results to
differ materially from those that might be anticipated from our forward-looking
statements. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in our subsequent
reports on Forms 10-K, 10-Q and 8-K should be consulted.
PART I
ITEM 1. BUSINESS
The Internet website addressReferences to the "Company," "EMCOR," "we," "us," "our" and words of
similar import refer to EMCOR Group, Inc. ("EMCOR" orand its consolidated subsidiaries
unless the "Company")
is http://www.emcorgroup.com. The Company's annual report on Form 10-K,
quarterly reports on Forms 10-Q and current reports on Forms 8-K (and any
amendments to those reports)context indicates otherwise.
GENERAL
We are available free of charge on or through its
Internet website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
GENERAL
EMCOR is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2004, EMCOR2005, we had revenues of approximately $4.75$4.7 billion. The
Company providesWe provide
services to a broad range of commercial, industrial, utility and institutional
customers through approximately 70 principal operating subsidiaries and joint
venture entities. EMCOR hasOur offices are located in 4241 states and the District of
Columbia in the United States, eightsix provinces in Canada and 12 primary locations
in the United Kingdom. In the United Arab Emirates, the
Company carrieswe carry on business through
two joint ventures. ItsOur executive offices are located at 301 Merritt Seven
Corporate Park, Norwalk, Connecticut 06851-1060, and itsour telephone number at
those offices is (203) 849-7800.
EMCOR specializesWe specialize in providing construction services relating to mechanical
and electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services."
EMCOR designs, integrates, installs, startsWe design, integrate, install, start up, operatesoperate and maintainsmaintain various
mechanicalelectrical and electricalmechanical systems, including:
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems;
o Plumbing, process and high-purity piping systems;
o Systems for generation and distribution of electrical power;Fire protection systems;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications
and process control systems; and
o Voice and data communications systems.
EMCOR'sOur facilities services businesses, which support the operation of a
customer's facilities, include:
o Site-based operations and maintenance;
o Mobile maintenance and services;
o Facilities management;
o Remote monitoring;
o Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development and management for energy systems.
These facilities services are provided to a wide range of commercial,
industrial, utility and institutional facilities, including those atto which EMCORwe
also provided construction services and others atto which construction services
were provided by others. EMCOR'sOur varied facilities services are frequently combined
to provide integrated service packages which include operations and maintenance,
mobile services and facility improvement programs.
EMCOR providesWe provide construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. ItWe also providesprovide these services indirectly by acting as
a subcontractor to general contractors, systems suppliers and other
subcontractors. Worldwide, EMCOR haswe have approximately 26,000 employees.
EMCOR'sOur revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of EMCOR's 2004our
2005 revenues, approximately 80%79% were generated in the United States and
approximately 20%21% were generated internationally. In 2004,2005, approximately 49%45% of
revenues were derived from new construction projects, 21%28% were derived from
renovation and retrofit of customer's existing facilities and 30%27% were derived
from facilities services operations.
1
The broad scope of EMCOR'sour operations areis more particularly described below.
For information regarding the revenues, operating income and total assets of
each of EMCOR'sour segments with respect to each of the last three fiscal years, and
EMCOR'sour revenues and assets attributable to the United States, Canada, the United
Kingdom and all other foreign countries, see Note M to EMCOR'sour financial statements
included herein.in this report.
1
OPERATIONS
The mechanical and electrical construction services industry has a higherhigh
growth rate than the overall non-residential construction industry, due principally to the ever increasing content and complexity of
mechanical and electrical systems in all types of projects. This increasing
content and complexity is, in part, a result of the expanded use of computers
and more technologically advanced voice and data communications, lighting and
environmental control systems in all types of facilities. For these reasons,
buildings of all types consume more electricity per square foot than in the past
and thus need more extensive electrical distribution systems. In addition, advanced
voice and data communication systems require more sophisticated power supplies
and extensive low voltage and fiber-optic communications cabling. Moreover, the
need for greatersubstantial environmental controls within a building, such asdue to the
heightened need for climate control to maintain extensive computer systems at
optimal temperatures, and the growing demand for environmental control in individual
spaces have created expanded opportunities for the mechanical and electrical
construction services and facilities services businesses.business.
Mechanical and electrical construction services primarily involve the
design, integration, installation and start-up of: (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b) fire
protection systems; (c) plumbing, process and high-purity piping systems; (c)(d)
systems for the generation and distribution of electrical power, including power
cables, conduits, distribution panels, transformers, generators, uninterruptible
power supply systems and related switch gear and controls; (d)(e) lighting systems,
including fixtures and controls; (e)(f) low-voltage systems, including fire alarm,
security and process control systems; and (f)(g) voice and data communications
systems, including fiber-optic and low-voltage copper cabling.
Mechanical and electrical construction services generally fall into one of
two categories: (a) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (b) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR'sOur United States mechanical and electrical construction services
operations accounted for about 60%62% of its 2004our 2005 revenues, of which revenues
approximately 72% were59% was related to new construction and approximately 28% were41% was
related to renovation and retrofit projects. EMCOR'sOur United Kingdom and Canada
mechanical and electrical construction services operations accounted for
approximately 10%21% of its 2004our 2005 revenues, of which revenues approximately 56%78% were
related to new construction and approximately 44%22% were related to renovation and
retrofit projects. EMCOR providesWe provide mechanical and electrical construction services
for both large and small installation and renovation projects. ItsOur largest
projects include those (a) for institutional use (such as water and wastewater
treatment facilities, hospitals, correctional facilities schools and research
laboratories); (b) for industrial use (such as pharmaceutical plants, steel,
pulp and paper mills, chemical, automotive and semiconductor manufacturing
facilities and oil refineries); (c) for transportation projects (such as
highways, airports and transit systems); (d) for commercial use (such as office
buildings, data centers, hotels, casinos, convention centers, sports stadiums,
shopping malls and resorts); and (e) for power generation and energy management
projects. EMCOR'sOur largest projects, which typically range in size from $10.0 million
up to and occasionally exceeding $50.0 million and are usuallyfrequently multi-year
projects, represented about 33%30% of EMCOR'sour construction services revenues in 2004.
EMCOR's2005.
Our projects of less than $10.0 million accounted for approximately 67%70% of
2004our 2005 mechanical and electrical construction services revenues. These
projects are typically completed in less than one year. They usually involve
mechanical and electrical construction services when an end-user or owner
undertakes construction or modification of a facility to accommodate a specific
use. These projects frequently require mechanical and electrical systems to meet
special needs such as critical systems power supply, fire protection systems,
special environmental controls and high-purity air systems, sophisticated
mechanicalelectrical and electricalmechanical systems for data centers, including those associated with internet service providers and
electronic commerce, trading floors in financial
services businesses, new production lines in manufacturing plants and office
arrangements in existing office buildings. They are not usually dependent upon
the new construction market. Demand for these projects and types of services is
often prompted by the expiration of leases, changes in technology or changes in
the customer's plant or office layout in the normal course of a customer's
business.
EMCOR performs itsWe 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.
2
EMCORWe also installsinstall and maintainsmaintain lighting for streets, highways, bridges and
tunnels, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactureswe manufacture and installsinstall sheet metal air
handling systems for both itsour own mechanical construction operations and for
unrelated mechanical contractors. EMCORWe also maintainsmaintain welding and pipe fabrication
shops in support of some of its ownour mechanical operations.
FacilitiesOur United States facilities services are providedsegment, as well as our other
segments, provide facilities services to a wide range of commercial, industrial
and institutional facilities, including both those for which EMCORwe have provided
construction services and those for which construction services were provided by
others. Facilities services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by our customer site-based
EMCOR
employees.
2
These facilities services, which generated approximately 30%27% of 2004our 2005
revenues, are provided to owners, operators, tenants and managers of all types
of facilities both on a contract basis for a specified period of time and on an
individual task-order basis.
In 1997, EMCORwe established a subsidiary to expand itsour facilities services
operations in North America.America (primarily in the United States). This division has
built on EMCOR'sour traditional mechanical and electrical construction services operations,
facilities services activities at itsour mechanical and electrical contracting
subsidiaries, and EMCOR'sour client relationships, as well as acquisitions, to expand
the scope of services currently offered and to develop packages of services for
customers on a regional, national and global basis.
As a consequence, EMCOR'sour United States facilities services division offers a
broad range of facilities services, including maintenance and service of
mechanical and electrical systems, which EMCOR haswe have historically provided to
customers following completion of construction projects, and site-based
operations and maintenance, mobile maintenance and service, facilities
management, remote monitoring, installation and support for building systems,
technical consulting and diagnostic services, small modification and retrofit
projects and program development and management for energy systems.
EMCOR hasWe have experienced an expansion in the demand for itsour facilities services
which it believeswe believe is driven by customers' decisions to focus on their own core
competencies, the increasing technical complexity of their facilities and their
mechanical, electrical, voice and data and other systems, and the need for
increased reliability, especially in mechanical and electrical systems. These
trends have led to outsourcing and privatization programs whereby customers in
both the private and public sectors seek to contract out those activities that
support, but are not directly associated with, the customer's core business. EMCOROur
clients requiring facilities services include the federal government, utilities
and major corporations engaged in information technology, telecommunications,
pharmaceuticals, financial services, publishing and manufacturing.
Illustrative of the outsourcing of companies' facilities services are
multi-year agreements we have with (a) Bank One under which EMCOR provideswe provide
facilities services for approximately 2,2002,400 Bank One locations encompassing 32.033.0
million square feet of space in 30 states; (b) LAM Research under which EMCOR provideswe
provide such services to approximately 1.0 million square feet of production and
research and development facilities and office space; (c) Fifth Third Bank under
which EMCOR provideswe provide facilities services to over 1,200 Fifth Third locations with
over 9.59.0 million square feet in seven states; (d) Exelon Corp. under which EMCOR provideswe
provide comprehensive facilities services to substations, power generation
facilities and offices encompassing over 5.7 million square feet of space in
four states; (e) Mattson Technology, Inc. under which EMCOR provides
integrated services to approximately 800,000 square feet of production and
research and development facilities and office space; (f) Fidelity Investments under which EMCOR provideswe provide integrated services
to approximately 2.5 million square feet of office and data center space; and
(g)(f) Hewlett-Packard Company under which EMCOR provideswe provide integrated services to
approximately 20.0 million square feet of production, distribution and office
space in seven states. Through a limited liability Companycompany owned by EMCORus and CB
Richard Ellis Inc., a nationwide real estate management company, operations and
maintenance services are provided to over 3,000 commercial facilities comprising
approximately 135.0 million square feet of space. In addition, a joint venture,
of which we are the managing partner, has recently secured an eight year
contract that commenced February 2006 pursuant to which the joint venture
provides base operations services to 25.0 million square feet of U.S. Navy
facilities in the West Sound region of the state of Washington.
In December 2002, EMCORwe acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business. In Washington D.C., CES is the second
largest facilities services provider to the federal government behind the
General Services Administration and currently provides services to such
preeminent buildings as the Ronald Reagan Building, the second largest federal
government facility after the Pentagon. It currently provides its services in 28
states throughout the Northeast, Midwest, Mid-Atlantic and Southeast.states. As part of its operations, CES is responsible for (a) the oversight of
all or most of a business' facilities operations, including operation and
maintenance;maintenance, (b) the oversight of logistical processes;processes, (c) tenant services and
management;management, (d) servicing upgrade and retrofit of HVAC, electrical, plumbing and
industrial piping and sheet metal systems in existing facilities;facilities and (e)
diagnostic and solution engineering for building systems and their components.
In November
2003, EMCOR acquired the Facility Management Services division of Siemens
Building Technologies, Inc., including contracts to provide facilities services
to several operating units of Siemens Corporation encompassing 5.0 million
square feet of corporate, manufacturing and research space.
EMCOR'sOur United Kingdom subsidiary also has a division dedicated tofocusing on facilities
services. This division currently provides a full range of facilities services
to public and private sector customers under multi-year agreements, including
the maintenance of British Airways' facilities at Heathrow and Gatwick Airports,
GlaxoSmithKline Research Laboratories and the Tubelines, a maintenance operating
company of the London Underground. In the United Kingdom, EMCORwe also providesprovide
facilities services at several manufacturing facilities, including BAE Systems
manufacturing plants. In addition, theour United Kingdom operations provide on-call
and mobile service support on a task-order or contract basis, small renovation
and alteration project work and installation and maintenance services for data
communications and security systems.
3
EMCOR'sOur EMCOR Energy & TechnologiesServices business designs and constructs customers'
energy-related
projects on a turnkey basis. We also operate 17 central heating and cooling
plants/power and cogeneration facilities and provide maintenance services for
certain of these projects also provides plant
staffing. This business'high voltage systems. In addition, we provide consulting and national program
energy management services under multi-year agreements. Our energy services
business's recent projects include the design and construction of a $15.6
million 14 megawatt controlcentral utility plant and a combined heat and power facility
to supply all HVAC, and hot water and electrical requirements for the Morongo Native
American Hotel/Casino complex in Cabazon, California and the design and
construction of a $27.0 million cogeneration facility and chiller plant to
provide cooling, heat and power at the University of New Hampshire main campus
in Durham, New Hampshire. EMCOR willWe also provide plant staffing to thesefor the Morongo and
University of New Hampshire energy projects under long-term20 year operations and
maintenance contracts. Over the past five years, EMCOR haswe have completed more than
3
80 energy-related projects ranging from basic life safety standby systems to
complete utility grade power plants and cogeneration/central utility plants
supplying thermal and power requirements completely separated from utilities'
electrical grids. This business is reported within theour United States facilities
services segment.
EMCOR believesWe believe mechanical and electrical construction services and facilities
services activities are complementary, permitting itus to offer customers a
comprehensive package of services. The ability to offer both construction and
facilities services enhances EMCOR'sour competitive position with customers.
Furthermore, EMCOR'sour facilities services operations tend to be less cyclical than
itsour construction operations because facilities services are more responsive to
the needs of an industry's operational requirements rather than its construction
requirements.
COMPETITION
EMCOR believesWe believe that the mechanical and electrical construction services
business is highly fragmented and competitive consisting ofour competition includes thousands of small
companies across the United States and around the world. EMCOR competesWe compete with
national, regional and local companies, many of which are small, owner-operated
entities that operate in a limited geographic area. However, there are a few
public companies focused on providing mechanical and electrical construction
services, such as Integrated Electrical Services, Inc. and Comfort Systems USA,
Inc. A majority of EMCOR'sour 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 EMCOR haswe have total assets,
annual revenues, net worth, access to bank credit and surety bonding and
expertise significantly greater than most of itsour competitors, EMCOR believes
it haswe believe we have
a significant competitive advantage over its competitors.our competitors in providing mechanical
and electrical construction services. Competitive factors in the mechanical and
electrical construction services business include: (a) the availability of
qualified and/or licensed personnel; (b) reputation for integrity and quality;
(c) safety record; (d) cost structure; (e) relationships with customers; (f)
geographic diversity; (g) the ability to control project costs; (h) experience
in specialized markets; (i) the ability to obtain surety bonding; (j) adequate
working capital; and (k) access to bank credit.
While the facilities services business is also highly fragmented with most
competitors operating in a specific geographic region, a number of large
corporations such as Johnson Controls, Inc., Fluor Corp., Unicco Service
Company, Washington International, Inc., Trammel Crow and Jones Lang LaSalle are
engaged in this field. The key competitive factors in the facilities services
business include price, service, quality, technical expertise, geographic scope
and the availability of qualified personnel and mangers. Due to our size, both
financial and geographic, and our technical capability and management
experience, we believe we are in a strong competitive position in the facilities
services business.
EMPLOYEES
EMCORWe presently employsemploy approximately 26,000 people, approximately 71%69% of whom
are represented by various unions pursuant to more than 460475 collective
bargaining agreements between EMCOR'sour individual subsidiaries and local unions. EMCOR believesWe
believe that itsour employee relations are generally good. NoneOnly two of these
collective bargaining agreements are national or regional in scope.
BACKLOG
EMCORWe had contract backlog as of December 31, 20042005 of approximately $2.8$2.76
billion, compared with backlog of approximately $3.0$2.75 billion as of December 31,
2003.2004. Backlog is not a term recognized under accounting principles generally
accepted in the United States; however, it is a common measurement used in EMCOR'sour
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, exceptcontracts. 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.
BacklogAVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. These filings are available to the public over the
internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room located at 100 F Street,
N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
Our Internet address is www.emcorgroup.com. We make available free of
charge on or through www.emcorgroup.com our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
4
Our Board of Directors has an audit committee, a compensation and
personnel committee and a nominating and corporate governance committee. Each of
these committees has a formal charter. We also have Corporate Governance
Guidelines, a Code of Ethics for Chief Executive Officer and Senior Financial
Officers, and a Code of Ethics and Business Conduct for Directors, Officers and
Employees. Copies of these charters, guidelines and codes, and any waivers or
amendments to such codes which are applicable to our executive officers, senior
financial officers or directors, can be obtained free of charge from our web
site, www.emcorgroup.com.
In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes and any waivers or amendments to such
codes which are applicable to our executive officers, senior financial officers
or directors, at no cost by writing to us at EMCOR Group, Inc., 301 Merritt
Seven, Norwalk, CT 06851, Attention: Corporate Secretary, or by telephoning us
at (203) 849-7800.
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks, including the risks
described below as well as adverse business conditions, mix of business and
risks associated with foreign operations. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
known to us or not described below which we have not determined to be material
may also impair our business operations. You should carefully consider the risks
described below, together with all other information in this report, including
information contained in the "Business," "Management's Discussion and Analysis
of Results of Operations and Financial Condition," and "Quantitative and
Qualitative Disclosures about Market Risk" sections. If any of the following
risks actually occur, our business, financial condition and results of
operations could be adversely affected, and we may not be able to achieve our
goals. Such events may cause actual results to differ materially from expected
and historical results, and the trading price of our common stock could decline.
AN ECONOMIC DOWNTURN MAY LEAD TO LESS DEMAND FOR OUR SERVICES. If the
general level of economic activity slows, our ultimate customers may delay or
cancel new projects. For example, the recent economic downturn led to increased
by $0.1 billion asbankruptcies and pricing pressures. These factors contributed to the delay and
cancellation of December 31, 2003 comparedprojects, especially with respect to December 31, 2002. For the year ended December 31,
2004, EMCOR had approximately $4.75 billion in revenues comparedmore profitable private
sector work and impacted our operations and ability to approximately $4.53 billion in revenuescontinue at historical
levels. A number of other factors, including financing conditions for the
year ended December 31, 2003.
4industries we serve, could further adversely affect our ultimate customers and
their ability or willingness to fund capital expenditures in the future or pay
for past services. In addition, consolidation, competition or capital
constraints in the industries of our ultimate customers may result in reduced
spending by such customers. If economic conditions do not continue to improve,
or if there is another economic downturn, reducing in particular the
availability of the more profitable private sector work, our results of
operations are likely to be adversely affected.
AN INCREASE IN THE PRICE OF CERTAIN MATERIALS USED IN OUR BUSINESSES COULD
ADVERSELY AFFECT OUR BUSINESSES. We are exposed to market risk of fluctuations
in certain commodity prices of materials such as copper and steel utilized in
both our construction and facilities services operations. We are also exposed to
increases in energy prices, particularly as they relate to gasoline prices for
our fleet of over 5,000 vehicles.
OUR INDUSTRY IS HIGHLY COMPETITIVE. Our industry is served by numerous
small, owner-operated private companies, a few public companies and several
large regional companies. In addition, relatively few barriers prevent entry
into some of our businesses. As a result, any organization that has adequate
financial resources and access to technical expertise may become one of our
competitors. Competition in our industry depends on numerous factors, including
price. Certain of our competitors have lower overhead cost structures and,
therefore, are able to provide their services at lower rates than we are
currently able to provide. In addition, some of our competitors have greater
resources than we do. We cannot be certain that our competitors will not develop
the expertise, experience and resources to provide services that are superior in
both price and quality to our services. Similarly, we cannot be certain that we
will be able to maintain or enhance our competitive position within the industry
or maintain a customer base at current levels. We may also face competition from
the in-house service organizations of existing or prospective customers,
particularly with respect to facilities services. Many of our customers employ
personnel who perform some of the same types of services that we do. We cannot
be certain that our existing or prospective customers will continue to outsource
facilities services in the future.
OUR BUSINESS MAY ALSO BE AFFECTED BY ADVERSE WEATHER CONDITIONS. Adverse
weather conditions, particularly during the winter season, could affect our
ability to perform efficient work outdoors in certain regions of the United
States, the United Kingdom and Canada. As a result, we could experience reduced
revenue in the first and fourth quarters of each year. In addition, cooler than
normal temperatures during the summer months could reduce the need for our
services, and we may experience reduced revenues and profitability during the
period such weather conditions persist.
OUR BUSINESS MAY BE AFFECTED BY THE WORK ENVIRONMENT. We perform our work
under a variety of conditions, including but not limited to, difficult terrain,
difficult site conditions and busy urban centers where delivery of materials and
availability of labor may be impacted, clean-room environments where strict
procedures must be followed and sites which may have been exposed to
environmental hazards. Performing work under these conditions can negatively
affect efficiency and therefore, our gross profit.
5
OUR DEPENDENCE UPON FIXED PRICE CONTRACTS COULD ADVERSELY AFFECT OUR
BUSINESS. We currently generate, and expect to continue to generate, a
significant portion of our revenues under fixed price contracts. We must
estimate the costs of completing a particular project to bid for fixed price
contracts. The cost of labor and materials, however, may vary from the costs we
originally estimated. These variations, along with other risks, inherent in
performing fixed price contracts, may cause actual revenues and gross profits
from projects to differ from those we originally estimated and could result in
reduced profitability or losses on projects. Depending upon the size of a
particular project, variations from the estimated contract costs, can have a
significant impact on our operating results for any fiscal quarter or year.
WE COULD INCUR ADDITIONAL COSTS TO COVER GUARANTEES. In some instances, we
guarantee completion of a project by a specific date, achievement of certain
performance standards or performance of our services as a certain standard of
quality. If we subsequently fail to meet such guarantees, we may be held
responsible for costs resulting from such failure. Such failure could result in
our payment in the form of contractually agreed upon liquidated or other
damages. To the extent that any of these events occur, the total costs of a
project could exceed the original estimated costs, and we would experience
reduced profits or, in some cases, a loss.
MANY OF OUR CONTRACTS, ESPECIALLY OUR FACILITIES SERVICES CONTRACTS, MAY
BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING SUCH
CONTRACTS IF THEY ARE CANCELED OR AS THEY ARE COMPLETED OR EXPIRE. We could
experience a decrease in revenue, net income and liquidity if any of the
following occur:
o customers cancel a significant number of contracts;
o we fail to win a significant number of our existing contracts upon
re-bid;
o we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
o we fail to reduce operating and overhead expenses consistent with
any decrease in our revenue.
WE MAY BE UNSUCCESSFUL AT GENERATING INTERNAL GROWTH. Our ability to
generate internal growth will be affected by, among other factors, our ability
to:
o expand the range of services offered to customers to address their
evolving needs;
o attract new customers;
o increase the number of projects performed for existing customers;
and
o hire and retain qualified employees.
In addition, our customers may reduce the number or size of projects
available to us due to their inability to obtain capital or pay for services
provided. Many of the factors affecting our ability to generate internal growth
may be beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. If we are not successful, we may not
be able to achieve internal growth, expand operations or grow our business.
THE DEPARTURE OF KEY PERSONNEL COULD DISRUPT OUR BUSINESS. We depend on
the continued efforts of our senior management. The loss of key personnel, or
the inability to hire and retain qualified executives, could negatively impact
our ability to manage our business. However, we have executive development and
management succession plans in place in order to minimize any such negative
impact.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES. Our ability to
maintain productivity and profitability will be limited by our ability to
employ, train and retain skilled personnel necessary to meet our requirements.
We cannot be certain that we will be able to maintain an adequate skilled labor
force necessary to operate efficiently and to support our growth strategy or
that labor expenses will not increase as a result of a shortage in the supply of
these skilled personnel. Labor shortages or increased labor costs could impair
our ability to maintain our business or grow our revenues.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS COULD RESULT IN SIGNIFICANT
LIABILITIES. Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and disposal of waste
products, PCBs and fuel storage. A violation of such laws and regulations may
expose us to liabilities, including remediation costs and fines. We own and
lease several facilities. Some of these facilities contain fuel storage tanks
which may be above or below ground. If these tanks were to leak, we could be
responsible for the cost of remediation as well as potential fines. As a part of
our business, we also install fuel storage tanks and are sometimes required to
deal with hazardous materials, all of which may expose us to environmental
liability.
In addition, new laws and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown contamination or
leaks, or the imposition of new clean-up requirements could require us to incur
significant costs or become the basis for new or increased liabilities that
could harm our financial condition and results of operations. In certain
instances, we have obtained indemnification or covenants from third parties
(including predecessors or lessors) for such cleanup and other obligations and
liabilities that we believe are adequate to cover such obligations and
liabilities. However, such third-party indemnities or covenants may not cover
all
6
of such costs or third-party indemnitors may default on their obligations. In
addition, unanticipated obligations or liabilities, or future obligations and
liabilities, may have a material adverse effect on our business operations or
financial condition. Further, we cannot be certain that we will be able to
identify, or be indemnified for, all potential environmental liabilities
relating to any acquired business.
ADVERSE RESOLUTION OF LITIGATION MAY HARM OUR OPERATING RESULTS OR
FINANCIAL CONDITION. We are a party to lawsuits most of which are in the normal
course of our business. Litigation can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. An unfavorable resolution of a particular lawsuit
could have a material adverse affect on our business, operating results,
financial condition, and in some cases, on our reputation. See Item 3, "Legal
Proceedings" for more information regarding certain lawsuits in which we are
involved.
OPPORTUNITIES WITHIN THE GOVERNMENT SECTOR COULD LED TO INCREASED
GOVERNMENTAL REGULATION APPLICABLE TO US AND UNRECOVERABLE START UP COSTS. Most
government contracts are awarded through a regulated competitive bidding
process. As we pursue increased opportunities in the government arena,
particularly in our facilities services segment, management's focus associated
with the start up and bidding process may be diverted away from other
opportunities. If we were to be successful in being awarded additional
government contracts, a significant amount of costs could be required before any
revenues were realized from these contracts. In addition, as a government
contractor we are subject to a number of procurement rules and other
regulations, any deemed violation of which could lead to fines or penalties or a
loss of business. Government agencies routinely audit and investigate government
contractors. Government agencies may review a contractor's performance under its
contracts, cost structure and compliance with applicable laws, regulations and
standards. If government agencies determine through these audits or reviews that
costs were improperly allocated to specific contracts, they will not reimburse
the contractor for those costs or may require the contractor to refund
previously reimbursed costs. If government agencies determine that we are
engaged in improper activity, we may be subject to civil and criminal penalties.
A SIGNIFICANT PORTION OF OUR BUSINESS DEPENDS ON OUR ABILITY TO PROVIDE
SURETY BONDS. WE MAY BE UNABLE TO COMPETE FOR OR WORK ON CERTAIN PROJECTS IF WE
ARE NOT ABLE TO OBTAIN THE NECESSARY SURETY BONDS. Our construction contracts
frequently require that we obtain from surety companies and provide to our
customers payment and performance bonds as a condition to the award of such
contracts. Such surety bonds secure our payment and performance obligations.
Surety market conditions are currently difficult as a result of
significant losses incurred by many surety companies in recent periods, both in
the construction industry as well as in certain large corporate bankruptcies.
Consequently, less overall bonding capacity is available in the market and terms
have become more expensive and restrictive. Further, under standard terms in the
surety market, surety companies issue bonds on a project-by-project basis and
can decline to issue bonds at any time or require the posting of additional
collateral as a condition to issuing any bonds.
Current or future market conditions, as well as changes in our sureties'
assessment of their operating and financial risk, could cause our surety
companies to decline to issue, or substantially reduce the amount of, bonds for
our work and could increase our bonding costs. These actions can be taken on
short notice. If our surety companies were to limit or eliminate our access to
bonding, our alternatives would include seeking bonding capacity from other
surety companies, increasing business with clients that do not require bonds and
posting other forms of collateral for project performance, such as letter of
credit, or cash. We may be unable to secure these alternatives in a timely
manner, on acceptable terms, or at all. Accordingly, if we were to experience an
interruption or reduction in the availability of bonding capacity, we may be
unable to compete for or work on certain projects.
WE ARE EFFECTIVELY SELF-INSURED AGAINST MANY POTENTIAL LIABILITIES.
Although we maintain insurance policies with respect to a broad range of risks,
including automobile liability, general liability, workers compensation and
employee group health, these policies do not cover all possible claims and
certain of the policies are subject to large deductibles. Accordingly, we are
effectively self-insured for a substantial number of actual and potential
claims. Our estimates for unpaid claims and expenses are based on known facts,
historical trends and industry averages utilizing the assistance of an actuary.
We reflect these liabilities in our balance sheet as other current and
non-current liabilities. The determination of such estimated liabilities and
their appropriateness are reviewed and updated at least quarterly. However,
these liabilities are difficult to assess and estimate due to many relevant
factors, the effects of which are often unknown, including the severity of an
injury or damage, the determination of liability in proportion to other parties,
the timeliness of reported claims, the effectiveness of our risk management and
safety programs and the terms and conditions of our insurance policies. Our
accruals are based upon known facts, historical trends and our reasonable
estimate of future expenses, and we believe such accruals are adequate. However,
unknown or changing trends, risks or circumstances, such as increases in claims,
a weakening economy, increases in medical costs, changes in case law or
legislation or changes in the nature of the work we perform, could render our
current estimates and accruals inadequate. In such case, adjustments to our
balance sheet may be required and these increased liabilities would be recorded
in the period that the experience becomes known. Insurance carriers may be
unwilling, in the future, to provide our current levels of coverage without a
significant increase in insurance premiums and/or collateral requirements to
cover our deductible obligations. Increased collateral requirements may be in
the form of additional letters of credit, and an increase in collateral
requirements could significantly reduce our liquidity. If insurance premiums
increase, and/or if insurance claims are higher than our estimates, our
profitability could be adversely affected.
7
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AS A RESULT OF
GOODWILL IMPAIRMENTS. When we acquire a business, we record an asset called
"goodwill" equal to the excess amount paid for the business, including
liabilities assumed, over the fair value of the tangible and intangible assets
of the business acquired. In 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141
which requires that all business combinations be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination be recognized as assets apart from goodwill. Also in 2001,
the FASB issued SFAS No. 142 which provides that goodwill and other intangible
assets that have indefinite useful lives not be amortized, but instead must be
tested at least annually for impairment, and intangible assets that have finite
useful lives should continue to be amortized over their useful lives. SFAS No.
142 also provides specific guidance for testing goodwill and other non-amortized
intangible assets for impairment. SFAS No. 142 requires management to make
certain estimates and assumptions to allocate goodwill to reporting units and to
determine the fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market conditions, projected
cash flows, investment rates, cost of capital and growth rates, which could
significantly impact the reported value of goodwill and other intangible assets.
Fair value is determined using discounted estimated future cash flow. Absent any
impairment indicators, we perform impairment tests annually each October 1.
Impairments, if any, would be recognized as operating expenses and would
adversely affect profitability.
AMOUNTS INCLUDED IN OUR BACKLOG MAY NOT RESULT IN ACTUAL REVENUE OR
TRANSLATE INTO PROFITS. Many of our contracts do not require purchase of a
minimum amount of services. In addition, many contracts are cancelable on short
notice. We have historically experienced variances in the components of backlog
related to project delays or cancellations resulting from weather conditions,
external market factors and economic factors beyond our control, and we may
experience such delays or cancellations in the future. If our backlog fails to
materialize, we could experience a reduction in revenue and a decline in
profitability which would result in a deterioration of our financial condition,
profitability and liquidity.
WE ACCOUNT FOR A MAJORITY OF OUR PROJECTS USING THE
PERCENTAGE-OF-COMPLETION ACCOUNTING METHOD; THEREFORE, VARIATIONS OF ACTUAL
RESULTS FROM OUR ASSUMPTIONS MAY REDUCE OUR PROFITABILITY. We recognize revenue
on construction contracts using the percentage-of-completion accounting method.
See Item 7 "Management's Discussion And Analysis Of Results Of Operations And
Financial Condition - Application of Critical Accounting Policies." Under the
percentage-of-completion accounting method, we record revenue as work on the
contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that
incurred costs to date bear to total estimated costs. Accordingly, contract
revenue and total cost estimates are reviewed and revised monthly as the work
progresses. Adjustments are reflected in contract revenue in the period when
such estimates are revised. Estimates are based on management's reasonable
assumptions and experience, but are only estimates. Variation of actual results
from assumptions on an unusually large project or on a number of average size
projects could be material. We are also required to immediately recognize the
full amount of the estimated loss on a contract when estimates indicate such a
loss. Such adjustments and accrued losses could result in reduced profitability
which could negatively impact our cash flow from operations.
CERTAIN PROVISIONS OF OUR CORPORATE GOVERNANCE DOCUMENTS COULD MAKE AN
ACQUISITION OF THE COMPANY, OR A SUBSTANTIAL INTEREST THEREIN, MORE DIFFICULT.
The following provisions of our certificate of incorporation and bylaws, as
currently in effect, as well as our stockholder rights plan and Delaware law,
could discourage potential proposals to acquire us, delay or prevent a change in
control of us or limit the price that investors may be willing to pay in the
future for shares of our common stock:
o our certificate of incorporation permits the board of directors to
issue "blank check" preferred stock and to adopt amendments to our
bylaws;
o our bylaws contain restrictions regarding the right of stockholders
to nominate directors and to submit proposals to be considered at
stockholder meetings;
o our certificate of incorporation and bylaws restrict the right of
stockholders to call a special meeting of stockholders and to act by
written consent;
o we are subject to provisions of Delaware law which prohibit us from
engaging in any of a broad range of business transactions with an
"interested stockholder" for a period of three years following the
date such stockholder becomes classified as an interested
stockholder; and
o We adopted a stockholder rights plan that could cause substantial
dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors or permitted by our
stockholder rights plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
8
ITEM 2. PROPERTIES
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities, both leased and owned, and identifies
the business segment that is the principal user of each such facility.
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
---------------------------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven Corporate Park
Norwalk, Connecticut ......................................................................................... 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona (a) ......................................................................................... 30,603 3/31/08
1200 North Sickles Drive
Tempe, Arizona (b) ............................................................................................. 29,000 Owned
1000 N. Kraemer Place
Anaheim, California (b) ............................................ 24,384 8/14/12
4540 Easton Drive
Bakersfield,601 S. Vincent Avenue
Azusa, California (c) ........................................ 11,368 3/......................................... 33,450 10/31/0908
3208 Landco Drive
Bakersfield, California (c) ........................................................................... 49,875 6/30/07
555 Anton Boulevard
Costa Mesa, California (a) ......................................... 17,058 5/31/08
1168 FeslerFelser Street
El Cajun,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
5 Vanderbilt
Irvine, California (a) ............................................. 18,000 7/31/08
4462 Corporate Center Drive
Los Alamitos, California (c) ......................................................................... 57,863 7/31/06
825 Howe Road
Martinez, California (c) ................................................................................. 109,800 12/31/07
8670 Younger Creek Drive
Sacramento, California (a) ............................................................................. 54,135 1/13/12
9505 and 9525 Chesapeake Drive
San Diego, California (c) ............................................................................... 25,124 12/31/06
414 Brannan Street
San Francisco, California (c) ...................................... 18,964 3/31/05
4405 and 4420 Race Street
Denver, Colorado (b) ............................................... 17,704 9/30/11
345 Sheridan Boulevard
Lakewood, Colorado (c) ..................................................................................... 63,000 Owned
367 and 377 Research Parkway
Meriden, Connecticut (b) ........................................... 23,500 7/31/11
1781 N.W. North River Drive
Miami, Florida (b) ................................................. 11,285 Owned
2501 S.W. 160th Street
Miramar, Florida (c) ............................................... 15,877 7/31/08
3145 Northwoods Parkway
Norcross, Georgia (c) ....................................................................................... 25,808 1/31/0612
400 Lake Ridge Drive
Smyrna, Georgia (a) ........................................... 30,000 9/30/12
2160 North Asland Avenue
Chicago, Illinois (b) ......................................... 36,850 6/30/10
2100 South York Road
Oak Brook, Illinois (c) ....................................... 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) ..................................... 40,000 6/9/10
1406 Cardinal Court
Urbana, Illinois (b) .......................................... 33,750 10/1/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ....................................... 136,695 10/31/08
59
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
---------------------------- ----------------
400 Lake Ridge Drive
Smyrna, Georgia (a) ................................................ 30,000 9/30/12
2160 North Asland Avenue
Chicago, Illinois (b) .............................................. 67,000 6/30/05
2100 South York Road
Oak Brook, Illinois (c) ............................................ 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) .......................................... 40,000 6/09/05
1406 Cardinal Court
Urbana, Illinois (b) ............................................... 33,750 10/01/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) ............................................ 136,695 10/31/08
2655 Garfield Road
Highland, Indiana (c) ....................................................................................... 45,816 6/30/06
5124-5128 W. 79th Street
Indianapolis, Indiana (b) .......................................... 12,600 9/30/06
2600 N. Ninth Street Road
Lafayette, Indiana (b) ............................................. 13,798 10/31/08
3100 Brinkerhoff Road
Kansas City, Kansas (b) ................................................................................... 42,836 11/30/05
3125 Brinkerhoff Road
Kansas City, Kansas (b) ............................................ 22,676 Owned
631 Pecan Circle
Manhattan, Kansas (b) .............................................. 22,750 8/31/0807
2118 W. Harry
Wichita, Kansas (b) ........................................................................................... 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky (c) ............................................ 20,600 1/07/09
4530 Hollins Ferry Road
Baltimore, Maryland (b) ................................................................................... 26,792 Owned
643 Lofstrand Lane
Rockville, Maryland (a) ............................................ 15,000 2/28/10
306 Northern Avenue
Boston, Massachusetts (a) .......................................... 15,275 6/30/05
200 Old Colony Way
Boston, Massachusetts (b) .......................................... 11,500 3/31/08
70-70D Hawes Way
Stoughton, Massachusetts (b) ....................................... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts (a) (b) ................................................................. 36,000 6/10/13
1743 Maplelawn
Troy, Michigan (c) ................................................. 22,000 4/30/06
6060 Hix Road
Westland, Michigan (b) ............................................. 23,000 Month to Month
6325 South Valley Boulevard
Las Vegas, Nevada (b) .............................................. 23,190 12/31/08
3555 W. Oquendo Road
Las Vegas, Nevada (c) ....................................................................................... 90,000 11/30/08
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ....................................................................... 25,000 1/14/0611
348 New Country Road
Secaucus, New Jersey (b) ................................................................................. 37,905 12/31/07
26 West Street
Brooklyn, New York (b) ............................................. 15,000 Owned
301 and 305 Suburban Avenue
Deer Park, New York (b) ................................................................................... 33,535 3/31/05
24-37 46th Street
Long Island City, New York (a) ..................................... 10,000 1/31/0710
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
253 West 35th Street
New York, New York (c) ............................................. 7,000 8/31/09
Two Penn Plaza
New York, New York (a) (c) ................................................................................. 55,891 1/31/16
704 Clinton Avenue South
Rochester, New York (a) ................................................................................... 25,000 7/31/06
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio (a) ............................................... 25,600 9/27/06
3976 Southern Avenue
Cincinnati,Cincinatti, Ohio (a) ......................................................................................... 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) ............................................................................................. 25,500 10/31/07
2904 S.W. 1st Avenue
Portland, Oregon (c) ............................................... 12,500 3/31/05
700 Gracern Road
Columbia, South Carolina9815 Roosevelt Boulevard
Philadelphia, Pennsylvania (a) ....................................... 11,850 2/28/07
7520 Bartlett Corp. Avenue, East
Bartlett, Tennessee (c) ............................................ 9,000 12/31/05................................ 33,405 11/30/11
4067 New Getwell Road
Memphis, Tennessee (b) ..................................................................................... 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas (c) ................................................. 18,028 1/31/07
5550 Airline Drive
Houston, Texas (b) ............................................................................................. 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) ............................................................................................. 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ................................................................................. 120,904 12/31/06
320 23rd Street
Arlington, VirginiaVA (a) ......................................................................................... 43,028 3/05/5/10
109-D Executive Drive
Dulles, Virginia (c) ............................................... 19,000 8/31/09
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
710
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
---------------------------- ----------------
3280 Formex Road
Richmond, Virginia (b) ............................................. 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
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom (d) .......................... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom (d) ....................... 24,300 12/24/06
2116 Logan400 Parkdale Avenue Winnipeg, Manitoba, Canada (e) ..................................... 19,800 Owned
3455 Landmark Boulevard
Burlington,N.
Hamilton, Ontario, Canada (e) .................................... 16,100 Owned(d) ................................. 48,826 5/29/06
EMCOR believesWe believe that all of itsour property, plant and equipment are well maintained, in
good operating condition and suitable for the purposes for which they are used.
See Note K -- Commitments and Contingencies of the notes to consolidated
financial statements for additional information regarding lease costs. EMCOR
utilizesWe
utilize substantially all of itsour leased or owned facilities and believesbelieve there
will be no difficulty either in negotiating the renewal of itsour real property
leases as they expire or in finding alternative space, if necessary.
- ----------------------------
(a) Principally used by a company engaged in the "United States facilities
services" segment.
(b) Principally used by a company engaged in the "United States mechanical
construction and facilities services" segment.
(c) Principally used by a company engaged in the "United States electrical
construction and facilities services" segment.
(d) Principally used by a company engaged in the "United Kingdom construction
and facilities services" segment.
(e) Principally used by a company engaged in the "Canada construction and
facilities services" segment.
811
ITEM 3. LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
EMCOR and three of its officers (Chairman of the Board and Chief Executive
Officer Frank T. MacInnis, Executive Vice President and Chief Financial Officer
Leicle E. Chesser, and Senior Vice President-Chief Accounting Officer and
Treasurer Mark A. Pompa) have been named as defendants in a purported
consolidated class action filed in the United States District Court of
Connecticut entitled IN RE EMCOR GROUP, INC SECURITIES LITIGATION. Plaintiff
purports to represent a class composed of all persons who purchased or otherwise
acquired EMCOR common stock and/or other securities between April 9, 2003 and
October 2, 2003, inclusive. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder and of Section 20(A) of
the Securities Exchange Act, relating to alleged misstatements and omissions in
certain of the Company's filings with the Securities and Exchange Commission,
press releases and other public statements between April 9 and October 2, 2003,
and seeks damages on behalf of the purported class in unspecified amounts. A
motion to dismiss the Complaint filed by EMCOR and the individual defendants is
currently under submission. As set forth in the motion, EMCOR and the individual
defendants believe that the plaintiff's allegations are without merit and are
vigorously defending against them.
In July 2003, EMCOR'sour subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneledempanelled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.
On September 6, 2005, a former employee of Poole & Kent and the employee's
wife pled guilty to federal fraud charges that they used an alleged woman-owned
business enterprise ("WBE") to help Poole & Kent qualify for public construction
projects. The former employee also pled guilty to filing a false federal
personal income tax return for his failure to report on his tax return the value
of free work done at his home by Poole & Kent. In addition, on October 19, 2005,
W. David Stoffregen, the former President and Chief Executive Officer of Poole &
Kent was indicted by a federal grand jury in Baltimore for racketeering,
conspiracy, fraud and obstruction of justice in connection with his role in
connection with the alleged WBE fraud scheme and for his role in a related
alleged scheme to provide benefits to a former Maryland state senator in
exchange for his help and using his influence on behalf of Poole & Kent. On
October 26, 2005, a former project manager of Poole & Kent pled guilty to giving
false statements to federal investigators in connection with such alleged scheme
to provide benefits to the former state senator. In conjunction with the federal
investigation, others, including present and former employees at Poole & Kent,
may be charged.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against EMCOR'sour United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named EMCOR Drake & Scull Group plcplc) ("D&S"), in connection with a
subcontract D&S entered into with Mowlem with respect to a project for the
United Kingdom Ministry of Defence at Abbey Wood in Bristol, U.K. Mowlem seeks
damages arising out of alleged defects in the D&S design and construction of the
mechanical and electrical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $75.8$68.0 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $22.3$20.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
EMCOR isWe are involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it hasus. We believe that we have a number of valid defenses to such
proceedings and claims and intendsintend to vigorously defend itselfourselves and doesdo not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCORwe or itsour
subsidiaries are involved range from a few thousand dollars to over $75.0$68.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR'sour financial position and/or results of operations.
These proceedings include the following: (a) aA civil action brought against EMCOR'sour
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW conspired to prevent competition and to
monopolize the market for communications wiring services in the New York City
area thereby excluding plaintiffs from wiring jobs in that market. Plaintiffs
allege they have lost profits as a result of this concerted activity and seek
damages in the amount of $50 million after trebling plus attorney's fees.
However, plaintiffs' damages expert has stated in his pre-trial deposition that
he estimates plaintiffs' damages at $8.7 million before trebling. Forest has
denied the allegations of wrongdoing set forth in the complaint, and pre-trail
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. In August 2005, Forest and the other
defendants moved for summary judgment dismissing all claims. The parties do not
know when the motion will be decided and there is no assurance that the motion
will be granted in the action. (b) A civil action brought by a joint venture
(the "JV") between EMCOR'sour subsidiary Poole & Kent Corporation ("Poole &
Kent") and an unrelated
company in the Fairfax, Virginia Circuit Court in which the JV seeks damages
from the Upper Occoquan Sewage Authority ("UOSA") resulting from material
breaches of a construction contract (the "Contract") entered into between the JV
and UOSA for construction of a wastewater treatment facility. Poole & Kent incurred unrecovered costsAs a result of a
jury decision on March 11, 2005 and a subsequent ruling on June 27, 2005 of the
trial judge in completing thisthe action, it was determined that the JV is entitled to be paid
approximately $17.0 million in connection with the UOSA project in addition to
the amounts it has already received from UOSA. The JV has asserted additional
claims against UOSA relating to the same project which are includedalso pending in the
balance sheet account "costsFairfax, Virginia Circuit Court and estimated earningswhich could result in excess of
billings on uncompleted contracts" in EMCOR's consolidated balance sheets as of
December 31, 2004another trial between
the JV and 2003. A jury has returnedUOSA to be held at a verdict finding that UOSA
committed material
9
breaches of the Contract and a jury trial to establish the JV's damages is
currently in process. The JV claims total damages, based upon alternative
measures of damages, in excess of $75.0 million (exclusive of interest),date not yet determined and in a jury trial to be subsequently heldwhich the JV
intends to claimwould seek damages in excess of $18.0 million (exclusive of interest).million. In accordance with the joint
venture agreement establishing the JV, Poole & Kent would beis entitled to approximately
one-half of any damage award receivedthe aggregate amounts paid and to be paid by UOSA to the JV. The JV
and UOSA are each seeking to have the determinations in the trial court reversed
on appeal to the Virginia Supreme Court. However, there is no assurance that the
Virginia Supreme Court will hear the appeals or, if the appeals are heard, that
they will be resolved in favor of the JV.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10No matters were submitted for a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2005.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 58;59; Chairman of the Board and Chief Executive
Officer of the Company since April 1994. Mr. MacInnis was elected to the
additional position of President on February 26, 2004 and served as such until
October 25, 2004. He also served as President of the Company from April 1994 to
April 1997. From April 1990 to April 1994, Mr. MacInnis served as President and
Chief Executive Officer, and from August 1990 to April 1994 as Chairman of the
Board, of Comstock Group, Inc., a nationwide electrical contracting company.
From 1986 to April 1990, Mr. MacInnis was Senior Vice President and Chief
Financial Officer of Comstock Group, Inc. In addition, from 1986 to April 1994,
Mr. MacInnis was also President of Spie Group Inc., which had interests in
Comstock Group, Inc., Spie Construction Inc., a Canadian pipeline construction
company, and Spie Horizontal Drilling Inc., a U.S. company, engaged in
underground drilling for the installation of pipelines and communications cable.
ANTHONY J. GUZZI, Age 40;41; President and Chief Operating Officer since
October 25, 2004. From August 2001, until he joined the Company, Mr. Guzzi
served as President of the North American Distribution and Aftermarket Division
of Carrier Corporation ("Carrier"). Carrier is a manufacturer and distributor of
commercial and residential HVAC and refrigeration systems and equipment and a
provider of aftermarket services and components of its own products and those of
other manufacturers in both the HVAC and refrigeration industries. From January
2001 to August 2001, Mr. Guzzi was President of Carrier's Commercial Systems and
Services Division and from June 1998 to December 2000, he was Vice President and
General Manager of Carrier's Commercial Sales and Services Division.
SHELDON I. CAMMAKER, Age 65;66; Executive Vice President and General Counsel
of the Company since September 1987 and Secretary of the Company since May 1997.
Prior to September 1987, Mr. Cammaker was a senior partner of the New York City
law firm of Botein, Hays & Sklar.
LEICLE E. CHESSER, Age 58;59; Executive Vice President and Chief Financial
Officer of the Company since May 1994. From April 1990 to May 1994, Mr. Chesser
served as Executive Vice President and Chief Financial Officer of Comstock
Group, Inc., and from 1986 to May 1994, Mr. Chesser was also Executive Vice
President and Chief Financial Officer of Spie Group, Inc.
R. KEVIN MATZ, Age 46;47; Senior Vice President - Shared Services of the
Company since June 2003. From April 1996 to June 2003, Mr. Matz served as Vice
President and Treasurer of the Company and Staff Vice President - Financial
Services of the Company from March 1993 to April 1996. From March 1991 to March
1993, Mr. Matz was Treasurer of Sprague Technologies Inc., a manufacturer of
electronic components.
MARK A. POMPA, Age 40;41; Senior Vice President - Chief Accounting Officer
and Treasurer of the Company since June 2003. From September 1994 to June 2003,
Mr. Pompa was Vice President and Controller of the Company.
1114
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION. EMCOR'sOur common stock trades on the New York Stock Exchange
under the symbol "EME".
The following table sets forth high and low sales prices for the common
stock for the periods indicated as reported by the New York Stock Exchange:Exchange,
adjusted for a 2-for-1 stock split effected in the form of a 100% stock
distribution made on February 10, 2006:
2005 HIGH LOW
- ---- ------ ------
First Quarter ........................................... $24.95 $20.90
Second Quarter .......................................... $25.50 $21.76
Third Quarter ........................................... $29.76 $24.15
Fourth Quarter .......................................... $36.14 $27.98
2004 HIGH LOW
- ---- ---- --------- ------
First Quarter .......................... $45.12 $34.06........................................... $22.56 $17.03
Second Quarter ......................... $46.01 $35.80.......................................... $23.01 $17.90
Third Quarter .......................... $44.00 $37.52........................................... $22.00 $18.76
Fourth Quarter ......................... $47.38 $37.41
2003 HIGH LOW
---- ---- ---
First Quarter .......................... $55.20 $43.40
Second Quarter ......................... $54.30 $45.61
Third Quarter .......................... $50.40 $39.79
Fourth Quarter ......................... $45.14 $33.00.......................................... $23.69 $18.71
HOLDERS. As of March 4, 2005,February 17, 2006, there were 127123 stockholders of record
and, as of that date, EMCOR estimateswe estimate there were approximately 7,6008,800 beneficial
owners holding our common stock in nominee or "street" name.
DIVIDENDS. EMCORWe did not pay dividends on itsour common stock during 2005 or
2004, or
2003, and it doeswe do not anticipate that itwe will pay dividends on itsour common stock in
the foreseeable future. EMCOR'sOur working capital credit facility limits the payment
of dividends on itsour common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes, as of December 31, 2005, equity compensation plans
that were approved by stockholders and equity compensation plans that were not
approved by stockholders as of December 31, 2004:stockholders. The information in the table and in the Notes thereto
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
Equity Compensation Plan Information
A B C
-------------------------- -------------------------- ---------------------------------------------- -------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN A)
- --------------------- -------------------------- -------------------------- -------------------------- ---------------------------------------------- -------------------------
Equity Compensation
Plans Approved
by Stockholders 624,288 $16.85 469,214(2)1,449,996 $19.20 1,206,524(2)
Equity Compensation
Plans Not Approved
by Security Holders 1,440,403(1) $34.43 103,463(3)2,364,944(1) $19.71 51,058(3)
--------- ----------------
Total 2,064,691 $32.56 572,6773,814,940 $19.52 1,257,582
========= ================
- -----------------------
(1) 50,468129,666 shares relate to outstanding options to purchase shares of Companyour
common stock which are held bywere granted to our employees (other than executive
officers) of the Company
(the "Employee Options"), 1,259,3982,041,066 shares relate to outstanding
options to purchase shares of Companyour common stock which are held bywere granted to our
executive officers of the
Company (the "Executive Options"), 14,00028,000 shares relate to
outstanding options to purchase shares of Companyour common stock which are held bywere
granted to our Directors of the
Company (the "Director Options"), and 116,537166,212 shares
relate to restricted common stock units ("RSUs") described below under
"Restricted Share Units."
(2) Includes 89,214114,924 shares of Companyour common stock reservedavailable for future issuance
under theour 1997 Non-Employee Directors' Non-Qualified Stock Option Plan
(the "1997 Directors' Plan"), 60,000 shares of Companyour common stock reservedavailable
for future issuance under theour 2003 Non-Employee Directors' Stock Option
Plan, and 320,00079,600 shares of Companyour common stock reservedavailable for future issuance
under theour 2003 Management Stock Incentive Plan. Subsequent to December 31, 2004, options to purchase
290,200Plan, 900,000 shares of Companyour
common stock wereavailable for future issuance under our 2005 Management Stock
Incentive Plan and 52,000 shares of our common stock available for future
issuance under our 2005 Stock Plan for Directors. The shares available for
future issuance under our 2003 and 2005 Management Stock Incentive Plans
may be issuable in respect of options and/or stock appreciation rights
granted under the 2003
ManagementPlan and/or may also be issued pursuant to the award of
restricted stock, unrestricted stock and/or awards that are valued in
whole or in part by reference to, or are otherwise based on the fair
market value of, our common stock. Our shares of common stock that remain
available for issuance under our 2005 Stock Incentive Plan.Plan for Directors are
issuable to each non-employee director who elects to receive $40,000 of
his non-cash annual retainer in shares of our common stock. The number of
shares issuable to each such director is determined
15
by dividing $40,000 by the fair market value of a share of our common
stock as of the first business day of each calendar year and increasing
such resulting number by 20%. One-half of such shares are to be delivered
to the director promptly after the first business day of the calendar
year, and the other half are held by us for one year after which they are
to be delivered to the director.
(3) Represents shares relating to the grant of RSU's.
12
RSUs.
EMPLOYEE OPTIONS
The Employee Options referred to in note (1) to the immediately preceding
table under Equity Compensation Plan Information (the "Table") vest over three
years in equal annual installments, commencing with the first anniversary of the
date of grant of the Employee Options. TheOur Board of Directors granted such
Employee Options to certain of our key employees of the Company based upon the
performance of such employees. Suchtheir performance.
Those Employee Options have an exercise price per share equal to the fair market
value of a share of Companyour common stock on their respective grant dates and have a
term of ten years from the grant date.
EXECUTIVE OPTIONS
140,000The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
280,000 of the Executive Options referred to in note (1) to the Table were
granted to six of our executive officers in connection with their employment
agreements with the Companyus, which employment agreements were made as of January 1, 1998,
as amended (the "1998 Employment Agreements"). Pursuant to the terms of the 1998
Employment Agreements, each such executive officer received a fixed number of
Executive Options on the first business day of 2000 and 2001 with respective
exercise prices of $17.56$8.78 and $25.44$12.72 per share; in addition, Mr. MacInnis, our
Chairman of the Board and Chief Executive Officer, of the Company, received an additional grant
under his 1998 Employment Agreement of an option to purchase 200,000400,000 shares with
an exercise price of $19.75$9.88 per share. Such Executive Options vested on the first
anniversary of the grant date, other than the option granted to Mr. MacInnis for
200,000400,000 shares which vested in four equal installments based upon the Company'sour common
stock reaching target stock prices of $25, $30, $35$12.50, $15.00, $17.50 and $40.
488,135$20.00.
1,301,066 of the Executive Options referred to in note (1) to the Table
were granted to six executive officers in connection with employment agreements
with the Companyus, which employment agreements were dated January 1, 2002 (the "2002
Employment Agreements") and 30,00060,000 of the Executive Options were granted to Mr.
Anthony Guzzi, our President and Chief Operating Officer, of the Company when he joined the Companyus in
October 2004. Of these Executive Options, (a)(i) an aggregate amount of 171,100342,200 of
such Executive Options were granted on December 14, 2001 (exercisable in full
upon grant) with an exercise price of $41.70$20.85 per share, (b)(ii) an aggregate amount
of 145,700291,400 of such Executive Options were granted on January 2, 2002 with an
exercise price of $46.35$23.18 per share, (c)(iii) an aggregate amount of 141,335282,670 of such
Executive Options were granted on January 2, 2003 with an exercise price of
$54.73$27.37 and (d) 30,000(iv) an aggregate amount of 384,796 of such Executive Options were
granted on October 25,January 2, 2004 with an exercise price of $38.68.$21.92. The Executive
Options referred to above in clause (a)(i) were exercisable in full on the grant
date. Thedate; the Executive Options referred to above in clauses (b)(ii), (iii) and (c)(iv)
provided that they were
originally exercisable as follows;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.
However, on June
10,During 2004, the out-of-the-money Executive Options referred to in classes (b)clauses (iii)
and (c)(iv) were amended
so that they became exercisablevested in full on that date in anticipation of a change in accounting rules
requiring the expensing of stock options beginning in July
2005.January 2006. The options
granted to Mr. Guzzi vestare exercisable in three equal annual installments,
commencing with the first anniversary of the date of grant.
On the first business day of 2005, the Company's executive officers were
granted options under the Company's stockholder-approved 2003 Management Stock
Incentive Plan to purchase an aggregate of 262,500 shares of Company common
stock with an exercise price of $45.08 per share. These options are not included
in the Table.
Each of the Executive Options granted have a term of ten years from their
respective grant dates and an exercise price per share equal to the fair market
value of a share of common stock on their respective grant dates.
DIRECTOR OPTIONS
The references below to numbers of options and to option exercise prices
have been adjusted for the 2-for-1 stock split effected on February 10, 2006.
During 2002, each of our non-employee director of the Companydirectors received 2,0004,000 Director
Options and in 2003, Mr. Larry J. Bump, upon his election to the Board, received
2,0004,000 Director Options. These options were in addition to the 3,0006,000 options to
purchase our common stock that were granted to each non-employee director under
the
Company'sour 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, which plan has
been approved by the Company'sour stockholders. The price at which such Director Options
are exercisable is equal to the fair market value per share of common stock on
the grant date. The exercise price per share of the Director Options is $55.49$27.75
per share, except those granted to Mr. Yonker, upon his election to the Board on
October 25, 2002, which have an exercise price of $51.75$25.88 per share, and those
granted to Mr. Bump, upon his election to the Board on February 27, 2003, which
have an exercise price of $48.15$24.08 per share. All of these options vested in full onbecame
exercisable commencing with the grant date and have a term of ten years from the
grant date.
16
RESTRICTED SHARE UNITS
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by theour
Board of Directors in October 2000 and amended on December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of unitsRestricted
Stock Units ("RSUs") that will subsequently be converted into shares of our
common stock at a 15% discount from the fair market value of common stock as of
the date the annual bonus is determined. The units are to be converted into
shares of common stock and delivered to the executive officer on the earliest of
(a)(i) the first business day following the day upon which the Company releaseswe release to the public
generally itsour 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"), (b)(ii) the executive officer's termination of employment for any reason or
(c)(iii) immediately prior to a "change of control" (as defined in the Stock Bonus
Plan). In addition, pursuant to the Stock Bonus Plan, each executive officer is
permitted at his election to cause all or part of his annual bonus not
automatically credited to him in the form of RSUs under the Stock Bonus Plan to
be
13
credited to him in the form of units ("Voluntary Units") that will
subsequently be converted into common stock at a 15% discount from the fair
market value of common stock as of the date the annual bonus is determined. An
election to accept Voluntary Units under the Stock Bonus Plan must be made at
least six months prior to the end of calendar year in respect of which the bonus
will be payable. These Voluntary Units are to be converted into shares of common
stock and delivered to the executive officer on the earliest of (a)(i) the date
elected by the executive officer, but in no event earlier than the Release Date,
(b)(ii) the executive officer's termination of employment or (c)(iii) immediately
prior to a "change of control." In addition, on October 25, 2004, when heMr. Guzzi
joined the Company, Mr. Guzzihe was granted 25,00050,000 (as adjusted for the 2-for-1 stock
split effected on February 10, 2006) restricted stock units, and 12,50025,000 (as
adjusted for the 2-for-1 stock split) of these units were converted into an
equal number of shares of the Company's common stock on March 1, 2005 and 25,000
(as adjusted for the 2-for-1 stock split effected on February 10, 2006) of those
units will be converted into an equal number of shares of the Company'sour common stock on
the first business day immediately following the day upon which the Company
releases to the public itsour results for the fourth quarter of each of
2004 and 2005, respectively.2005.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
financial statements and should be read in conjunction with the consolidated
financial statements, the related notes thereto and the Reportreport of Independent Registered
Public Accounting Firmour
independent registered public accounting firm thereon included elsewhere in this
and in previously filed annual reports on Form 10-K of EMCOR.
As required, the results of operations for all years presented have been
adjusted to reflect a 2-for-1 stock split effected in the form of a 100% stock
distribution made February 10, 2006. See Note H - Common Stock. The results of
operations for all years presented reflect discontinued operations accounting
due to the sale of a subsidiary in 2005.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues ................................. $4,747,880 $4,534,646.............................................. $4,714,547 $4,718,010 $4,500,401 $3,968,051 $3,419,854
$3,460,204
Gross profit ............................. 446,902 482,454.......................................... 499,764 444,600 477,511 482,634 391,823
357,817
Operating income ......................... 42,129 47,057...................................... 81,131 42,250 46,057 115,539 88,682
78,925
Net income ........................................................................... $ 60,042 $ 33,207 $ 20,621 $ 62,902 $ 50,012 $ 40,089
========== ========== ========== ========== ==========
Basic earnings per share .................- continuing operations ...... $ 2.181.97 $ 1.381.09 $ 4.230.67 $ 3.862.12 $ 3.841.93
Basic earnings per share - discontinued operations .... (0.04) (0.00) 0.02 -- --
---------- ---------- ---------- ---------- ----------
$ 1.93 $ 1.09 $ 0.69 $ 2.12 $ 1.93
========== ========== ========== ========== ==========
Diluted earnings per share ...............- continuing operations .... $ 2.131.93 $ 1.331.07 $ 4.070.65 $ 3.402.04 $ 2.951.70
Diluted earnings per share - discontinued operations .. (0.04) (0.00) 0.02 -- --
---------- ---------- ---------- ---------- ----------
$ 1.89 $ 1.07 $ 0.67 $ 2.04 $ 1.70
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ................................................................... $ 615,436 $ 562,361 $ 521,356 $ 489,870 $ 421,933
$ 233,503
Total assets ........................................................................................... $1,778,941 $1,817,969 $1,795,247 $1,758,491 $1,349,664
$1,261,864
Goodwill ................................................................................................... $ 283,412 $ 279,432 $ 277,994 $ 290,412 $ 56,011
$ 67,625
Notes payable ......................................................................................... $ -- $ -- $ -- $ 21,815 $ 573
$ --
Borrowings under working capital credit lines ......................... $ -- $ 80,000 $ 139,400 $ 112,000 $ --
$ --
Other long-term debt, including current maturities ............... $ 387 $ 476 $ 589 $ 1,015 $ 973
$ 116,056
Capital lease obligations ................................................................. $ 1,570 $ 1,662 $ 339 $ 351 $ 249 $ 573
- -------------------------
(a) No cash dividends on EMCOR'sthe Company's common stock have been paid during the
past five years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
We are one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. We provide services to a broad range of commercial, industrial,
utility and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. Our offices are located in 41 states
and the District of Columbia in the United States, six provinces in Canada and
12 primary locations in the United Kingdom. In the United Arab Emirates, we
carry on business through two joint ventures.
OVERVIEW
RevenuesOn February 10, 2006, we effected a 2-for-1 stock split in the form of a
stock distribution of one common share for each common share owned on the year ended December 31, 2004 were $4.75 billionrecord
date of January 30, 2006. The earnings per share data gives effect to the stock
split, applied retroactively, to all periods presented.
Operating income for 2005 was $81.1 million, an increase of $38.9 million,
or 92.2%, compared to $4.53 billion and $3.97 billion for the years ended December 31, 2003 and 2002,
respectively. Netoperating income was $33.2of $42.2 million for 2004, compared to $20.6 million
for 2003on revenues of
approximately $4.7 billion in both periods. Our United States mechanical
construction and $62.9 million for 2002. Diluted earnings per share on net income
were $2.13 per share for 2004 compared to $1.33 per share for 2003facilities services, United States facilities services and $4.07 per
share for 2002.
Positively impacting 2004 net income and diluted earnings per share were
increased operating income from the
United Kingdom construction and facilities segment whichservices operating segments each
reported
breakeven results18
increased operating income and operating income as a percentage of revenues
("operating margin") for 20042005 compared to an operating loss
of $22.4 million for 2003, increased gross profits from transportation
infrastructure, financial services, healthcare and hospitality work for2004, the United States electrical
construction and facilities services operating segment and a
reduction inperformed approximately
the provision for income taxes of approximately $16.3 million insame as 2004, and 2003. This was offset by decreased gross profits due to: (a) poor
contract performance on certain work in the United States mechanical and the Canada construction and facilities services segments;segment
reported a smaller operating loss for 2005 than for 2004.
Net income for 2005 was positively impacted by tax adjustments of $17.5
million, compared to $13.9 million of positive tax adjustments for 2004. Net
cash provided by operating activities was $143.3 million in 2005, a $98.4
million improvement over 2004. Primarily as a result of the improvement in net
cash provided by operating activities, we reduced borrowings under our working
capital credit line to zero at December 31, 2005 compared to $80.0 million at
December 31, 2004 and increased cash and cash equivalents by $44.7 million to
$103.8 million at December 31, 2005.
On September 30, 2005, we disposed of one of our subsidiaries in the
United States facilities services segment. Consequently, results of operations
for all prior periods reflect discontinued operations accounting. Included in
the results of discontinued operations for 2005 is a loss of $1.3 million, net
of income tax, by reason of the sale of the subsidiary. We will not have any
future involvement with this subsidiary.
Net income and diluted earnings per share for 2005 compared to 2004 were
positively impacted by (a) generally improved performance on United States and
United Kingdom construction contracts, (b) greater availability of generally
higher margin discretionary project work in the United States and United
Kingdom, (c) favorable income tax adjustments of $17.5 million, (d) the
settlement of an insurance coverage related dispute which contributed
approximately $5.6 million to operating income, (e) a generally improved
economic environment, particularly for the commercial construction industry and
(f) reduced losses in the Canada construction and facilities services segment.
The favorable income tax adjustments of $17.5 million were comprised of a
reversal of $22.7 million in income tax reserves no longer required, partially
offset by a $5.2 million income tax provision related to a valuation allowance
recorded to reduce deferred tax assets related to net operating losses and other
temporary differences of our Canada construction and facilities services
segment. The valuation allowance was required because there is uncertainty as to
whether the segment will have sufficient taxable income in the future to realize
the income tax benefit of such deferred tax assets. The results for 2004 also
included favorable income tax adjustments of $13.9 million (see discussion
below). Results for 2005 were negatively impacted by non-cash expenses of $11.7
million as a result of proceedings in a civil action described below brought
against the Upper Occoquan Sewage Authority by a joint venture consisting of one
of our subsidiaries and an unrelated company.
Net income and diluted earnings per share for 2004 increased compared to
2003 after excluding 2004 restructuring expenses of $8.3 million and a gain on
the sale of assets of the United Kingdom Delcommerce equipment rental services
division of $2.8 million. Positively impacting 2004 operating income was
increased gross profits from our United Kingdom construction and facilities
services segment, increased gross profit from United States transportation
infrastructure projects and favorable income tax adjustments of $13.9 million.
The income tax adjustment was comprised of $22.1 million in income tax reserves
no longer required, partially offset by $8.2 million of income tax provision
related to a valuation allowance recorded to reduce deferred tax assets related
to net operating losses and other temporary differences in the United Kingdom
construction and facilities services segment inasmuch as there was uncertainty
whether that segment will have sufficient taxable income in the future to
realize the income tax benefit of such deferred tax assets. These increases were
offset by decreased gross profits due to (a) poor performance on certain
construction work, particularly in the United States mechanical construction and
facilities services and Canada construction and facilities services segments,
(b) continued decreased availability of generally higher margin discretionary
small project spending and repair and maintenance work in certain geographical
markets in the United States;States, (c)
continued heightened price competition for commercial,
industrial and public sector work in the United States;States and (d) increased prices
for certain fixed price construction project materials, particularly in Canada.
14Selling, general and administrative expenses for 2004 decreased compared to 2003
primarily due to reduced salary costs and other variable costs associated with
reductions in personnel in all segments. We also sold our interest in a South
African joint venture for a gain of $1.8 million during 2004.
A civil action (the "UOSA Action") was brought by a joint venture (the
"JV") between our subsidiary Poole & Kent Corporation ("Poole & Kent") and an
unrelated company in the Fairfax, Virginia Circuit Court based on a material
breach by the Upper Occoquan Sewage Authority ("UOSA") of a construction
contract between the JV and UOSA. As a result of a jury decision on March 11,
2005 and a subsequent ruling on June 27, 2005 of the trial judge in the action,
it was determined that the JV is entitled to be paid approximately $17.0 million
in connection with the UOSA project in addition to the amounts it has already
received from UOSA. However, inasmuch as the jury decision and the trial judge's
subsequent ruling did not reflect the amount the JV sought in the trial, we
recorded a non-cash expense of approximately $8.7 million during the first
quarter of 2005 following the jury decision on March 11, 2005 and an additional
non-cash expense of approximately $3.0 million during the second quarter of 2005
following the trial judge's ruling on June 27, 2005. These non-cash expenses
reflected a write-off of unrecovered costs of Poole & Kent in completing certain
work related to this project based on what we believe is probable of recovery by
the JV based on current facts. (The unrecoverable costs were included in the
balance sheet account "costs and estimated earnings in excess of billings on
uncompleted contracts" in our consolidated balance sheet as of December 31,
2004.) The JV has asserted additional claims against UOSA relating to the same
project which are also pending in the Fairfax, Virginia Circuit Court and which
could result in another trial between the JV and UOSA to be held at a date not
yet determined and in which the JV would seek damages in excess of $18.0
million. Upon the resolution of the additional claims referred to in the
immediately preceding sentence, we may record income or additional non-cash
expense. In accordance with the joint venture agreement establishing the JV,
Poole & Kent
19
is entitled to approximately one-half of the aggregate amounts paid and to be
paid by UOSA to the JV. The JV and UOSA are each seeking to have the
determinations in the trial court reversed on appeal to the Virginia Supreme
Court. However, there is no assurance that the Virginia Supreme Court will hear
the appeals or, if the appeals are heard, that they will be resolved in favor of
the JV.
The 2005 and 2004 results were also positively affected by the
implementation, beginning in 2003, of significant strategic decisions and
management changes initiated by EMCOR Group,
Inc. senior management in late 2003 and during 2004.we initiated. These actions included athe curtailment in bidding forof work
on certain types of public sector work,projects, replacement of senior management at
certain business units and reductions inincreased focus on reducing selling, general and
administrative expenses in all segments. Related to these actions were $1.8
million and $8.3 million of restructuring expenses infor 2005 and 2004,
principallyrespectively. The restructuring expenses were primarily related to employee
severance obligations.
EMCOR will continue to focus during 2005 on controlling selling, general and
administrative expenses, increasing revenues from multi-year facilities services
contracts and selective estimating and bidding of work. At the same time, a
continued gradual improvement in commercial construction is anticipated.
Management believes it has positioned EMCOR to benefit from the strategic
decisions and management changes initiated in late 2003 and during 2004;
however, there is no assurance that there will be significantly improved future
results if economic conditions, with respect to the availability of more
profitable private sector work affecting EMCOR and the construction industry
generally, do not continue to improve and competitive pressures do not ease.
Results of operations for 2003 compared to 2002 were positively impacted by
the acquisition of the capital stock of Consolidated Engineering Services, Inc.
("CES") in December 2002 and an increase in revenues and income generated by
United States facilities services operations and United States transportation
infrastructure work. However, the 2003 results compared to 2002 were negatively
impacted by: (a) poor performance in the United Kingdom construction operations;
(b) increased competition for, and a related decrease in gross profit margin on,
commercial and industrial work in the United States due to a continuing decline
in commercial and industrial work in the United States resulting from the
economic recession; (c) reduced private sector spending on small and
discretionary projects and repairs and maintenance work resulting from the
economic recession; (d) an increase in the percentage of work relating to public
sector construction that typically has lower gross profit margins than private
sector work; (e) lower than historical gross profit margins on several United
States projects as a result of poor contract performance; and (f) reduced labor
productivity due to the uncertain job market. (The foregoing factors affecting
the United States subsidiaries are hereafter referred to collectively as the
"2003 Unfavorable United States Market Conditions").
The consolidated results of operations for EMCOR for the year ended December
31, 2002 include the results of operations of (a) a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc. and (b)
CES from their respective dates of acquisition in 2002. EMCOR acquired one
additional company during each of 2003 and 2002, and their results of operations
are also included from their respective dates of acquisition. See Note C -
Acquisitions of Businesses and Disposition of Assets of the notes to
consolidated financial statements for additional discussion of these
transactions.
OPERATING SEGMENTS
EMCOR hasWe have the following reportable segments which provide services
associated with the design, integration, installation, startup, operation and
maintenance of various systems:systems, (a) United States electrical construction and
facilities services (involving systems for generation and distribution of
electrical power, lighting systems, low-voltage systems such as fire alarm,
security, communications and process control systems and voice and data
systems);, (b) United States mechanical construction and facilities services
(involving systems for heating, ventilation, air conditioning, refrigeration and
clean-room ventilation systems, fire protection systems and plumbing, process
and high-purity piping systems);, (c) United States facilities services;services, (d)
Canada construction and facilities services;services, (e) United Kingdom construction and
facilities services;services and (f) Other international construction and facilities
services. The segment "United States facilities services" principally consists
of those operations which provide a portfolio of services needed to support the
operation and maintenance of customers' facilities (mobile operation and
maintenance services, site-based operation and maintenance services, facility
planning and consulting services, energy management programs and the design and
construction of energy-related projects) which services are not related to
customers' construction programs. The Canada, United Kingdom and Other
international segments perform electrical construction, mechanical construction
and facilities services. The "Other international construction and facilities
services" segment represents EMCOR'sour operations outside of the United States, Canada and the
United Kingdom (primarily(currently primarily in South Africa and the Middle East during the periods presented)East). EMCOR'sIn August of 2004, we
sold our interest in itsa South African joint venture was sold in July 2004.venture.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
TheOur consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. EMCOR'sOur significant accounting policies are described in
Note B - Summary of Significant Accounting Policies of the notes to consolidated
financial statements included in Item 8 of this Form 10-K. There was no initial adoption
of any new accounting policies during 2004. EMCOR believes2005. We believe that some of the more
critical judgment areas in the application of accounting policies that affect
theour financial condition and results of operations are the impact of changes in
the estimates and judgments pertaining to:to (a) revenue recognition from (i)
long-term construction contracts for which the percentage
of completionpercentage-of-completion method
of accounting is used and (ii) services contracts;contracts, (b) collectibility or
valuation of accounts receivable;receivable, (c) insurance liabilities;liabilities, (d) income taxes;taxes
and (e) goodwill and intangible assets.
15
REVENUE RECOGNITION FROM LONG-TERM CONSTRUCTION CONTRACTS AND SERVICES CONTRACTS
EMCOR believes itsWe believe our most critical accounting policy is revenue recognition from
long-term construction contracts for which EMCOR useswe 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 EMCOR'sour industry. Percentage-of-completion for each contract is
measured principally by the ratio of costs incurred to date to perform each
contract to the estimated total costs to perform such contract at completion.
Certain of EMCOR'sour 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 EMCOR'sour consolidated balance sheets. Costs and estimated earnings in
excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers based upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion of a contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also
include amounts EMCOR seekswe 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 (unapproved(claims and unapproved change
orders and
claims)orders). Such amounts are recorded at estimated net realizable value and take
into account factors that may affect the ability to bill unbilled revenues and
collect amounts after billing. No profit is recognized on the construction costs
incurred in connection with claim
amounts. As of December 31, 20042005 and 2003,2004, costs and estimated earnings in
excess of billings on uncompleted contracts included unbilled revenues for
unapproved change orders of approximately
$65.420
$56.3 million and $43.0$65.4 million, respectively, and claims of approximately $53.5$36.6
million and $51.4$53.5 million, respectively. In addition, accounts receivable as of
December 31, 20042005 and 20032004 include claims of approximately $4.7 million and $5.4
million, and $9.4
million, respectively, plus unapproved change orders and contractually billed
amounts related to such contracts of approximately $75.5$76.2 million and $53.1$75.5
million, respectively. Generally, contractually billed amounts will not be paid
by the customer to EMCORus until final resolution of related claims. Due to
uncertainties inherent in estimates employed in applying
percentage-of-completion accounting, estimates may be revised as project work
progresses. Application of percentage-of-completion accounting requires that the
impact of revised estimates be reported prospectively in the consolidated
financial statements. In addition to revenue recognition for long-term
construction contracts, EMCOR
recognizeswe recognize revenues from services contracts as such
contracts are performed in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition, revised and updated" ("SAB 104"). There are two basic
types of services contracts: (a) fixed price services contracts which are signed
in advance for maintenance, repair and retrofit work over periods typically
ranging from one to three years (pursuant to which thereour employees may be EMCOR employees onat a
customer's site full time) and (b) services contracts which may or may not be
signed in advance for similar maintenance, repair and retrofit work on an as
needed basis (frequently referred to as time and material work). Fixed price
services contracts are generally performed over the contract period, and
accordingly, revenue is recognized on a pro-rata basis over the life of the
contract. Revenues derived from other services contracts are recognized when the
services are performed in accordance with SAB 104. Expenses related to all
services contracts are recognized as incurred.
ACCOUNTS RECEIVABLE
EMCOR isWe are required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the realization of
receivables. Relevant assessment factors include the creditworthiness of the
customer, EMCOR'sour prior collection history with the customer and related aging of
past due balances. The provisions for bad debts during 2005, 2004 2003, and 20022003
amounted to approximately $8.5 million, $7.0 million and $11.2 million,
and $3.4 million,
respectively. The increase of $7.9 million in this provision for 2003 compared
to 2002 primarily related to the potential non-payment of an account receivable
of approximately $5.8 million due to the publicly reported financial
difficulties of the customer which owed that amount. This receivable was
written-off against the allowance for doubtful accounts in 2004. At December 31, 2005 and 2004, and 2003,our accounts receivable of $1,073.5$1,046.4
million and $1,009.2$1,073.5 million, respectively, included allowances for doubtful
accounts of $36.2$30.0 million and $43.7$36.2 million, respectively. Specific accounts
receivable are evaluated when EMCOR believeswe believe a customer may not be able to meet its
financial obligations due to a deterioration of its financial condition or its
credit ratings. The allowance requirements are based on the best facts available
and are re-evaluated and adjusted on a regular basis and as additional
information is received.
INSURANCE LIABILITIES
EMCOR hasWe have deductibles for certain workers' compensation, auto liability,
general liability and property claims, hashave self-insured retentions for certain
other casualty claims, and isare self-insured for employee-related health care
claims. Losses are recorded based upon estimates of theour liability for claims
incurred and an estimate offor claims incurred but not reported. The liabilities are derived
from known facts, historical trends and industry averages utilizing the
assistance of an actuary to determine the best estimate of these obligations. EMCOR believes itsWe
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
16
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 wouldwill be recorded in the period that the
experience becomes known.
INCOME TAXES
EMCOR hadWe have net deferred tax assets primarily resulting from deductible
temporary differences of $2.5 million$12.3 milion and $18.8$2.5 million at December 31, 20042005 and
2003,2004, respectively, which will reduce taxable income in future periods. A
valuation allowance is required when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. As of December 31, 20042005
and 2003,2004, the total valuation allowance on net deferred tax assets was
approximately $10.9$18.7 million and $2.0$10.9 million, respectively. The increase in the
valuation allowance for 2005 was recorded to reduce net deferred tax assets related
to net operating losses and other temporary differences of the United Kingdomour Canada
construction and facilities services segment inasmuch as there is uncertainty of
sufficient future income from this segment to realize the benefit of such
deferred tax assets. Additionally, an increase in the valuation allowance was
required for an increase in the deferred tax asset recorded to reflect an
increase in the minimum pension liability for the United Kingdom pension plan
inasmuch as there is uncertainity of sufficient future income from the United
Kingdom construction and facilities services segment to realize the benefit of
such deferred tax assets.
GOODWILL AND INTANGIBLE ASSETS
As of December 31, 2004, EMCOR2005, we had goodwill and net identifiable intangible
assets (primarily the market value of itsour backlog, customer relationships and
trademarks and tradenames)trade names) of $279.4$283.4 million and $18.8$17.0 million, respectively,
arising out of the acquisition of companies. The determination of related
estimated useful lives for identifiable intangible assets and whether those
assets are impaired involves significant judgments based upon short and
long-term projections of future performance. These forecasts reflect assumptions
regarding the ability to successfully integrate acquired companies. Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") requires goodwill to be tested for impairment, on at least an
annual basis (each October 1), and be
21
written down when impaired, rather than amortized as previous standards
required. Furthermore, SFAS 142 requires that identifiable intangible assets,
other than goodwill, be amortized over their useful lives unless these lives are
determined to be indefinite. Changes in strategy and/or market conditions may
result in adjustments to recorded intangible asset balances. As of December 31,
2004,2005, no indicators of impairment of itsour goodwill or identifiableindefinite lived intangible
assets resulted from EMCOR'sour annual impairment review, which was performed in
accordance with the provisions of SFAS 142 and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). The review under SFAS
144 also included long-term assets related to the United Kingdom that were
determined not to be impaired. See Note B - Summary of Significant Accounting Policies of
the notes to consolidated financial statements for additional discussion of the
provisions of SFAS 142 and SFAS 144.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The reportable segments reflect, in all years presented, discontinued
operations accounting due to the sale of a subsidiary in 2005 and certain
reclassifications of certain expenses within the income statement for the prior years and
reclassifications of certain business unitsamounts among the segments due to changes in
EMCOR's internal reporting structure.
REVENUES
As described below in more detail, revenues for 2005 and 2004 were
approximately $4.7 billion. Although the total revenues in the two years were
approximately the same, 2005 revenues when compared to 2004 were positively
impacted by increased private sector commercial construction and discretionary
project work, offset by our planned curtailment of work on certain types of
public sector and other longer-term projects by certain of our subsidiaries.
Revenues for 2004 increased 4.7%4.8% to $4.75$4.7 billion compared to $4.53$4.5 billion for
2003. This revenue growth in 2004 was principally due to:to (a) increased work on
United States transportation infrastructure, financial services, healthcare and
hospitality construction projects;projects, (b) the impact of favorable foreign exchange
rate changes on revenues amounting to $19.7
milliongenerated in the Canada construction and facilities
services segment (despite reduced revenues from our Canadian segment as a
consequence of certain power generation and healthcare projects having been
completed in 2003) and amounting to $72.6 million in the United Kingdom construction and facilities
services segment;segment and (c) an increase in the number of United States site-based
facilities services contracts. This growth in 2004 revenues was partially offset
by reduced revenues from power generation projects, office and manufacturing
construction projects and repair and maintenance work in the United States.
ContractOur contract backlog as ofat December 31, 20042005 was approximately $2.8$2.76 billion a
$0.2compared to
$2.75 billion decrease compared with backlog of approximately $3.0 billion as ofat December 31, 2003.2004. The increase in backlog compared to the
prior year end was primarily due to the addition of private sector construction
contracts, partially offset by the curtailment of work on certain types of
public sector and other longer-term projects at certain subsidiaries. This
increase in backlog has been supplemented by an increase in smaller shorter-term
discretionary project work. A portion of the increase in such work is not
included in backlog due to its shorter duration (i.e. work started and completed
in less than a three month period). Backlog is not a term recognized under
accounting principles generally accepted in the United States; however, it is a
common measurement used in EMCOR'sour 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, exceptcontracts. However, if the remaining term of a facilities services contract
exceeds 12 months, the unrecognized revenues attributable to such contract
included in the backlog are limited to only 12 months of revenues. The decrease was primarily related to
completion of the prior year's backlog, combined with the curtailment in bidding
for public sector and other long-term contracts. The 2004 decrease in backlog
can be expected to result in lower revenues in 2005 than in 2004. Factors such
as availability of additional work and the timing thereof, in 2005, may also
impact total 2005 revenues. The impact of these factors, however, is not
possible to predict with certainty.
17
The $566.6 million increase in revenues for 2003 when compared to 2002 was
primarily due to revenues of $508.4 million from companies acquired in 2003 and
2002 and to increased revenues in the United States electrical construction and
facilities services and United States facilities services segments (excluding
companies acquired in 2003 and 2002) of $85.1 million and $19.7 million,
respectively. Excluding companies acquired in 2003 and 2002, revenues for the
United States mechanical construction and facilities services segment were lower
for 2003 than for 2002.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages that each segment's revenues was of total revenues for
the years ended December 31, 2005, 2004 2003 and 20022003 (in millions, except for
percentages):
% OF % OF % OF
2005 TOTAL 2004 TOTAL 2003 TOTAL
2002 TOTAL
------------------ ----- ------------------ ----- ------------------ -----
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3.... $1,224.6 26% $ 1,239.5 27% $ 1,152.4 29%$1,235.3 26% $1,239.5 28%
United States mechanical construction and facilities services ............ 1,718.5 36% 1,825.7 38%39% 1,715.8 38% 1,715.4 43%
United States facilities services .................................... 727.6................................ 756.2 16% 697.7 15% 661.2 15% 250.0 6%
---------- ---------- ----------627.0 14%
-------- -------- --------
Total United States operations ....................................... 3,788.6................................... 3,699.3 78% 3,758.7 80% 3,616.53,582.3 80% 3,117.8 79%
Canada construction and facilities services ................................................ 342.1 7% 280.8 6% 346.8 8% 316.3 8%
United Kingdom construction and facilities services ................................ 673.1 14% 678.5 14% 571.3 13% 533.9 13%
Other international construction and facilities services ...................... -- -- -- -- -- --
---------- ---------- ------------------ -------- --------
Total worldwide operations ............................................. $ 4,747.9....................................... $4,714.5 100% $ 4,534.6$4,718.0 100% $ 3,968.0$4,500.4 100%
========== ========== ================== ======== ========
Revenues of theour United States electrical construction and facilities
services segment for 2005 decreased $10.7 million compared to 2004. The decrease
in revenues were primarily attributable to reduced transportation infrastructure
construction work and construction work for financial services firms, partially
offset by increased commercial construction and discretionary project work
generally due to the greater availability of such work. Revenues for 2004
decreased $4.2 million compared to 2003. The decrease in revenues was primarily
due to fewer power generation and manufacturing construction projects available,
partially offset by an increase in the availability of transportation
infrastructure, financial services and hospitality work.
Revenues for 2003 increased by $87.1 million compared to 2002.
This increase in revenues was primarily due to an increase in transportation
infrastructure and power generation work, partially offset by a significant
decline in private sector commercial work, which includes offices, manufacturing
facilities and hotels. Of all of the major urban centers served by EMCOR, the
New York City area market in 2003 experienced the largest reduction in revenues
from private sector commercial work compared to 2002. This 2003 decline in
revenues from private sector commercial work (when compared to 2002) was offset
by increased public sector work in the Washington D.C. area market, increased
transportation infrastructure work in the Denver area and increased power
generation and transportation infrastructure work in California.22
Revenues of theour United States mechanical construction and facilities
services segment for 2005 decreased $107.2 million compared to 2004. The
revenues decrease was primarily attributable to a planned decrease in activities
of certain subsidiaries related to the reduction in certain types of public
sector and other long-term projects undertaken, partially offset by increased
wastewater treatment and hospitality projects undertaken by certain of our
subsidiaries and increased discretionary project work. The increase in
discretionary project work was partially attributable to seasonably warm weather
conditions in 2005 compared to unseasonably cool weather conditions in 2004.
Revenues for 2004 increased $109.9 million compared to 2003. The increase in
revenues was primarily attributable to increased work on healthcare, hospitality
and financial services construction projects, partially offset by decreased
power generation work, and commercialcommerical work, including discretionary small projects and repair
and maintenance work. Revenues for 2003 increased $0.4
million compared to 2002 principally due to increases in the education and
institutional sectors related to increased public sector spending, partially
offset by significantly decreased commercial office, manufacturing and power
generation work due to a fall off in availability of such work. In 2003, EMCOR'sour mid-western markets were particularly negatively impacted
by a fall off in available outage upgrade and replacement work at manufacturing
facilities. In addition, revenues in 2003 were negatively impacted by declines
in small and discretionary projects and repairs and maintenance work caused
largely by the cooler than normal summer weather conditions in parts of the
United States.
United States facilities services segment revenues, which include our operations
that principally provide maintenance and consulting services, increased $66.4$58.5
million for 2005 compared to 2004. The increase was primarily attributable to
increases in the availability of discretionary project work due to improved
economic conditions, an increase in mobile services revenues which was partially
attributable to seasonably warm weather conditions compared to unseasonably cool
weather conditions for 2004 and increases in the number of site based operations
contracts as a result of increased sales efforts. Revenues increased $70.7
million for 2004 compared to 2003. The increase in revenues for 2004 was
primarily attributable to increased site-based facilities services contracts as
a result of increased sales efforts.
Revenues of the Canada construction and facilities services segment
increased by $411.2$61.3 million for 20032005 compared to 2002.2004. The increase in revenues
for 2003 was primarily due to revenues of $387.5
million attributable to the CES acquisition and increased site-based facilities
services contracts, partially offset by a decline in certain small and
discretionary projectswere due to increased competition resultingdiscretionary project work at manufacturing facilities,
construction work at oil and gas extraction facilities, construction work at
hospitals and power transmission line work generally due to the greater
availability of such work. The revenues increases also reflected an increase of
$22.9 million related to the change in fewer projects
awardedthe rate of exchange of Canadian dollars
for United States dollars due to EMCOR. Additionally, a reduction in demand for mobile services, which
services had been adversely affected by cooler than normal 2003 summer weather
conditions in partsthe strengthening of the United States, contributed to a decrease in 2003
revenues.Canadian dollar.
Revenues of Canada construction and facilities services decreased by $66.0 million for 2004 compared to 2003. This decrease was
primarily due to the completion in 2003 of certain long-term power generation
and healthcare projects,
active in 2003, partially offset by increased revenues from power
transmission projects. The decrease was also partially offset by $19.7 million
of increased revenues resulting from the impact of changes in the rates of
exchange forof Canadian dollars tofor United States dollars due to the strengthening
of the Canadian dollar.
Revenues increased by $30.5 million for 2003 as compared to
2002. The increase in revenues for 2003 was primarily attributable to an
increase of $36.7 million resulting from the impact of changes in the rates of
exchange for Canadian dollars to United States dollars due to strengthening of
the Canadian dollar. But for the exchange rates, Canada's construction and
facilities services revenues for 2003 when compared to 2002 would have decreased
due to a temporary scale-back in work on certain long-term power generation
projects attributable to a customer's project scheduling.
18
United Kingdom construction and facilities services revenues decreased
$5.4 million for 2005 compared to 2004, principally due to a $7.3 million
decrease related to the rate of exchange of British pounds for United States
dollars due to the weakening of the British pound, partially offset by increased
small discretionary project work. Revenues increased $107.2 million for the year
ended December 31, 2004 compared to the year ended December 31, 2003. This
increase in revenues was principally due to an increase of $72.6 million
resulting from the impact of changes in the rates of exchange forof British pounds
tofor United States dollars because ofdue to strengthening of the British pound and to
increases in transportation infrastructure work. Revenues increased
$37.4 million for 2003 compared to 2002, due to an increase of $47.5 million
related to changes in the rates of exchange for British pounds to United States
dollars because of strengthening of the British pound. But for exchange rates,
revenues for 2003 would have declined because of implementation of a planned
reduction in bidding for certain types of institutional and government-sponsored
construction projects.
Other international construction and facilities services activities
consist of operations primarily in South Africa (until the sale of EMCOR'sour interest
in aits South African joint venture in JulyAugust 2004) and in the Middle East.
During each of 2005, 2004 2003 and 2002,2003, all of the projects in these markets were
performed by joint ventures, and accordingly, the results of these joint venture
operations were accounted for under the equity method of accounting because either EMCOR had
less than majority ownership or was not subject to a majority of the risk of
loss from the joint venture activities and was not entitled to receive a
majority of the joint venture's residual returns. Accordingly, revenues
attributable to such joint ventures were not reflected as revenues in the
consolidated financial statements. EMCOR continuesaccounting. We continue
to pursue new business selectively in the Middle Eastern and European markets;
however, the availability of opportunities therein these markets has been
significantly reduced as a result of local economic factors, particularly in the
Middle East.
COST OF SALES AND GROSS PROFIT
The following table presents EMCOR's cost of sales, gross profit, and gross profit
as a percentage of revenues for the years ended December 31, 2005, 2004 2003
and 20022003
(in millions, except for percentages):
2004 2003 2002
---------- ---------- ----------
Cost of sales .................................................... $ 4,301.0 $ 4,052.2 $ 3,485.4
Gross profit ..................................................... $ 446.9 $ 482.5 $ 482.6
Gross profit as a percentage of revenues ......................... 9.4% 10.6% 12.2%
2005 2004 2003
-------- -------- --------
Cost of sales ........... $4,214.8 $4,273.4 $4,022.9
Gross profit ............ $ 499.8 $ 444.6 $ 477.5
Gross profit margin ..... 10.6% 9.4% 10.6%
Our gross profit (revenues less cost of sales) increased $55.2 million for
2005 compared to 2004. Gross profit margin (gross profit as a percentage of
revenues) was 10.6% for 2005 compared to 9.4% for 2004. The increase in gross
profit was primarily attributable to improvements in United States and United
Kingdom construction contract performance compared to the prior year primarily
related to an increase in generally more profitable commercial construction
work, the greater availability of generally higher margin small discretionary
project work (including mobile services work), a decrease in certain types of
public sector work which is generally less profitable, an improvement in gross
profit in the Canada construction and facilities services segment and a
favorable settlement of an insurance coverage related dispute of approximately
$5.6 million. These improvements were partially offset by the results of the
UOSA Action which resulted in $11.7 million of non-cash expenses during 2005.
The increase in gross profit also reflected an increase of $1.1 million related
to the change
23
in the rate of exchange of Canadian dollars for United States dollars due to the
strengthening of the Canadian dollar, offset by a decrease of $0.6 million
related to the rate of exchange of British pounds for United States dollars due
to the weakening of the British pound. Our gross profit decreased $35.6$32.9 million
for 2004 compared to 2003. Gross profit as a percentage of revenuesmargin was 9.4% for 2004 compared to
10.6% for 2003. Gross profit for 2004 was lower than in the prior year, despite
greater revenues than in 2003, primarily due to:to (a) greater than originally
estimated labor requirements to perform work as well as continued reduced labor
productivity due to the uncertain construction job market;market, (b) reduced
availability of higher margin small and discretionary small project spending and
repair and maintenance work;work, (c) increased competition for, and a related
decrease in gross profit margin on, commercial, industrial and public sector work in
the United States;States and (d) increased prices for material required for certain
construction projects, which price increases particularly negatively impacted
the Canada construction and facilities services segment gross profit. Positively
impacting 2004overall gross profit wasmargin during 2004 were improved gross profit
from the United Kingdom construction and facilities services segment project performance and
increased gross profit from United States transportation infrastructure,
financial services healthcare and hospitality projects due to the increased availability
and successful performance of these types of projects. Additionally, total gross
profit increased $5.7 million in 2004 compared to 2003, primarily resulting from
the impact of changes in the rates of exchange for British pounds to United
States dollars amounting to $5.8 million, partially offset by a $0.1 million decrease
resulting from the impact of changes in the rates of exchange for Canadian
dollars to United States dollars.
Gross profit decreased $0.1 million for 2003 compared to 2002. Gross profit
as a percentage of revenues was 10.6% for 2003 compared with 12.2% for 2002.
Gross profit as a percentage of revenues for 2003 compared to 2002 decreased
primarily due to poor performance in the United Kingdom construction and
facilities services segment and the 2003 Unfavorable United States Market
Conditions (previously discussed in the Overview above); this decline was offset
in part by $93.7 million of gross profit attributable to the companies acquired
in 2003 and 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table presents EMCOR's selling, general and administrative expenses,
and selling, general and administrative expenses as a percentage of revenues,
for the years ended December 31, 2005, 2004 2003 and 20022003 (in millions, except for
percentages):
2005 2004 2003
2002
-------- -------- -------------- ------ ------
Selling, general and administrative expenses .......................................... $ 399.3 $ 435.4 $ 367.1.............................. $416.9 $396.9 $431.5
Selling, general and administrative expenses as a percentage of revenues ................ 8.8% 8.4% 9.6% 9.3%
Our selling, general and administrative expenses for 2005 increased $20.0
million to $416.9 million compared to $396.9 million for 2004. Selling, general
and administrative expenses as a percentage of revenues were 8.8% for 2005
compared to 8.4% for 2004. Selling, general and administrative expenses were
impacted in 2005 by increased incentive compensation expense due to our improved
profitability. Selling, general and administrative expenses for 2004 decreased
$36.1$34.5 million compared to 2003. Selling, general and administrative expenses as
a percentage of revenues were 8.4% for 2004 compared to 9.6% for 2003. This
decline in selling, general and administrative expenses both in dollars and as a
percentage of revenues was primarily attributable to lower salary costs and
other variable costs associated with reductions in personnel.
The decrease was offset by an
increase of $6.8 million for 2004 compared to 2003 resulting from the impact of
changes in the rates of exchange for United Kingdom and Canadian currencies to
United States dollars, and an increase of $0.6 million in expense for the
amortization of identifiable intangible assets.
19
Selling, general and administrative expenses for 2003 increased $68.3 million
compared to 2002. As a percentage of revenues, total selling, general and
administrative expenses increased from 9.3% in 2002 to 9.6% in 2003. For 2003,
selling, general and administrative expenses included amortization expense of
$2.8 million attributable to identifiable intangible assets associated with
acquisitions compared to $0.8 million for 2002. Selling, general and
administrative expenses (excluding companies acquired in 2003 and 2002 and
related amortization expense) for 2003 were approximately $302.8 million (8.4%
of revenues) compared to $307.5 million (8.9% of revenues) for 2002. This
decrease in selling, general and administrative expenses was attributable to a
managed reduction of both variable expenses (including reduced incentive
compensation related to less favorable financial performance and reduction in
personnel) and fixed expenses (such as building occupancy costs).
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance
obligations, were $1.8 million and $8.3 million for 2004. Approximately $7.0 million2005 and 2004, respectively.
As of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates2005, the balance of these obligations was $0.2 million,
which we anticipate paying substantially all of the remaining obligations in 2005.during 2006. There were no restructuring expenses for
the year ended December 31, 2003 or 2002.2003.
GAIN ON SALE OF ASSETS AND EQUITY INVESTMENT
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 2004 sale of assets of EMCOR'sour United Kingdom
Delcommerce equipment rental services division. ContemporaneouslyConcurrently with the sale, EMCORwe
entered into a long-term agreement to utilize the equipment rental services of
the purchaser, a publicly traded United Kingdom company. The $1.8
million gain onIn addition to this
sale, of an equity investment of 2004 was attributable to the
August 2004 sale of EMCOR's interest in a South African joint venture, the
operating results of which had been reported previously in the Other
international segment. Therethere were no other sales of such assets in 2005, 2004 or equity investments in
either 2003 or 2002 other than
the disposal of property, plant and equipment in the normal course of business.
24
OPERATING INCOME
The following table presents EMCOR'sour operating income (gross profit less
selling, general and administrative expenses, restructuring expenses plus gain
on sale of assets) by segment, and each segment's operating income as a
percentage of its segment's revenues, for the years ended December 31, 2005,
2004 2003 and 20022003 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2005 REVENUES 2004 REVENUES 2003 REVENUES 2002 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services ........... $ 79.7 6.5% $ 81.2 6.6% $ 57.8 4.7% $ 79.3 6.9%
United States mechanical construction and facilities services ...... (1.4)..... 22.0 1.3% (1.2) -- 25.6 1.5% 59.9 3.5%
United States facilities services .................................. 14.2................................. 24.6 3.3% 14.1 2.0% 18.417.4 2.8% 4.4 1.8%
------ ------ ------
Total United States operations ..................................... 94.0.................................... 126.3 3.4% 94.1 2.5% 101.8100.8 2.8% 143.6 4.6%
Canada construction and facilities services ............................................... (7.9) -- (11.9) -- 2.0 0.6% 3.3 1.0%
United Kingdom construction and facilities services ................ 7.5 1.1% 0.0 -- (22.4) -- 0.0 --
Other international construction and facilities services ..................... 0.0 -- 0.5 -- 0.3 --
(0.1) --
Corporate administration ..................................................................................... (43.0) -- (35.0) -- (34.7) --
(31.3) --
Restructuring expense ........................................................................................... (1.8) -- (8.3) -- -- -- -- --
Gain on sale of assets ............................................. 2.8 -- -- 2.8 -- -- --
------ ------ ------
Total worldwide operations ......................................... 42.181.1 1.7% 42.2 0.9% 47.046.0 1.0% 115.5 2.9%
Other corporate items:
Interest expense ..................................................................................................... (8.3) (8.9) (8.9)
(4.1)
Interest income ....................................................................................................... 2.7 1.9 0.7 2.0
Gain on sale of equity investment .................................. -- 1.8 -- --
Minority interest ................................................................................................... (4.5) (3.8) (1.9)
(1.1)
Income from continuing operations before income taxes ............................................................. $ 33.271.0 $ 36.9 $112.333.3 $ 35.9
As described in more detail below, our operating income was $42.1$81.1 million
for 2005, $42.2 million for 2004 $47.0and $46.0 million for 2003 and $115.5 million for 2002. 20042003. 2005 operating
income decreased $4.9increased $38.9 million compared to 2003,2004 primarily due to restructuring expenses(a) generally
improved performance on United States and United Kingdom construction contracts,
(b) greater availability of $8.3 million.generally higher margin discretionary project work
in the United States and United Kingdom, (c) the settlement of an insurance
coverage related dispute which contributed approximately $5.6 million, (d) a
generally improved economic environment, particularly for the commercial
construction industry and (e) reduced losses in the Canada construction and
facilities services segment. Excluding 2004 restructuring expenses of $8.3
million and a gain on the sale of assets of $2.8 million, 2004 operating income
increased $0.5$1.6 million compared to 2003. Operating income for 2004 compared to
2003 was also impacted by other factors previously discussed in the Overview
above. The decrease in 2003
operating income compared to 2002 operating income was primarily attributable to
the 2003 Unfavorable United States Market Conditions (previously discussed in
the Overview above), and operating losses from the United Kingdom construction
and facilities services segment. Operating income was favorably impacted by $3.6 million, $9.8 million and
$4.5 million in 2005, 2004 and $2.3 million2003, respectively, in reduction of insurance
liabilities previously established for insurance exposures as a consequence of
effective risk management and safety programs for 2004, 2003 and 2002, respectively.
20
programs.
Our United States electrical construction and facilities services segment
operating income was $79.7 million for 2005, a $1.5 million decrease compared to
operating income of $81.2 million for 2004. The decrease in operating income was
primarily the result of reduced transportation infrastructure and financial
services projects, mostly offset by increased commercial construction and
discretionary project work and approximately $4.5 million of income resulting
from the settlement of the insurance coverage-related dispute referred to
earlier. Our selling, general and administrative expenses decreased compared to
the prior year primarily due to a reduction in personnel and a reduction in
incentive compensation expense related to reduced profitability. Operating
income for 2004 increased $23.4 million compared to 2003. This segment's
increasedincrease in 2004
operating income, in 2004when compared to 2003, was attributable principally to
increased gross profit on transportation infrastructure, financial services and
hospitality construction projects due to the increased availability and
successful performance of these types of projects. Selling, general and
administrative expenses decreased in 2004, when compared to 2003, due to lower
salary costs and other variable costs associated with reductions in personnel.
The decrease in
operating income for 2003 of $21.5 million as compared to 2002, and the related
decrease in operating income as a percentage of revenues, was primarily
attributable to the 2003 Unfavorable United States Market Conditions (previously
discussed in the Overview above). In 2003, the New York City area market was
particularly adversely impacted by a significant decline in commercial work and
by unprofitable performance of power generation work. The overall 2003 decrease
was partially offset by profitable performance of transportation infrastructure,
certain power generation work and project close-outs. In addition, 2003 selling,
general and administrative expenses (excluding that attributable to companies
acquired in 2002) compared to 2002 decreased by approximately $19.1 million.
This decrease was mostly related to a reduction in incentive compensation, which
was attributable to less favorable financial performance, a reduction in
personnel and a reduction in other variable expenses.
TheOur United States mechanical construction and facilities services
operating income for 2005 was $22.0 million, a $23.2 million improvement, when
compared to an operating loss of $1.2 million 2004. The operating income
reflects an approximately $11.7 million reduction in gross profit as a result of
the write-off of unrecovered costs related to the UOSA Action. Notwithstanding
the impact of the UOSA Action, this segment had generally improved results for
2005 as a consequence of (a) improved construction performance when compared to
construction performance for 2004 partially due to the greater availability of
generally more profitable private sector commercial construction work as a
result of improved economic conditions and (b) increased discretionary project
work which was partially attributable to seasonably warm weather conditions
compared to unseasonably cool weather conditions in 2004. In addition, operating
income for 2005 includes approximately $1.1 million of income resulting from the
settlement of the insurance coverage related dispute referred to earlier. The
improvement in performance was partially attributable to our planned curtailment
of certain public sector and other longer-term contracts of certain of our
subsidiaries, which work is generally been less profitable than private sector
work currently being
25
performed. Increased selling, general and administrative expenses related to
increased incentive compensation expense due to the segment's improved
profitability was partially offset by personnel reductions during 2005, which
reductions also contributed to the improvement in operating income. The
operating loss for 2004 was $1.4$1.2 million compared to operating income of $25.6
million for 2003. The segment's 2004 operating loss was primarily attributable
to:to (a) decreases in the expected recovery of estimated costs upon completion of certain
projects, principally in the Western United States;States, (b) poor contract performance on
certain construction work related to greater labor requirements than originally
estimated to perform the work and continued reduced labor productivity due to
the uncertain construction job market;market, (c) a continued decrease in the
availability of generally more profitable discretionary small projects and
repair and maintenance work due to general economic conditions negatively
impacting commercial construction spending;spending and (d) increased competition for,
and a related decrease in gross profit margin on, commercial, industrial and
public sector work. Partially offsetting these operating results for 2004 were
decreased selling, general and administrative expenses attributable to lower
salary costs and other variable costs associated with reductions in personnel
and to reduced incentive compensation due to less favorable financial
performance.
This segment'sOperating income of our United States facilities services segment for 2005
increased by $10.5 million compared to 2004. During 2005, operating income
decreased by $34.3 million for 2003
compared to 2002. This decrease in operating income and decrease as a percentage
of revenues for 2003 wasimproved primarily due to improved gross margins on increased revenues, which
for the 2003 Unfavorable United States
Market Conditions (previously discussedmobile services business was partially related to seasonably warm
weather conditions in the Overview above). The mid-western
markets were negatively impacted by a significant reduction2005 compared to unseasonably cool weather conditions in
available work on
manufacturing projects, the western markets were negatively impacted by reduced
income from power generation work, and other United States markets were
negatively impacted by reduced repairs and maintenance work caused largely by
the cooler than normal summer weather conditions. This decrease in operating
income was2004, partially offset by increased income from additional water and
wastewater treatment facilities projects for 2003 compared to 2002. In addition, selling, general and administrative expenses
decreased by approximately $11.5
million in this segment for 2003 compared to 2002. This decrease was mostly2005 related to a reduction inincreased incentive compensation relateddue to less favorableimproved financial
performance, reduction in personnel and reduction in other variable
expenses.
United States facilities services operatingperformance. Operating income for 2004 decreased $4.2$3.3 million compared to 2003.
The reduced operating income was primarily related to a decrease in revenues
from, and profits earned on, discretionary small projects and repair and
maintenance work due to general economic conditions negatively impacting
commercial construction spending and an increase in expenses for site-based
facilities services business development. In addition, during 2004 this segment
also incurred approximately $2.3 million of losses on certain construction
projects, outside of the normal facilities services operations of this segment,
that were contracted for by a subsidiary in this segment prior to itsour
acquisition by EMCOR.of the subsidiary. The decrease in operating income for 2004
compared to 2003 was partially offset by a reduction in selling, general and
administrative expenses related to lower salary costs and other variable costs
associated with reductions in personnel.
United States facilities services operating income
increased by $14.0 million for 2003 compared to 2002. The increase in operating
income was primarily attributable to income of $13.5 million from CES and an
increase in the number of site-based facilities services contracts resulting
from business development activities. The increase was partially offset by
reduced income from certain small and discretionary projects due to increased
competition and from mobile services, which services were adversely affected by
cooler than normal summer weather conditions in parts of the United States.Our Canada construction and facilities services operating loss was $7.9
million for 2005 compared to an operating loss of $11.9 million for 2004. The
2005 loss was primarily associated with a large power transmission project,
severance expenses not associated with restructuring activities and legal
expenses. The impact of exchange rate movements increased operating losses by
$0.7 million for 2005 compared to 2004. The operating loss for 2004 was $11.9
million compared to operating income of $2.0 million for 2003. The 2004 losses
wereloss was
primarily due to greater labor requirements than originally estimated to perform
certain projects, increased material prices and the completion of certain
long-term power generation projects in 2003 not presentthat were absent in 2004. The impact
of exchange rate movements increased operating losses by $1.5 million for 2004
compared to 2003.
Canada construction and facilities services operating
income decreased by $1.3 million for 2003 compared to 2002. This decrease was
principally due to: (a) increased hospital and school construction projects and
less manufacturing outage work in 2003 compared to 2002, since hospital and
school construction projects generally have lower gross profits than the
manufacturing outage work and (b) decreased profit from several longer-term
power generation projects. The decline was offset in part by $0.2 million of an
increase in operating income resulting from the impact of the change in exchange
rates due to strengthening of the Canadian dollar.Our United Kingdom construction and facilities services operating income
for 2005 was $7.5 million compared to breakeven for 2004. This improvement in
2005 operating income was primarily attributable to improved performance on
construction projects and to a reduction in selling, general and administrative
expenses related to a reorganization of the United Kingdom operations, partially
offset by increased incentive compensation due to improved financial
performance. Operating income was breakeven forin 2004 compared to an operating
loss of $22.4 million for 2003. This improvement was primarily attributable to
(a) an improvement in the 2004 gross profit as there was profitable performance of work in 2004 in contrast tothe contracts causing large
losses, which were incurred in 2003, which 2003 contracts were substantially completed by December
31, 2003. The improvement in 2004 operating income was
also attributable2003 and to (b) reductions in selling, general and administrative expenses
related to a reorganization of the United Kingdom operations in late 2003. United Kingdom construction and facilities services reported a $22.4 million
operating loss in 2003 compared to breakeven results for 2002. The
2003 operating loss was primarily attributable to:to (a) net unfa-
21
vorableunfavorable
settlements and closeouts of certain construction projects completed during that
year;year, (b) increased bad debt expense of $5.8 million in 2003 primarily related
to the then potential non-payment of a large customer account receivable (which
account receivable was subsequently written-off against the allowance for
doubtful accounts in 2004);,
(c) reorganization expenses of approximately $2.0 million related to employee
severance expenses and the closing of several offices;offices and (d) $1.5 million
resulting from the impact of the change in exchange rates due to strengthening
of the British pound.
Other international construction and facilities services operating income
was $0.5 millionat breakeven for 20042005 compared to operating income of $0.3$0.5 million for 20032004
and $0.1$0.3 million of operating loss for 2002. EMCOR continues to pursue new business selectively in
the Middle Eastern and European markets; however, the availability of
opportunities has been significantly reduced as a result of local economic
factors, particularly in the Middle East.
Our corporate administration expense for 2005 was $43.0 million compared
to $35.0 million for 2004. This increase in expense was primarily due to
increased incentive compensation, and to a lesser extent, increased professional
fees and the absence of a non-recurring benefit attributable to expense
reimbursement that occurred in 2004. General corporate expenses for 2004
increased by $0.3 million compared to 2003 and increased by $3.4 million for 2003 comparedprimarily due to 2002. General corporate
expenses for 2004 compared to 2003 have been negatively impacted bythe negative impact
of higher audit fees and other costs of complying with the provisions of the
Sarbanes - Oxley Act of 2002. However, these increased costs have beenin 2004 compared to
2003 were largely offset by other expense reductions.
The increase in general corporate expenses for 2003 compared
to 2002 was primarily related to an increase in personnel required to support
the business growth related to acquisitions and increased marketing expenses
associated with EMCOR's brand awareness campaign, which promotes the EMCOR brand
in the United States on the national and local level.26
NON-OPERATING ITEMS
Interest expense was $8.3 million for 2005 and $8.9 million for both 2004
and 2003. The decrease inDecreased borrowings under EMCOR'sthe revolving credit facility for 2005
compared to 2004 and 2003, was partially offset by the impact of increases in
interest rates during the year.2005 and 2004.
Interest expenseincome increased by $4.8$0.8 million in 2003for 2005 compared to 2002 principally due to increased
borrowing under EMCOR's revolving credit facility as a result of the 2002
acquisition of CES.
Interest income2004 and
increased by $1.2 million for 2004 compared to 2003 due primarily to interest
earned on cash provided by the United Kingdom constructionconstructon and facilities
services segment, as such cash was invested in the United Kingdom at interest
rates generally greater than the net cost of borrowing under EMCOR'sour revolving
credit facility.
InterestThe $1.8 million gain on sale of an equity investment of 2004 was
attributable to the August 2004 sale of our interest in a South African joint
venture, the operating results of which had been reported previously in the
Other international construction and facilities services segment.
Minority interest represents the allocation of earnings to those of our
joint venture partners who have a minority-ownership interest in joint ventures
to which we are a party and which joint ventures have been consolidated.
For 2005, the income decreased by $1.3tax provision was $9.7 million compared to an income
tax provision of less than $0.01 million for 2003 compared2004. Our income tax provision for
2005 was comprised of (a) $27.3 million of income tax provision in respect of
pre-tax earnings of $71.0 million, (b) $5.2 million of income tax provision
related to 2002 duea valuation allowance recorded to repaymentreduce deferred tax assets related
to net operating losses and other temporary differences with respect to our
Canadian construction and facilities services segment, since there is
uncertainty as to whether the segment will have sufficient taxable income in the
future to realize the benefit of increased borrowingssuch deferred tax assets and (c) the offset of
such income tax provisions by a $22.7 million income tax benefit for working capital under EMCOR's
revolving credit facility.income tax
reserves no longer required based on a current analysis of probable exposures.
The income tax benefit of less than $0.05$0.01 million for 2004 was comprised of (a)
$13.9 million of income tax provision on pre-tax earnings of $33.2 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficientsufficent future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by $22.1 million of income tax benefits for income tax
reserves no longer required based on current analysis of probable exposures. The
provision on income before income taxes for each of 2005, 2004 2003 and 20022003 was
recorded at an effective income tax rate of approximately 38%, 42%. and 42%,
respectively.
On September 30, 2005, we disposed of one of our subsidiaries in our
United States facilities services segment. The results of operations for all
periods presented reflect discontinued operations accounting. Included in the
$1.3 million loss from discontinued operations for 2005 is a loss of $1.0
million, net of income tax, by reason of the sale of the subsidiary. We will not
have any future involvement with the subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 20042005 and 20032004 (in millions):
2005 2004 2003
------- -------
Net cash provided by operating activities ............................... $ 54.5143.3 $ 1.644.9
Net cash used in investing activities ....................................... $ (4.0)(20.1) $ (23.6)(3.1)
Net cash (used in) provided byused in financing activities ......................... $ (78.5) $ (58.4)
$ 7.1
The Company'sOur consolidated cash balance decreasedincreased by $7.9approximately $44.7 million
from $78.3$59.1 million at December 31, 20032004 to $70.4$103.8 million at December 31, 2004. Net2005.
The $98.4 million improvement in net cash provided by operating activities for
2004 was $54.5 million, an increase of
$52.9 million from net cash provided by operating activities of $1.6 million for
2003. The increase in cash provided by operating activities in 20042005 compared to 20032004 was primarily due to an improvement in our working capital
position of $81.3 million primarily as a result of an improvement in the
billings and collection cycle and an increase in net income of $12.6 million, a decrease
in$26.8 million. In
2005, net operating assets and liabilities of $41.2 million and a $0.9 million
decrease related to other items. This increase in 2004 cash provided by
operating activities was in contrast to the cash provided by operating
activities of $1.6 million in 2003, as 2003 was impacted by the shift toward
increased public sector work, which work typically involves larger projects and
significant working capital requirements until initial billing milestones can be
reached. Net cash used in investing activities inof $20.1 million was primarily due
to (a) earn-out payments and acquisitions aggregating $10.7 million, (b) net
disbursements for other investments of $5.0 million and (c) payments for
purchases of property, plant and equipment of $12.4 million, which were offset
by (i) $4.4 million of proceeds from the sale of discontinued operations, the
sale of assets and an equity investment and (ii) $3.6 million of proceeds from
the sale of property, plant and equipment. In 2004, net cash used for investing
activities of $4.0$3.1 million consistedwas primarily ofdue to (a) earn-out payments of $1.6
million for acquisitions in prior periods, (b) net disbursements for other
investments of $1.3$1.0 million and $16.1
million(c) payments for purchases of property, plant
and equipment of $16.1 million, which were offset by (i) $10.1 million of
proceeds from the sale of assets and an equity investment and $5.0 million of
proceeds from the sale of property, plant and equipment. This activity compares
to net cash used in investing activities for 2003 of $23.6 million, which
consisted primarily of aggregate payments of $8.9 million for acquisitions in
2003 and earn-out payments of $2.0 million for acquisitions in prior periods,
net disbursements for other investments of $1.8 million and $17.9 million for
purchases of property, plant and equipment, offset by $5.2 million of payments
received pursuant to indemnity provisions of acquisition agreements and $1.9(ii) $5.5 million
of proceeds from the sale of property, plant and equipment. Net cash used in
financing activities forduring 2005 increased $20.1 million compared to 2004 of $58.4 millionand
was primarily attributable toa result of net paymentsrepayments under the working capital credit linesline
in 2005 of $80.0 million compared to $59.4 million offset by proceeds from the exercise of stock options of $1.6 million.
22in 2004.
27
Net cash provided by financing activities for 2003 of $7.1 million was primarily
attributable to net borrowings under working capital credit lines of $27.4
million and proceeds from the exercise of stock options of $2.0 million, offset
by repayments of long-term debt of $22.2 million.
The following is a summary of EMCOR's material contractual obligations and other
commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------------------------- -------- -------- -------- ------- ------- ------ -------
Other long-term debt ........................................................................ $ 0.50.4 $ 0.1 $ 0.2 $ 0.20.1 $ --
Capital lease obligations ...................................... 1.9 0.7....................... 1.6 0.5 0.8 0.40.3 --
Operating leases ............................................... 165.6 39.6 57.4 32.8 35.8................................. 161.2 40.1 60.6 31.9 28.6
Minimum funding requirement for pension plan ................... 10.7 10.7..... 9.5 9.5 -- -- --
Open purchase obligations (1) .................................. 661.2 514.1 142.1 5.0.................... 664.0 554.8 109.2 -- --
Other long-term obligations, including current
portion (2) ................................ 88.5 17.6 70.9................................... 125.1 13.0 112.1 -- --
-------- -------- -------- ------- ------- ------ -------
Total Contractual Obligations ...................................................... $ 928.4961.8 $ 582.8618.0 $ 271.4282.9 $ 38.432.3 $ 35.8
======== ========28.6
======== ======= ======= ====== =======
AMOUNT OF COMMITMENT EXPIRATIONEXPIRATIONS BY PERIOD
------------------------------------------------------------------------------------------------------------
OTHER TOTAL LESS
OTHER
COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
----------------------------- --------- -------- -------- ------- ------- ------ -------
Revolving Credit Facility (3) ...................... $ 80.0.................... $ -- $ 80.0-- $ -- $ -- $ --
Letters of credit .................................. 54.3................................ 53.3 -- 54.353.3 -- --
Guarantees ................................................................................ 25.0 -- -- -- 25.0
-------- -------- ----------------- ------- ------- ------ -------
Total Commercial Commitments ............................................ $ 159.378.3 $ -- $ 134.353.3 $ -- $ 25.0
======== ======== ================= ======= ======= ====== =======
- -----------------------
(1) Represents open purchase orders for material and subcontracting costs
related to EMCOR's construction and service contracts. These purchase orders are
not reflected in EMCOR's consolidated balance sheet and should not impact
future cash flows as amounts will be recovered through customer billings.
(2) Represents primarily insurance related liabilities, classified as other
long-term liabilities in the timingconsolidated balance sheets. Cash payments
for which
paymentsinsurance related liabilities may be payable beyond one yearthree years, but
it is not practical to estimate.
(3) EMCOR classifiesWe classify these borrowings as short-term on its consolidated balance
sheet because of EMCOR'sour intent and ability to repay the amounts on a
short-term basis. On September 26, 2002, EMCOR entered into a $275.0 million five yearAs of December 31, 2005, there were no borrowings
outstanding.
Our previous revolving credit agreement (the "Revolving"Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility that was due to expire September 26, 2007 with an
amended and restated $350.0 million revolving credit facility (the "2005
Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased itsThe 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 $350.0 million. Theletters of
credit, which amount compares to $75.0 million under the previous Old Revolving
Credit Facility. The 2005 Revolving Credit Facility which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain of
our direct and indirect subsidiaries, of EMCOR, is secured by substantially all of our
assets and most of the assets of EMCOR and most of itsour 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 0.3%0.25% to 0.5%
of the unused amount, based on certain financial tests. Borrowings under the
2005 Revolving Credit Facility bear interest at (a)(1) a rate which is the prime
commercial lending rate announced by Harris NesbittN.A. from time to time (5.25%(7.25% at
December 31, 2004)2005) plus 0%0.0% to 1.0%0.5%, based on certain financial tests or (b)(2)
United States dollar LIBOR (at December 31, 20042005, the rate was 2.42%4.38%) plus 1.5%1.0%
to 2.5%2.25%, based on certain financial tests. The interest rates in effect at
December 31, 20042005 were 5.50%7.25% and 4.17%5.38% for the prime commercial lending rate and
the United States dollar LIBOR, respectively. Letter of credit fees issued under
this facility range from 0.75%1.0% to 2.5%2.25% of the respective face amounts of the
letters of credit issued and are charged based on the type of letter of credit
issued and certain financial tests. In connection with the replacement of the
Old Revolving Credit Facility, $0.4 million of prepaid commitment fees were
recorded as interest expense. As of December 31, 2005 and 2004, and 2003, EMCORwe had
approximately $54.3$53.3 million and $49.2$54.3 million of letters of credit outstanding,
respectively. EMCORThere were no borrowings under the 2005 Revolving Credit Facility
as of December 31, 2005. We had borrowings of $80.0 million and $139.4 million outstanding under
the Old Revolving Credit Facility at December 31, 2004 and 2003, respectively.2004.
In August 2001, the Company'sour Canadian subsidiary, Comstock Canada Ltd., renewed a
credit agreement with a bank providing for an overdraft facility of up to Cdn.
$0.5 million. The facility is secured by a standby letter of credit and provides
for interest at the bank's prime rate, (4.25%which was 5.25% at December 31, 2004).2005.
There were no borrowings outstanding under this credit agreement at December 31,
20042005 or 2003.
A subsidiary2004.
28
One of EMCORour subsidiaries has guaranteed indebtedness of a venture in which
it
haswe 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 private and publiccommercial properties.
These guarantees are not expected to have a material effect on EMCOR'sour financial
position or results of operations. Each of the venturers isWe and Baltimore Gas and Electric are jointly
and severally liable, in the event of default, for the venture's $25.0 million
borrowing due December 2031.
During
September 2002, each venture partner contributed equityThe 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 venture,award of which
EMCOR's contribution was $14.0 million.
23
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects whichsuch
contracts. The Surety Bonds secure EMCORour payment and performance obligations under
such contracts, and we have agreed to indemnify the Surety Companies for
such projects.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 EMCORof our
employees, bondsSurety Bonds are sometimes provided to secure obligations for wages
and benefits payable to or for such employees. EMCORPublic 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, 2004, sureties2005, Surety Companies had issued bondsSurety Bonds for
theour account of EMCOR in the aggregate amount of approximately $1.6$1.5 billion. The bondsSurety
Bonds are issued by EMCOR's suretiesSurety Companies in return for a premiumpremiums, which variesvary
depending on the size and type of the bonds.bond. The largest individual bondsingle Surety Bond
outstanding for our account is approximately $170.0 million.
In recent periods there has been a reduction in the aggregate bond
issuance capacity of Surety Companies due to industry consolidations and
significant losses of Surety Companies as a result of providing Surety Bonds to
construction companies as well as companies in other industries. Consequently,
the availability of Surety Bonds has become more limited and the terms upon
which Surety Bonds are available have become more restrictive. We had been
notified earlier in 2005 by one of our Surety Companies, which provides
approximately 20% of our Surety Bonds, that it (the "Terminating Surety") would
be terminating its Surety Bond business. Following that notification, we entered
into an arrangement with another Surety Company in August 2005 to provide us
with the level of Surety Bonds previously provided by the Terminating Surety. If
we experience other changes in our bonding relationships or if there are further
changes in the surety industry, we may seek to satisfy certain customer requests
for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds
such as letters of credit or guarantees by EMCOR has agreedGroup, Inc., by seeking to
indemnifyconvince customers to forego the suretiesrequirement of a Surety Bond, by increasing our
activities in business segments that rarely require Surety Bonds such as the
facilities services segment and/or by refraining from bidding for any
payments made by themcertain
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 respectthe availability of
bonds issuedSurety Bonds, we could experience a material adverse effect on EMCOR's behalf.
EMCOR doesour 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.
TheOur primary source of liquidity for EMCOR has been, and is expected to continue to
be, cash generated by operating activities. EMCORWe also maintainsmaintain 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 EMCORus 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. EMCORWe may also increase liquidity through an equity
offering or issuance of other debt instruments. Short-term changes in
macroeconomic trends may have an effect,affect, positively or negatively, on liquidity.
In addition to managing borrowings, EMCOR'sour focus on the facilities services market
is intended to provide an additional buffer against economic downturns inasmuch
as the facilities services marketbusiness is characterized by annual and multi-year
contracts that provide a more predictable stream of cash flow than the
construction
market. The acquisition in December 2002 of CES, which is primarily focused on
the facilities services market, is part of EMCOR's plan to grow its facilities
services business. Short-term liquidity is also impacted by the type and
length of construction contracts in place. During economic downturns, such as
the downturn during 2001 through 2004 period forin the commercial construction industry,
there arewere typically fewer small and discretionary projects from the private sector,
and companies such as EMCORlike us more aggressively bid more large long-term infrastructure
and public sector contracts. Performance of long duration contracts typically
requires working capital until initial billing milestones are achieved. While EMCOR striveswe
strive to maintain a net over-billed position with itsour customers, there can be
no assurance that a net over-billed position can be maintained. EMCOR'sOur net
over-billings, defined as the balance sheet accounts billings"billings in excess of
costs and estimated earnings on uncompleted contractscontracts" less cost"cost and estimated
earnings in excess of billings on uncompleted contracts,contracts", was $119.0$144.6 million and
$95.8$119.0 million as of December 31, 20042005 and 2003,2004, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the 2005 Revolving Credit Facility and the
sale of various secured or unsecured debt and/or equity interests in the public
and private markets. Based upon EMCOR'sour current credit ratings and financial
position, EMCORwe can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, EMCOR'sour 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,
EMCOR'sour ability to perform work at profitable levels is critical to meeting
long-term liquidity requirements.
EMCOR believes29
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,
EMCOR iswe are a party to lawsuits and other proceedings in which other parties seek to
recover from itus amounts ranging from a few thousand dollars to over $70.0$68.0
million. If EMCOR waswe were required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on itsour financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2004, EMCOR2005, we utilized approximately $43.7$49.4 million of
letters of credit issued pursuant to itsour 2005 Revolving Credit Facility as
collateral for its insurance obligations.
NEW ACCOUNTING PRONOUNCEMENT
On December 16, 2004, the Financial Accounting Standards Board (FASB)("FASB")
issued FASB Statement No. 123 (revised 2004), Share-Based Payment"Share-Based Payment" ("123(R)"),
which is a revision of FASB Statement No. 123, Accounting"Accounting for Stock-Based
Compensation.Compensation". Statement 123(R) supersedes APB Opinion No. 25, Accounting"Accounting for
Stock Issued to Employees,Employees", ("Opinion 25") and amends FASB Statement No. 95,
Statement"Statement of Cash Flows.Flows". Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure will no longer be an alternative. Statement 123(R)
must be adopted no later than JulyJanuary 1, 2005.
EMCOR2006. As of January 1, 2006, we will
adopt Statement 123(R) on July 1, 2005..
As permitted by Statement 123, EMCORwe currently accountsaccount for share-based
payments to employees using Opinion 25's intrinsic value method and, as such, we
generally recognizesrecognize no compensation cost for employee stock options. We will
utilize the modified prospective method of accounting as permitted under 123(R).
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significantan
impact on our resultfuture results of operations, although it will have no impact on
our overall financial posi-
24
tion. EMCOR is currently evaluating the impact that adoption of Statement 123(R)
will have on the results of operations in 2005.position. The impact of thethat standard on future operatingreported results
cannotwould be predicted at this time because it will depend
on levelsapproximately as described in Note B - Summary of share-based payments granted inSignificant
Accounting Policies of the future.notes to the consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While EMCORwe cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were not material.
On the first business day of 2005,
options to purchase an aggregate of 290,200 shares of EMCOR common stock were
granted pursuant to the 2003 Management Stock Incentive Plan, and options to
purchase an aggregate of 31,752 shares of EMCOR common stock were granted
pursuant to the 1997 Stock Option Plan for directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR hasWe have not used any material derivative financial instruments for any purpose during the
years ended December 31, 20042005 and 2003,2004, including trading or speculating on
changes in interest rates or commodity prices of materials used in itsour business.
EMCOR isWe are exposed to market risk for changes in interest rates for borrowings
under the 2005 Revolving Credit Facility. Borrowings under that facility bear
interest at variable rates, and the fair value of this borrowing is not
significantly affected by changes in market interest rates. As of December 31,
2004,2005, there was $80.0 million ofwere no borrowings outstanding under the facility, and
thesefacility. Had there been
borrowings, they would bear interest at (a)(1) a rate which is the prime commercial
lending rate announced by Harris NesbittN.A. from time to time (5.25%(7.25% at December 31,
2004)2005) plus 0%0.0% to 1.0%0.5%, based on certain financial tests or (b)(2) United States
dollar LIBOR (at December 31, 2004,2005, the rate was 2.42%4.38%) plus 1.5%1.0% to 2.5%2.25%,
based on certain financial tests. Based on the borrowings outstanding of $80.0
million, if the overall interest rates were to increase by 1.0%, the net of tax
interest expense would increase approximately $0.5 million in the next twelve
months. Conversely, if the overall interest rates were to decrease by 1.0%,
interest expense would decrease by approximately $0.5 million in the next twelve
months. The 2005 Revolving Credit Facility expires in
September 2007. There is no
guarantee that EMCOR will be able to renew the facility at its expiration.
EMCOR isOctober 2010.
We are also exposed to market risk and the market's potential related
impact on accounts receivable or costs and estimated earnings in excess of
billings on uncompleted contracts. The amounts recorded may be at risk if our
customers' ability to pay these obligations is negatively impacted by economic
conditions. EMCORWe continually monitorsmonitor the credit worthiness of itsour customers and
maintainsmaintain on-going discussions with customers regarding contract status with
respect to change orders and billing terms. Therefore, EMCOR believes it takeswe believe we take
appropriate action to manage market and other risks, but there is no assurance
that itwe will be able to reasonably identify all risks with respect to
collectibility of these assets. See also the previous discussion of Accounts
Receivable under the heading "Application of Critical Accounting Policies" in
the Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Amounts invested in EMCOR'sour foreign operations are translated into U. S.
dollars at the exchange rates in effect at year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income, a component
of stockholders' equity, in itsour consolidated balance sheets. EMCOR believesWe believe the
exposure to the effects that fluctuating foreign currencies may have on itsour
consolidated results of operations is limited because the foreign operations
primarily invoice customers and collect obligations in their respective local
currencies. Additionally, expenses associated with these transactions are
generally contracted and paid for in their same local currencies.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS ANNUAL REPORT ARE BASED UPON
INFORMATION AVAILABLE TO EMCOR, AND MANAGEMENT'S PERCEPTION THEREOF, AS OF THE
DATE OF THIS ANNUAL REPORT. EMCOR ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS
REGARDING MARKET SHARE GROWTH, GROSS PROFIT, PROJECT MIX, PROJECTS WITH VARYING
PROFIT MARGINS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
ACCORDINGLY, THESE STATEMENTS ARE NO GUARANTEE OF FUTURE PERFORMANCE. SUCH RISK
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE EFFECTS OF GENERAL
ECONOMIC CONDITIONS, CHANGES IN THE POLITICAL ENVIRONMENT, CHANGES IN THE
SPECIFIC MARKETS FOR EMCOR'S SERVICES, ADVERSE BUSINESS CONDITIONS, INCREASED
COMPETITION, UNFAVORABLE LABOR PRODUCTIVITY, MIX OF BUSINESS, AND RISKS
ASSOCIATED WITH FOREIGN OPERATIONS. CERTAIN OF THE RISKS AND FACTORS ASSOCIATED
WITH EMCOR'S BUSINESS ARE ALSO DISCUSSED IN OTHER REPORTS FILED BY EMCOR FROM
TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD TAKE
THE AFOREMENTIONED RISKS AND FACTORS INTO ACCOUNT IN EVALUATING ANY
FORWARD-LOOKING STATEMENTS.
2530
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------------------------------------
2005 2004 2003
----------- -----------
ASSETS
ASSETS
Current assets:
Cash and cash equivalents ........................................................................ $ 70,404103,785 $ 78,26059,109
Accounts receivable, less allowance for doubtful accounts of $29,973 and $36,185, and $43,706, respectively .......................................................................... 1,046,380 1,073,454 1,009,170
Costs and estimated earnings in excess of billings on uncompleted contracts ............................................. 185,634 240,716
249,393
Inventories ............................................................................................................................................................................. 10,175 10,580 9,863
Prepaid expenses and other ....................................................................... 30,417 42,470........................................................................ 43,829 41,712
----------- -----------
Total current assets ........................................................................... 1,389,803 1,425,571 1,389,156
Investments, notes and other long-term receivables .................................................................................................... 28,659 26,472 26,452
Property, plant and equipment, net .................................................................................................................................... 46,443 56,468
66,156
Goodwill ........................................................................................................................................................................................ 283,412 279,432 277,994
Identifiable intangible assets, less accumulated amortization of $10,209 and $7,017, and $3,573, respectively ....... 16,990 18,782 22,226
Other assets ................................................................................................................................................................................ 13,634 11,244 13,263
----------- -----------
Total assets ................................................................................................................................................................................ $ 1,817,9691,778,941 $ 1,795,2471,817,969
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ........................................................................................................... $ 80,000-- $ 139,40080,000
Current maturities of long-term debt and capital lease obligations ............................................................... 551 806 367
Accounts payable ................................................................................................................................................................... 452,709 467,415 451,713
Billings in excess of costs and estimated earnings on uncompleted contracts ............................................. 330,235 359,667 345,207
Accrued payroll and benefits ........................................................................................................................................... 154,276 138,771 131,623
Other accrued expenses and liabilities ....................................................................................................................... 107,545 115,714 110,147
----------- -----------
Total current liabilities ...................................................................... 1,045,316 1,162,373 1,178,457
Long-term debt and capital lease obligations ................................................................................................................ 1,406 1,332 561
Other long-term obligations .................................................................................................................................................. 116,783 91,903 94,873
----------- -----------
Total liabilities ...................................................................................................................................................................... 1,163,505 1,255,608 1,273,891
----------- -----------
Stockholders' equity:
Preferred stock, $0.10$0.01 par value, 1,000,000 shares authorized, zero issued and outstanding .................... -- --
Common stock, $0.01 par value, 30,000,00080,000,000 shares authorized, 16,324,33533,266,154 and 16,155,84432,648,670 shares
issued, respectively ........................................................... 163 162.............................................................................. 333 326
Capital surplus .................................................................................... 318,122 316,729...................................................................................... 325,232 317,959
Accumulated other comprehensive (loss) income ..................................................................................................................... (5,370) 7,699 1,257
Retained earnings ...................................................................................................................................................................... 313,170 253,128 219,921
Treasury stock, at cost 1,088,2862,162,388 and 1,123,6512,176,572 shares, respectively ............................................................... (17,929) (16,751) (16,713)
----------- -----------
Total stockholders' equity .................................................................................................................................................... 615,436 562,361 521,356
----------- -----------
Total liabilities and stockholders' equity .................................................................................................................... $ 1,817,9691,778,941 $ 1,795,2471,817,969
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2631
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003
2002
----------- ----------- --------------------- ---------- ----------
Revenues ......................................................... $ 4,747,880 $ 4,534,646 $ 3,968,051............................................................. $4,714,547 $4,718,010 $4,500,401
Cost of sales .................................................... 4,300,978 4,052,192 3,485,417
----------- ----------- -----------........................................................ 4,214,783 4,273,410 4,022,890
---------- ---------- ----------
Gross profit ..................................................... 446,902 482,454 482,634......................................................... 499,764 444,600 477,511
Selling, general and administrative expenses ..................... 399,338 435,397 367,095......................... 416,883 396,915 431,454
Restructuring expenses .......................................................................................... 1,750 8,274 -- --
Gain on sale of assets .......................................................................................... -- 2,839 --
--
----------- ----------- --------------------- ---------- ----------
Operating income ................................................. 42,129 47,057 115,539..................................................... 81,131 42,250 46,057
Interest expense ...................................................................................................... (8,316) (8,883) (8,939)
(4,096)
Interest income ........................................................................................................ 2,730 1,886 703 1,997
Gain on sale of equity investment .................................................................... -- 1,844 -- --
Minority interest .................................................................................................... (4,515) (3,814) (1,905)
(1,114)
----------- ----------- --------------------- ---------- ----------
Income from continuing operations before income taxes ....................................... 33,162 36,916 112,326................ 71,030 33,283 35,916
Income tax (benefit) provision ................................... (45) 16,295 49,424
----------- ----------- -----------................................................. 9,738 1 15,915
---------- ---------- ----------
Income from continuing operations .................................... 61,292 33,282 20,001
(Loss) gain from discontinued operations, net of income tax effect ... (1,250) (75) 620
---------- ---------- ----------
Net income .................................................................................................................. $ 60,042 $ 33,207 $ 20,621
========== ========== ==========
Net income (loss) per common share - Basic
From continuing operations ........................................ $ 62,902
=========== =========== ===========
Basic earnings1.97 $ 1.09 $ 0.67
From discontinued operations ...................................... (0.04) (0.00) 0.02
---------- ---------- ----------
$ 1.93 $ 1.09 $ 0.69
========== ========== ==========
Net income (loss) per common share .........................................- Diluted
From continuing operations ........................................ $ 2.181.93 $ 1.381.07 $ 4.23
=========== =========== ===========
Diluted earnings per share .......................................0.65
From discontinued operations ...................................... (0.04) (0.00) 0.02
---------- ---------- ----------
$ 2.131.89 $ 1.331.07 $ 4.07
=========== =========== ===========0.67
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2732
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2005 2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income ............................................................................ $ 60,042 $ 33,207 $ 20,621 $ 62,902
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ....................................................... 19,439 20,939 21,717 15,371
Amortization of identifiable intangible assets ...................................... 3,192 3,444 2,818 755
Provision for doubtful accounts ..................................................... 8,457 7,026 11,249 3,354
Minority interest ................................................................... 4,515 3,814 1,905 1,114
Deferred income taxes ............................................................... 5,002 13,704 7,451
7,432
GainLoss (gain) on sale of discontinued operation, sale of assets
and equity investment .................................................................................................... 1,250 (4,683) --
--
(Gain) lossLoss (gain) on sale of property, plant and equipment ................................ 263 (196) 314 (190)
Non-cash expense for amortization of debt issuance costs ............................ 2,589 1,925 1,416 630
Non-cash expense for Restricted Stock Units ......................................... -- -- 557
----------- ----------- -----------
104,749 79,180 67,491 91,925
Change in operating assets and liabilities excluding effect of businesses acquired:
(Increase) decreaseDecrease (increase) in accounts receivable .......................................... (55,244) (49,171) 28,46411,029 (52,993) (52,350)
Decrease (increase) in inventories and contracts in progress, net ................... 21,130 (29,018) (14,174)
Increase28,837 20,979 (28,538)
(Decrease) increase in accounts payable ........................................................ 6,912 40,931 32,653............................................. (7,759) 6,846 41,978
Increase (decrease) in accrued payroll and benefits and other accrued expenses
and liabilities .......................................................... 10,459 (27,351) 14,860................................................................... 14,907 10,534 (26,420)
Changes in other assets and liabilities, net ........................................ (7,954) (1,258) 779(8,454) (19,632) (4,087)
----------- ----------- -----------
Net cash provided by (used in) operating activities ............................................. 54,483 1,624 154,507................................... 143,309 44,914 (1,926)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of discontinued operation, sale of assets and equity investment .................................... 4,413 10,061 -- --
Proceeds from sale of property, plant and equipment ................................. 4,964 1,872 2,0093,577 5,478 2,500
Purchase of property, plant and equipment ........................................... (12,445) (16,134) (17,940) (15,585)
Payments for acquisitions of businesses, net of cash acquired, and related earn-out
agreements ..................................................................................... (10,690) (1,568) (10,943) (343,358)
Net disbursements for other investments ............................................. (1,281) (1,810) (7,679)(4,959) (970) (1,439)
Payments received pursuant to indemnity provisions of acquisition agreements ........ -- -- 5,244 --
----------- ----------- -----------
Net cash used in investing activities ................................................. (3,958) (23,577) (364,613)(20,104) (3,133) (22,578)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit lines ..........................................line ........................................... 899,552 1,365,950 1,445,904 248,000
Repayments of working capital credit lines ..........................................line ........................................... (979,552) (1,425,350) (1,418,504) (136,000)
Borrowings for long-term debt ....................................................... -- 31 -- 70
Repayments for long-term debt ....................................................... (89) (144) (22,241) (1,100)
Repayments for capital lease obligations ............................................ (182) (458) (12) (34)
Net proceeds from exercise of stock options ......................................... 1,742 1,590 1,963 2,507
----------- ----------- -----------
Net cash (used in) provided by financing activities ................................... (78,529) (58,381) 7,110 113,443
----------- ----------- -----------
DecreaseIncrease (decrease) in cash and cash equivalents ................................................. (7,856) (14,843) (96,663)...................................... 44,676 (16,600) (17,394)
Cash and cash equivalents at beginning of year ........................................ 78,26059,109 75,709 93,103 189,766
----------- ----------- -----------
Cash and cash equivalents at end of year .............................................. $ 70,404103,785 $ 78,26059,109 $ 93,10375,709
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2833
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS)
TOTAL ACCUMULATED
TOTALSTOCK- OTHER
STOCK- COMPREHENSIVE
HOLDERS' COMMON CAPITAL INCOMECOMPREHENSIVE RETAINED TREASURY COMPREHENSIVE
EQUITY STOCK SURPLUS (LOSS)(1) INCOME(1) EARNINGS STOCK INCOME
---------- --------- --------- ------------- --------- ---------------- ----------- --------- -------------
Balance, December 31, 2001 ................2002 .......... $ 421,933489,870 $ 159321 $ 307,636312,233 $ (5,424)(5,148) $ 136,398199,300 $ (16,836)
Net income .............................. 62,902 -- -- -- 62,902 -- $ 62,902
Foreign currency translation
adjustments ........................... 3,725 -- -- 3,725 -- -- 3,725
Pension plan additional
minimum liability, net of
tax benefit of $1.9 million ........... (3,449) -- -- (3,449) -- -- (3,449)
---------
Comprehensive income .................... $ 63,178
=========
Common stock issued under
stock option plans, net ............... 2,507 2 2,505 -- -- --
Value of Restricted Stock
Units (4) ............................. 2,252 -- 2,252 -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 ................ 489,870 161 312,393 (5,148) 199,300 (16,836)
Net income ...................................................... 20,621 -- -- -- 20,621 -- $ 20,621
Foreign currency translation
adjustments ................................................ 12,440 -- -- 12,440 -- -- 12,440
Pension plan additional
minimum liability, net of
tax benefit of $2.6 million ................ (6,035) -- -- (6,035) -- -- (6,035)
---------
Comprehensive income .................................. $ 27,026
=========
Common stock issued under
stock option plans, net ........................ 3,026 1 2,9022 2,901 -- -- 123
Value of Restricted Stock
Unitsrestricted stock units (4) ............................. 1,434 -- 1,434 -- -- --
--------- --------- --------- --------- -------------------- ---------
Balance, December 31, 2003 .......................... 521,356 162 316,729323 316,568 1,257 219,921 (16,713)
Net income ...................................................... 33,207 -- -- -- 33,207 -- $ 33,207
Foreign currency translation
adjustments ................................................ 5,409 -- -- 5,409 -- -- 5,409
Pension plan reduction of
minimum liability, net of
tax provision of $2.6 million ................ 1,033 -- -- 1,033 -- -- 1,033
---------
Comprehensive income .................................. $ 39,649
=========
Issuance of treasury stock
for restricted stock units (2) .............. -- -- (836) -- -- 836
Treasury stock, at cost (3) .................... (902) -- -- -- -- (902)
Common stock issued under
stock option plans, net .............................. 1,590 1 1,5613 1,559 -- -- 28
Value of Restricted Stock
Unitsrestricted stock units (4) ............................. 668 -- 668 -- -- --
--------- --------- --------- --------- -------------------- ---------
Balance, December 31, 2004 .......................... 562,361 326 317,959 7,699 253,128 (16,751)
Net income ........................ 60,042 -- -- -- 60,042 -- $ 562,36160,042
Foreign currency translation
adjustments ..................... (1,174) -- -- (1,174) -- -- (1,174)
Pension plan additional
minimum liability, net of
$0 tax effect ................... (11,895) -- -- (11,895) -- -- (11,895)
---------
Comprehensive income .............. $ 16346,973
=========
Issuance of treasury stock
for restricted stock units (2) .. -- -- (540) -- -- 540
Treasury stock, at cost (3) ....... (871) -- -- -- -- (871)
Common stock issued under
stock option plans, net (5)...... 5,615 7 6,455 -- -- (847)
Value of restricted stock units (4) 1,358 -- 1,358 -- -- --
--------- --------- --------- --------- ----------- ---------
Balance, December 31, 2005 .......... $ 318,122615,436 $ 7,699333 $ 253,128325,232 $ (16,751)(5,370) $ 313,170 $ (17,929)
========= ========= ========= ========= ==================== =========
- ----------------------
(1) Represents cumulative foreign currency translation and net of tax minimum
pension liability adjustments of $11.5 million and $(16.9) million,
respectively, as of December 31, 2005. Represents cumulative foreign
currency translation and net of tax minimum pension liability adjustments
of $12.7 million and $(5.0) million, respectively, as of December 31,
2004. Represents cumulative foreign
currency translation and net of tax minimum pension liability adjustments
of $7.3 million and $(6.0) million, respectively, as of December 31, 2003.
(2) Represents common stock transferred at cost from treasury stock upon the
vesting of restricted stock units.
(3) Represents value of shares of common stock withheld by EMCOR for income
tax withholding requirements upon the vesting of restricted stock units.
(4) Shares of common stock will be issued in respect of restricted stock
units. This amount represents the value of restricted stock units at the
date of grant plusgrant.
(5) Includes the related compensation expense in the current year due to an
increase in market valuetax benefit of the underlying common stock. As of October
2002, the terms of the restricted stock unit plan were changed resulting in
fixed plan accounting after the grant date from the date of this change for
both existing and new grants.option exercises.
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
2934
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., a Delaware corporation, and its consolidated subsidiaries
(collectively
"EMCOR"), isunless the context indicates otherwise.
We are one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. EMCOR specializesWe specialize in providing services relating to mechanical and
electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services." EMCOR
designs, integrates, installs, startsWe
design, integrate, install, start up, operatesoperate and maintainsmaintain various electrical
and mechanical and electrical systems, including:including, (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b)
plumbing, process and high-purity piping systems; (c) systems for the generation and
distribution of electrical power;power, (b) fire protection systems, (c) lighting
systems, (d) lighting systems; (e) low-voltage systems, such as fire alarm, security, communication
and process control systems;
and (f)systems, (e) voice and data communications systems, (f)
heating, ventilation, air conditioning, refrigeration and clean-room process
ventilation systems and (g) plumbing, process and high-purity piping systems. EMCOR providesWe
provide mechanical and electrical construction services and facilities services
directly to corporations, municipalities and other governmental entities,
owners/developers and tenants of buildings. ItWe also providesprovide these services
indirectly by acting as a subcontractor to general contractors, systems
suppliers and other subcontractors. Mechanical and electrical construction
services generally fall into one of two categories: (a) large installation
projects with contracts often in the multi-million dollar range that involve
construction of industrial and commercial buildings and institutional and public
works facilities or the fit-out of large blocks of space within commercial
buildings and (b) smaller installation projects typically involving fit-out,
renovation and retrofit work. EMCOR'sOur facilities services, which are needed to support the
operation of a customer's facilities, include site-based operations and
maintenance, mobile maintenance and service, facilities management, remote
monitoring, small modification and retrofit projects, technical consulting and
diagnostic services, installation and support for building systems, and program
development, energy management programs and the design and construction of
energy-related projects. These services are provided to a wide range of
commercial, industrial, utility and institutional facilities including those at
which EMCORwe provided construction services.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EMCORthe Company
and its majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. All investments over which EMCOR exerciseswe exercise
significant influence, but doesdo not control (a 20% to 50% ownership interest), are
accounted for using the equity method of accounting.
Minority interest represents the allocation of earnings to our joint
venture partners who have a minority-ownership interest in joint ventures to
which we are a party and which joint ventures have been accounted for by us
using the consolidation method of accounting.
On February 10, 2006, we effected a 2-for-1 stock split in the form of a
stock distribution of one common share for each common share owned on the record
date of January 30, 2006. The capital stock accounts, all share data and
earnings per share data give effect to the stock split, applied retroactively,
to all periods presented. See Note H - Common Stock.
The results of operations for all years presented reflect discontinued
operations accounting due to the year ended December 31, 2002 include, from
the respective dates of acquisition, the resultssale of a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc.
("Comfort") on March 1, 2002 and the results of Consolidated Engineering
Services, Inc. ("CES") acquired on December 19, 2002.subsidiary in 2005.
The results of operations of other acquisitions in each of 2005 and 2003, which
are not material, have been included in the results of operations from the date
of the respective acquisition by EMCOR.us.
PRINCIPLES OF PREPARATION
The preparation of the consolidated financial statements, in conformity
with accounting principles generally accepted in the United States, requires EMCORus
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications of the prior years presentations of minority interest in
the consolidated statements of operationsdata have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
year presentation.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of EMCOR'sour 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:contracts (a) fixed
price facilities services contracts which are signed in advance for maintenance,
repair and retrofit work over periods typically ranging from one to three years
(for which there may be EMCORour employees at the customer's site full time) and (b)
services contracts which may or may not be signed in advance for similar
maintenance, repair and retrofit work on an as needed basis (frequently referred
to as time and material work). Fixed price services contracts are generally
performed over the contract period, and, accordingly, revenue is recognized on a
pro-rata basis over the life of the contract. Revenues derived from other
services contracts are recognized when the services are performed in accordance
with Staff Accounting Bulletin
30
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) No. 104, "Revenue Recognition, revised and
updated." Expenses related to all services contracts are recognized as incurred.
Provisions for estimated losses on uncompleted long-term contracts are made in
the period in which such losses are determined. In the case of customer change
orders for uncompleted long-term construction contracts, estimated recoveries
are included for work performed in forecasting ultimate profitability on certain
contracts. Due to uncertainties inherent in the estimation process, it is
reasonably possible that completion costs, including those arising from contract
penalty provisions and final contract settlements, will be revised in the
near-term. Such revisions to costs and income are recognized in the period in
which the revisions are determined.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts reflected in the consolidated balance sheets arise when revenues have
been recordedrecognized 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 EMCOR seekswe 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 (unapproved(claims and unapproved change orders and claims)orders). TheseSuch amounts are recorded
at their estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the construction costs incurred
in connection with claim amounts. Claims and unapproved change orders made by EMCORus
involve negotiation and, in certain cases, litigation. In the event litigation
costs are incurred by EMCORus in connection with claims or unapproved change orders,
such litigation costs are expensed as incurred although EMCORwe may seek to recover
these costs. EMCOR believesWe believe that it haswe have established legal bases for pursuing
recovery of itsour 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 and claims may be made in the near-term. If EMCOR doeswe 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 EMCORus
are recognized when a loss is considered probable and amounts are reasonably
determinable.
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
----------- -----------
Costs incurred on uncompleted contracts ......... $ 8,390,950 $ 7,942,997
Estimated earnings .............................. 450,481 499,556
----------- -----------
8,841,431 8,442,553
Less: billings to date .......................... 8,960,382 8,538,367
----------- -----------
$ (118,951) $ (95,814)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets at
December 31, 2004 and 2003 under the following captions (in thousands):
2004 2003
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts .................. $ 240,716 $ 249,393
Billings in excess of costs and estimated earnings on uncompleted contracts .................. (359,667) (345,207)
--------- ---------
$(118,951) $ (95,814)
========= =========
As of December 31, 2004 and 2003, costs and estimated earnings in excess of
billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $65.4 million and $43.0 million, respectively,
and for claims of approximately $53.5 million and $51.4 million, respectively.
In addition, accounts receivable as of December 31, 2004 and 2003 includes
claims of approximately $5.4 million and $9.4 million, respectively, and
contractually billed amounts related to such contracts of $75.5 million and
$53.1 million, respectively. Generally, contractually billed amounts will not be
paid by the customer to EMCOR until final resolution of related claims. Included
in the claims amount is approximately $28.6 million and $31.2 million as of
December 31, 2004 and 2003, respectively, related to projects of EMCOR's Poole &
Kent subsidiary, which projects had commenced prior to EMCOR's acquisition of
Poole & Kent in 1999. The Poole & Kent claims amount principally relates to a
civil action in which Poole & Kent is a participant, see Note O -- Legal
Proceedings.
3136
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 2005 and 2004 were as follows (in thousands):
2005 2004
----------- -----------
Costs incurred on uncompleted contracts ....................................... $ 8,927,230 $ 8,390,950
Estimated earnings ............................................................ 546,394 450,481
----------- -----------
9,473,624 8,841,431
Less: billings to date ........................................................ 9,618,225 8,960,382
----------- -----------
$ (144,601) $ (118,951)
=========== ===========
Such amounts were included in the accompanying Consolidated Balance Sheets
at December 31, 2005 and 2004 under the following captions (in thousands):
2005 2004
---------- ----------
Costs and estimated earnings in excess of billings on uncompleted contracts ... $ 185,634 $ 240,716
Billings in excess of costs and estimated earnings on uncompleted contracts ... (330,235) (359,667)
---------- ----------
$(144,601) $ (118,951)
========== ==========
As of December 31, 2005 and 2004, costs and estimated earnings in excess
of billings on uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $56.3 million and $65.4 million, respectively,
and for claims of approximately $36.6 million and $53.5 million, respectively.
In addition, accounts receivable as of December 31, 2005 and 2004 includes
claims of approximately $4.7 million and $5.4 million, respectively, plus
unapproved change orders and contractually billed amounts related to such
contracts of $76.2 million and $75.5 million, respectively. Generally,
contractually billed amounts will not be paid by the customer to us until final
resolution of related claims. Included in the claims amount is approximately
$18.2 million and $28.6 million as of December 31, 2005 and 2004, respectively,
related to projects of our Poole & Kent subsidiary, which projects had commenced
prior to our acquisition of Poole & Kent in 1999. The Poole and Kent claims
amount principally related to a civil action in which Poole and Kent is a
participant, see Note O - Legal Proceedings.
CLASSIFICATION OF CONTRACT AMOUNTS
In accordance with industry practice, EMCOR classifieswe classify as current all assets
and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year,
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Accounts receivable at December 31, 2005 and 2004
and 2003
included $212.3$209.5 million and $189.5$210.1 million, respectively, of retainage billed
under terms of the contracts. EMCOR estimatesWe estimate that approximately 86.2%87% of retainage
recorded at December 31, 20042005 will be collected during 2005.2006. Accounts payable at
December 31, 2005 and 2004 included $43.1 million and $47.8 million,
respectively, of retainage withheld under terms of the contracts. We estimate
that approximately 85% of retainage withheld at December 31, 2005 will be paid
during 2006. Specific accounts receivable are evaluated when we believe a
customer may not be able to meet its financial obligations. The allowance for
doubtful accounts requirements are re-evaluated and adjusted on a regular basis
and as additional information is received.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, EMCOR considerswe consider all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. EMCOR maintainsWe maintain a centralized cash management programsystem whereby itsour
excess cash balances are invested in high quality, short-term money market
instruments, which are considered cash equivalents. At times, cash balances in
EMCOR'sour bank accounts may exceed federally insured limits.
INVENTORIES
Inventories, which consist primarily of construction materials, are stated
at the lower of cost or market. Cost is determined principally using the average
cost method.
Inventories increased by $0.7 million to $10.6 million at December
31, 2004 compared to $9.9 million at December 31, 2003.37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables waswere $28.7 million and
$26.5 million at December 31, 2005 and 2004, and 2003respectively, and primarily consistsconsist
of investments in joint ventures accounted for using the equity method of
accounting. Included as investments, notes and other long-term receivables were
investments of $18.7$18.3 million and $18.9$18.7 million as of December 31, 20042005 and 2003,2004,
respectively, relating to a venture with Baltimore Gas & Electric.Electric (a subsidiary
of Constellation Energy). This joint venture designs, constructs, owns,
operates, leases and maintains facilities to produce chilled water for use in
air conditioning commercial properties.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation, including
amortization of assets under capital leases, is recorded principally using the
straight-line method over estimated useful lives ranging from 2of 3 to 40 years.10 years for machinery
and equipment, 3 to 5 years for furniture and fixtures and 25 years for
buildings. Leasehold improvements are amortized over the shorter of the
remaining life of the lease term or the expected service life of the
improvement. As events and circumstances indicate, EMCOR reviewswe 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, 2004,2005, no adjustment for the
impairment of property, plant and equipment carrying value has been required.
Property, plant and equipment in the accompanying Consolidated Balance
Sheets consisted of the following amounts as of December 31, 20042005 and 20032004 (in
thousands):
2005 2004
2003
--------- ----------------- --------
Machinery and equipment ................................................ $ 69,90278,211 $ 78,60969,902
Furniture and fixtures .................................................. 47,256 45,540 40,425
Land, buildings and leasehold improvements .......... 43,934 45,375
41,586
--------- ----------------- --------
169,401 160,817 160,620
Accumulated depreciation and amortization ............ (122,958) (104,349)
(94,464)
--------- ----------------- --------
$ 46,443 $ 56,468
$ 66,156
========= ================= ========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 20042005 and 20032004 was approximately $279.4$283.4 million
and $278.0$279.4 million, respectively, and reflects the excess of cost over fair
market value of net identifiable assets of companies acquired. EMCOR hasWe have adopted
the following accounting standards issued by the Financial Accounting Standards
Board ("FASB"): Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets"
32
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) ("SFAS 142"). SFAS 141 requires that
all business combinations be accounted for using the purchase method of
accounting and that certain intangible assets acquired in a business combination
be recognized as assets apart from goodwill. SFAS 142, which was adopted as of
January 1, 2002, requires goodwill to be tested for impairment at least annually.annually
(each October 1). SFAS 142 requires that goodwill be allocated to the reporting
units. The fair value of the reporting unit is compared to the carrying amount
on an annual basis to determine if there is a potential impairment. If the fair
value of the reporting unit is less than its carrying value of such goodwill, an
impairment loss is recorded to the extent that the fair value of the goodwill
within the reporting unit is less than the carrying value. The fair value of the reporting unitfor
goodwill is determined based on discounted estimated future cash flows.
Furthermore, SFAS 142 requires identifiable intangible assets other than
goodwill to be tested for impairment and be amortized over their useful lives
unless these lives are determined to be indefinite.
The goodwill deductible for income tax purposes was $144.3 million and $157.6
million at December 31, 2004 and 2003, respectively.
The changes in the carrying amount of goodwill during the year ended
December 31, 20042005 were as follows (in thousands):
2004
---------
Balance at beginning of period ..................................................................... $ 277,994279,432
Earn-out payments on prior year acquisitions ..................... 1,568.................... 673
Goodwill recorded for acquisition of businesses ................. 4,506
Goodwill allocated to the sale of assets and other items, net .... (130)... (1,199)
---------
Balance at end of period ................................................................................. $ 279,432283,412
=========
ThereAs of December 31, 2005, there are no material remaining contingent payments related
to acquisitions
asa 2005 acquisition, the impact of December 31, 2004.which if paid is not expected to be
material.
38
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Identifiable intangible assets are comprised of $12.4$12.8 million in market value of customer
backlog, $7.0$7.1 million in market value of customer relationships and $6.4$7.4 million in market value of trademarks
and tradenames, all acquired as a result of acquisitions in 2002.2002 and 2005. The
$12.4$12.8 million attributable to backlog and $7.0$7.1 million attributable to customer
relationships are being amortized on a straight-line method over periods from
one to seven years. The backlog and customer relationships are presented in the
consolidated balance sheets are net of accumulated amortization of $7.0$10.2 million and
$3.6$7.0 million at December 20042005 and 2003,2004, respectively. The $6.4$7.4 million
attributable to trademarks and tradenames is not being amortized as trademarks
and tradenames have indefinite lives, but are subject to an annual review for
impairment in accordance with SFAS 142. See Note C - Acquisitions of Businesses
for additional information. The following table presents the estimated future
amortization expense of identifiable intangible assets as of December 31, 2005
(in thousands):
2005 ................................................................ $ 3,092
2006 ................................................................ 2,740................................................... $3,103
2007 ................................................................ 2,740................................................... 2,746
2008 ................................................................ 2,740................................................... 2,745
2009 ................................................... 1,075
2010 ................................................... 5
Thereafter .......................................................... 1,070
-------
$12,382
=======............................................. 31
------
$9,705
======
INSURANCE LIABILITIES
EMCOR'sOur insurance liabilities are determined actuarially based on claims filed
and an estimate of claims incurred but not yet reported. At December 31, 20042005
and 2003,2004, the estimated current portion of undiscounted insurance liabilities of
$17.6$13.0 million and $16.0$17.6 million, respectively, were included in "Other accrued
expenses and liabilities" in the accompanying Consolidated Balance Sheets. The
estimated non-current portion of the undiscounted insurance liabilities were included
in "Other long-term obligations" and at December 31, 2005 and 2004 were $76.9
million and 2003 were $63.2 million, and $74.6 million, respectively. EMCOR's
insurance liabilities for workers' compensation, auto liability, general
liability and property and casualty claims decreased $9.8 million for the year
ended December 31, 2004 compared to the year ended December 31, 2003 primarily
due to effective risk management and safety programs. For the years ended
December 31, 2003 and 2002 these liabilities increased over the immediately
preceeding year by $8.0 million and $9.0 million, respectively, primarily due to
increased premiums and estimated liabilities related to the increase in revenues
for the corresponding years. The decrease for 2004, and 2003 and 2002 increases
are net of $9.8 million, $4.5 million and $2.3 million, respectively, in
reduction of insurance liabilities previously established for insurance
exposures as a consequence of effective risk management and safety programs.
33
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of EMCOR'sour financial instruments, which include accounts
receivable and other financing commitments, approximate their fair values due
primarily to their short-term maturities.
FOREIGN OPERATIONS
The financial statements and transactions of EMCOR'sour foreign subsidiaries are
maintained in their functional currency and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation."Translation". Translation adjustments have been recorded as
Accumulated"Accumulated other comprehensive income,(loss) income", a separate component of
Stockholders'equity."Stockholders'equity".
INCOME TAXES
EMCOR accountsWe account for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach which requires the
recognition of deferred tax assets and deferred tax liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amount
expected to be realized.
DERIVATIVES AND HEDGING ACTIVITIES
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are recognized in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income as a component of Accumulated
other comprehensive income.
As of December 31, 2005, 2004 and 2003, and 2002, EMCORwe did not have any material
derivative instruments.
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
VALUATION OF STOCK OPTION GRANTS
At December 31, 2004, EMCOR has2005, we had stock-based compensation plans and programs,
which are described more fully in Note I - Stock Options and Stock Plans. EMCOR
appliesWe
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APBOpinion 25") and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized in the
accompanying Consolidated Statements of Operations for the years ended December
31, 2005, 2004 2003 and 20022003 in respect of stock options granted during those years
inasmuch as EMCOR grantswe grant stock options at fair market value. Had compensation cost
for these options been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), EMCOR'sour net income, basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS") would have been reduced from the following
"as reported amounts"reported" amounts to the following "pro forma amounts"forma" amounts for the years ended
December 31, 2005, 2004 and 2003 (in thousands, except per share amounts):
FOR THE YEARS ENDED
------------------------------------------2005 2004 2003
2002
---------- ---------- ----------------- ------- -------
Net income:Income from continuing operations:
As reported ...................................................................... $ 33,207 $ 20,621 $ 62,902.......................................................................... $61,292 $33,282 $20,001
Less: Total stock-based compensation expense determined under fair value based method,
(described in Note I), net of related tax effects ................................................................... 2,112 2,981 1,199
2,690
---------- ---------- ----------------- ------- -------
Pro forma ........................................................................ $ 30,226 $ 19,422 $ 60,212
========== ========== ==========Forma ............................................................................ $59,180 $30,301 $18,802
======= ======= =======
Basic EPS:
As reported ................................................................................................................................................ $ 2.181.97 $ 1.381.09 $ 4.230.67
Pro forma ........................................................................Forma ............................................................................ $ 1.991.90 $ 1.301.00 $ 4.050.63
Diluted EPS:
As reported ................................................................................................................................................ $ 2.131.93 $ 1.331.07 $ 4.070.65
Pro forma ........................................................................Forma ............................................................................ $ 1.941.86 $ 1.260.97 $ 3.900.61
34
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payment"Share-Based Payment" ("123(R)"),
which is a revision of FASB Statement No. 123, Accounting"Accounting for Stock-Based
Compensation.Compensation". Statement 123(R) supersedes APB Opinion No. 25 Accounting for Stock Issued to
Employees, and amends FASB
Statement No. 95, Statement"Statement of Cash Flows.Flows". Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure will no longer be an alternative.
Statement 123(R) must be adopted no later than JulyJanuary 1, 2005.
EMCOR will adopt2006. As of January 1,
2006, we adopted Statement 123(R) on July 1, 2005..
As permitted by Statement 123, EMCORwe currently accountsaccount for share-based
payments to employees using Opinion 25's intrinsic value method and, as such, we
generally recognizesrecognize no compensation cost for employee stock options. We will
utilize the modified prospective method of accounting as permitted under 123(R).
Accordingly, the adoption of Statement 123(R)'s fair value method will have a significantan
impact on our resultfuture results of operations, although it will have no impact on
our overall financial position. EMCOR is currently evaluating the impact that adoption of
Statement 123(R) will have on the results of operations in 2005. The impact of adoption of thethat standard on future operatingreported results
cannotwould be predicted at this
time because it will depend on levels of share-based payments grantedapproximately as described above in the future.disclosure of pro forma net
income and earnings per share. Statement 123(R) also requires the benefitsbenefit of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While EMCORwe cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating
cash flows recognized in prior periods for such excess tax deductions were not
material.
On the first
business day of 2005, options to purchase an aggregate of 290,200 shares of
EMCOR common stock were granted pursuant to the 2003 Management Stock Incentive
Plan, and options to purchase an aggregate of 31,752 shares of EMCOR common
stock were granted pursuant to the 1997 Stock Option Plan for directors.
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS
On March 1, 2002, EMCOR acquired the Acquired Comfort Companies. Accordingly,
the Consolidated Results of Operations for EMCOR for the year ended December 31,
2002 include the results of operations for the Acquired Comfort Companies since
March 1, 2002. The purchase price paid for the Acquired Comfort Companies was
$186.25 million and was comprised of $164.15 million in cash and $22.1 million
by assumption of Comfort's notes payable to former owners of certain of the
Acquired Comfort Companies. In 2002, pursuant to the terms of the acquisition
agreement, an additional $7.1 million of cash purchase price was paid by EMCOR
to Comfort subsequent to the acquisition date due to an increase in net assets
of the Acquired Comfort Companies between the closing date and an agreed upon
pre-closing date. The acquisition was funded with $121.25 million of EMCOR's
funds and $50.0 million from borrowings under EMCOR's revolving credit facility.
The Acquired Comfort Companies, which are based predominantly in the United
States midwest and New Jersey, are active in the installation and maintenance of
mechanical systems and the design and installation of process and fire
protection systems. Services are provided to a wide variety of industries,
including the food processing, pharmaceutical and manufacturing/distribution
sectors. During 2003, EMCOR reduced goodwill by $8.4 million upon receipt of
$5.2 million in settlement of Comfort's obligations to EMCOR under the indemnity
provisions of the acquisition agreement and of $3.2 million of other purchase
price adjustments primarily related to deferred income taxes.
On December 19, 2002, EMCOR acquired CES. CES primarily provides a broad
array of facilities services, including comprehensive facilities management,
operation and maintenance, mobile services, remote monitoring, technical
consulting and diagnostic services, and installation and support for building
systems. The purchase price paid for CES was $178.0 million, of which $156.0
million was paid from borrowings under EMCOR's revolving credit facility and
$22.0 million was paid from EMCOR's funds. During 2003, EMCOR reduced goodwill
by $9.4 million inasmuch as EMCOR attributed $11.2 million of the purchase price
to CES identifiable intangible assets offset by other final purchase price and
allocation adjustments of $1.8 million.
In 2003 and 2002, EMCOR acquired one additional company for which an
aggregate of $8.0 million and $3.4 million was paid, respectively.
EMCOR believes the addition of the companies acquired in 2002, which are
generally in geographic markets where EMCOR did not have significant presence,
furthers EMCOR's goal of market and geographic diversification, expansion of its
facilities services operations and expansion of its services offerings.
Additionally, the acquisitions create more opportunities for EMCOR companies to
collaborate on national facilities services contracts. These factors contributed
to total goodwill, representing the excess purchase price over the fair value of
amounts assigned to the net assets acquired, of $207.9 million in 2003 compared
to total preliminary goodwill of $225.8 million in 2002.
3540
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS
-- (CONTINUED)In November 2005, we acquired one company for which an aggregate of $13.6
million was paid. Goodwill, representing the excess purchase price over the fair
value of amounts assigned to the net assets acquired, was preliminarily valued
at $4.5 million.
We believe the addition of this company furthers our goal of market and
geographic diversification, expansion of our facilities services operations and
expansion of our service offerings. Additionally, this acquisition creates more
opportunities for our subsidiaries to collaborate on national facilities
services contracts. See Note B - Summary of Significant Accounting Policies for
a discussion of goodwill and intangible assets.
During 2005 and 2004, and 2003, EMCORwe paid an aggregate of $1.6$0.7 million and $2.0$1.6 million
in cash, respectively, by reason of earn-out obligations in respect of prior
year acquisitions.
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 1, 2004 sale of assets of EMCOR'sour United Kingdom
Delcommerce equipment rental servicesservice division. ContemporaneouslyConcurrently with the sale, EMCORwe
entered into a long-term agreement to utilize the equipment rental services of
the purchaser, a publicly traded United Kingdom company. The $1.8 million gain
in 2004 on the sale of an equity investment of 2004 was attributable to the August 2004
sale of EMCOR'sour interest in a South African joint venture, the operating results of
which had been reported in the Other international construction and facilities
services segment. There were no other sales of such assets or equity investments
in either of the years ended December 31, 20032005, 2004 and 20022003 other than the disposal of
property, plant and equipment in the normal course of business.
The following tables present unaudited pro forma resultsOn September 30, 2005, we disposed of operations
including all companies acquired during 2002 as if the acquisitions had occurred
at the beginningone of fiscal 2002.our subsidiaries in our United
States facilities services segment. The unaudited pro forma results of operations for companies acquired during 2003 have been excluded due to immateriality. The
unaudited pro forma resultsall periods
presented reflect discontinued operations accounting. Included in the $1.3
million loss from discontinued operations for 2005 is a loss of operations are not necessarily indicative$1.0 million,
net of income tax, by reason of the resultssale of operations had the acquisitions actually occurred atsubsidiary. We will not have any
future involvement with the beginning of
fiscal 2002, nor is it necessarily indicative of future operating results (in
thousands, except per share data):
ADJUSTMENTS TO ARRIVE AT PRO FORMA RESULTS OF OPERATIONS
--------------------------------------------------------
(UNAUDITED)
-------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------------
EMCOR ACQUIRED COMFORT OTHER
AS REPORTED COMPANIES (1) CES (2) ACQUISITIONS (3) PRO FORMA
------------ ---------------- ------------ ---------------- ------------
Revenues .................................. $ 3,968,051 $ 94,084 $ 403,900 $ 15,284 $ 4,481,319
Operating income (loss) ................... $ 115,539 $ (40) $ 11,401 $ 1,401 $ 128,301
Interest (expense) income, net ............ $ (2,099) $ 162 $ (6,509) $ 7 $ (8,439)
Income before income taxes ................ $ 112,326 $ 122 $ 4,892 $ 1,408 $ 118,748
Net income ................................ $ 62,902 $ 68 $ 2,740 $ 788 $ 66,498
Basic earnings per share .................. $ 4.23 $ 0.01 $ 0.18 $ 0.05 $ 4.47
Diluted earnings per share ................ $ 4.07 $ 0.00 $ 0.18 $ 0.05 $ 4.30
- -------------
(1) Adjustments to arrive at pro formasubsidiary. The results of operations for the
year ended
December 31, 2002 represent results from January 1, 2002 throughdiscontinued operation is not presented as it is not material to the
acquisition date of March 1, 2002.
(2) Adjustments to arrive at pro formaconsolidated results of operations for the yearyears ended December 31, 2002 represent results from January 1, 2002 through the
acquisition date of December 19, 2002.
(3) Adjustments to arrive at pro forma results of operations for the year ended
December, 31, 2002 represent results from January 1, 2002 through the date
of each acquisition.
36
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)2005, 2004
and 2003.
NOTE D -- EARNINGS PER SHARE
The following tables summarize EMCOR'sour calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 2005, 2004 2003 and 2002:
INCOME SHARES PER SHARE
2004 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $33,207,000 15,197,905 $2.18
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 368,832
----------- ----------
DILUTED EPS .............................. $33,207,000 15,566,737 $2.132003:
2005 2004 2003
----------- ----------- -----------
NUMERATOR:
Income before discontinued operations .......................................... $61,292,000 $33,282,000 $20,001,000
(Loss) gain from discontinued operations ....................................... (1,250,000) (75,000) 620,000
----------- ----------- -----------
Net income available to common stockholders .................................... $60,042,000 $33,207,000 $20,621,000
=========== =========== ===========
DENOMINATOR:
Weighted average shares outstanding used to compute basic earnings per share ... 31,143,363 30,395,810 29,972,158
Effect of diluted securities - options to purchase common stock ................ 691,518 737,664 951,238
----------- ----------- -----------
Shares used to compute diluted earnings per share .............................. 31,834,881 31,133,474 30,923,396
=========== =========== ===========
Basic earnings (loss) per share:
Continuing operations ........................................................ $ 1.97 $ 1.09 $ 0.67
Discontinued operations ...................................................... (0.04) (0.00) $ 0.02
----------- ----------- -----------
Total ........................................................................ $ 1.93 $ 1.09 $ 0.69
=========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations ........................................................ $ 1.93 $ 1.07 $ 0.65
Discontinued operations ...................................................... (0.04) (0.00) $ 0.02
----------- ----------- -----------
Total ........................................................................ $ 1.89 $ 1.07 $ 0.67
=========== =========== ===========
========== =====
INCOME SHARES PER SHARE
2003 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $20,621,000 14,986,079 $1.38
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 475,619
----------- ----------
DILUTED EPS .............................. $20,621,000 15,461,698 $1.33
=========== ========== =====
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---- ----------- ------------- ---------
BASIC EPS
Income available to common stockholders .. $62,902,000 14,876,906 $4.23
=====
EFFECT OF DILUTIVE SECURITIES:
Options .................................. -- 580,096
----------- ----------
DILUTED EPS .............................. $62,902,000 15,457,002 $4.07
=========== ========== =====
The number of EMCOR's options granted to purchase shares of our common stock, which
options were excluded from the computation of Diluted EPS for the years ended
December 31, 2005, 2004 2003 and 20022003 because they would be antidilutive, were
886,647, 425,499365,940, 1,773,294 and 45,000,850,998, respectively.
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT
2002 CREDIT FACILITY
On September 26, 2002, EMCOR entered into a $275.0 million five yearFACILITIES
Our previous revolving credit agreement (the "Revolving"Old Revolving Credit
Facility") made as of September 26, 2002, as amended, provided for a credit
facility of $350.0 million. Effective October 17, 2005, we replaced the Old
Revolving Credit Facility that was due to expire September 26, 2007 with an
amended and restated $350.0 million revolving credit facility (the "2005
Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased itsThe 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 $350.0 million. Theletters of
credit, which amount compares to $75.0 million under the previous Old Revolving
Credit Facility. The 2005 Revolving Credit Facility which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain of
our direct and indirect subsidiaries, of EMCOR, is secured by substantially all of our
assets and most of the assets of EMCOR and most of itsour 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 0.3%0.25% to 0.5%
of the unused amount, based on certain financial tests. LoansBorrowings under the
2005 Revolving Credit Facility bear interest at (a)(1) a rate which is the prime
commercial lending rate announced by Harris NesbittN.A. from time to time (5.25%(7.25% at
December 31, 2004)2005) plus 0%0.0% to 1.0%0.5%, based on certain financial tests or (b)(2)
United States dollar LIBOR (at December 31, 2004,2005, the rate was 2.42%4.38%) plus 1.5%1.0%
to 2.5%2.25%, based on certain financial tests. The interest rates in effect at
December 31, 20042005 were 5.50%7.25% and 4.17%5.38% for the prime commercial lending rate and
the United States dollar LIBOR, respectively. Letter of credit fees issued under
this facility range from 0.75%1.0% to 2.5%2.25% of the respective face amounts of the
letters of credit issued and are charged based on the type of letter of credit
issued and certain financial tests. In connection with the replacement of the
Old Revolving Credit Facility, $0.4 million of prepaid commitment fees were
recorded as interest expense. As of December 31, 2005 and 2004, and 2003, EMCORwe had
approximately $54.3$53.3 million and $49.2$54.3 million of letters of credit outstanding,
respectively. EMCORThere were no borrowings under the 2005 Revolving Credit Facility
as of December 31, 2005. We had borrowings of $80.0 million and $139.4 million outstanding under
the Old Revolving Credit Facility at December 31, 2004 and 2003, respectively.
37
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CURRENT DEBT -- (CONTINUED)2004.
FOREIGN BORROWINGS
In August 2001, EMCOR'sour Canadian subsidiary, Comstock Canada Ltd., renewed a
credit agreement with a bank providing for an overdraft facility of up to Cdn.
$0.5 million. The facility is secured by a standby letter of credit and provides
for interest at the bank's prime rate, which was 4.25%5.25% at December 31, 2004.2005.
There were no borrowings outstanding under this credit agreement at December 31,
20042005 or 2003.2004.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 20042005 and 20032004 (in thousands):
2005 2004
2003
------ ------------- -------
Capitalized Lease Obligations at weighted average interest rates from 2.0% to 8.25%,7.0%
payable in varying amounts through 2009 ............................................................ $1,6622014 ............................................. $ 3391,570 $ 1,662
Other, at weighted average interest rates of approximately 10.0%9.0%, payable in varying
amounts through 2012 ............................................................................................................................................... 387 476
589
------ ------------- -------
1,957 2,138 928
Less: current maturities ........................................................................................................................................... 551 806
367
------ ------
$1,332------- -------
$ 561
====== ======1,406 $ 1,332
======= =======
CAPITALIZED LEASE OBLIGATIONS
See Note K -- Commitments and Contingencies.
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT -- (CONTINUED)
OTHER LONG-TERM DEBT
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. The aggregate amount of other
long-term debt maturing is approximately $0.1 million in each of the next five
years.
NOTE G -- INCOME TAXES
For 2005, the income tax provision was $9.7 million, compared to an income
tax provision of less than $0.01 million for 2004. Our income tax provision for
2005 was comprised of (a) $27.3 million of income tax provision in respect of
pre-tax earnings of $71.0 million, (b) $5.2 million of income tax provision
related to a valuation allowance recorded to reduce deferred tax assets related
to net operating losses and other temporary differences with respect to our
Canadian construction and facilities services segment, since there is
uncertainty as to whether the segment will have sufficient taxable income in the
future to realize the benefit of such deferred tax assets and (c) the offset of
such income tax provisions by a $22.7 million income tax benefit for income tax
reserves no longer required based on a current analysis of probable exposures.
The income tax benefit of less than $0.05$0.01 million for 2004 was comprised of (a)
$13.9 million of income tax provision on pre-tax earnings of $33.2 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficent future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by $22.1 million of income tax benefits for income tax
reserves no longer required based on current analysis of probable exposures. EMCOR filesThe
provision on income before income taxes for 2005, 2004 and 2003 each was
recorded at an effective income tax rate of approximately 38%, 42% and 42%,
respectively.
We have recorded liabilities for our best estimate of the probable loss on
certain positions taken on our income tax returns. We believe our recorded
income tax liabilities are adequate for all tax years subject to audit based on
our assessment of many factors. Although we believe our recorded income tax
assets and liabilities are reasonable, tax regulations are subject to
interpretation and tax litigation is inherently uncertain; therefore, our
assessments involve judgments about future events and rely on reasonable
estimates and assumptions. These income tax liabilities generally are not
finalized with the individual tax authorities until several years after the end
of the annual period for which income taxes have been estimated. As of December
31, 2005 and 2004, we had income tax reserves of $4.3 million (included in Other
accrued expenses and liabilities) and $24.9 million (included in Other long-term
obligations), respectively. The decrease in income tax reserves relates to the
reversals discussed above.
We file a consolidated federal income tax return including all itsof our U.S.
subsidiaries. At December 31, 2004, EMCOR2005, we had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $2.0$2.3 million, which
expire in the year 2009. In addition, at December 31, 2004, EMCOR2005, we had NOLs for
United Kingdom income tax purposes of approximately $21.8$4.7 million, which have no
expiration date and NOLs for Canadian income tax purposes of approximately $9.0$20.5
million, which expire in 2011.2015. The NOLs are subject to review by taxing
authorities.
38The income tax provision (benefit)in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2005, 2004 and 2003
consisted of the following (in thousands):
2005 2004 2003
-------- -------- --------
Current:
Federal (benefit) provision ...... $ (154) $(16,385) $ 2,682
State and local .................. 5,642 4,988 4,987
Foreign (benefit) provision ...... (752) (2,306) 795
-------- -------- --------
4,736 (13,703) 8,464
-------- -------- --------
Deferred ......................... 5,002 13,704 7,451
-------- -------- --------
$ 9,738 $ 1 $ 15,915
======== ======== ========
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES -- (CONTINUED)
The income tax provision (benefit) in the accompanying Consolidated
Statements of Operations for the years ended December 31, 2004, 2003 and 2002
consisted of the following (in thousands):
2004 2003 2002
-------- ------- -------
Current:
Federal ............................................................................ $(16,431) $ 3,062 $33,762
State and local .................................................................... 4,988 4,987 7,686
Foreign ............................................................................ (2,306) 795 544
-------- ------- -------
(13,749) 8,844 41,992
-------- ------- -------
Deferred ........................................................................... 13,704 7,451 7,432
-------- ------- -------
$ (45) $16,295 $49,424
======== ======= =======
Factors accounting for the variation from U.S. statutory income tax rates
for the years ended December 31, 2005, 2004 2003 and 20022003 were as follows (in
thousands):
2005 2004 2003
2002
-------- ------- --------------- --------
Federal income taxes at the statutory rate ............................................................................... $ 11,607 $12,921 $39,31424,861 $ 11,653 $ 12,541
State and local income taxes, net of federal tax benefits ................................................. 1,655 3,242 3,242 7,742
Foreign income taxes ........................................................................................................................... (1,673) (2,086) (158) 85
Adjustments to valuation allowance for deferred tax assets ............................................... 5,181 7,387 (153) --
Reversal of tax reserves ................................................................................................................... (22,745) (22,083) --
--
Other ......................................................................................................................................................... 2,459 1,888 443
2,283
-------- ------- --------------- --------
$ (45) $16,295 $49,4249,738 $ 1 $ 15,915
======== ======= =============== ========
The components of the net deferred income tax asset are included in
"Prepaid expenses and other" ($22.0 million) and "Other long-term liabilities"
($9.7 million) at December 31, 2005 and "Prepaid expenses and other" ($17.1
million) and "Other long-term liabilities" ($14.6 million) at December 31, 2004 and "Prepaid expenses and other" ($23.0 million)
and "Other assets" ($4.2 million) at December 31, 2003
in the accompanying Consolidated Balance Sheets. The amounts recorded for the
years ended December 31, 20042005 and 20032004 were as follows (in thousands):
2005 2004 2003
-------- --------
Deferred income tax assets:
Net operating loss carryforwards .............................................................................................................................. $ 11,4969,486 $ 7,07911,496
Excess of amounts expensed for financial statement purposes over amounts deducted for income
tax purposes .............................................................................................................................................. 42,497 34,451 46,240
-------- --------
Total deferred income tax assets .............................................................................................................................. 51,983 45,947 53,319
Valuation allowance for deferred tax assets ........................................................................................................ (18,738) (10,859) (1,971)
-------- --------
Net deferred income tax assets .................................................................................................................................. 33,245 35,088 51,348
-------- --------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes ................ (20,931) (32,595) (32,565)
-------- --------
Total deferred income tax liabilities .................................................................................................................... (20,931) (32,595) (32,565)
-------- --------
Net deferred income tax asset .................................................................................................................................... $ 2,49312,314 $ 18,7832,493
======== ========
Income (loss) from continuing operations before income taxes for the years
ended December 31, 2005, 2004 2003
and 20022003 consisted of the following (in
thousands):
2005 2004 2003
2002
--------- --------- ----------------- -------- --------
United States ..................................................................................................... $ 39,60468,398 $ 55,01339,725 $ 108,73354,013
Foreign ................................................................................................................. 2,632 (6,442) (18,097)
3,593
--------- --------- ----------------- -------- --------
$ 33,16271,030 $ 36,91633,283 $ 112,326
========= ========= =========35,916
======== ======== ========
The Company hasWe have not recorded deferred income taxes on the undistributed earnings
of itsour foreign subsidiaries because of management'sour intent to indefinitely reinvest such
earnings. Upon distribution of these earnings in the form of dividends or
otherwise, EMCORwe may be subject to U.S. income taxes and foreign withholding taxes.
It is not practical, however, to estimate the amount of taxes that may be
payable on the eventual remittance of these earnings. 39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)If invested capital was
repatriated to the United States, there could be income taxes payable on any
such amount.
NOTE H -- COMMON STOCK
On January 27, 2006, our stockholders approved an amendment to our
Restated Certificate of Incorporation authorizing an increase in the number of
shares of our common stock from 30 million shares to 80 million shares.
Following this approval, we effected on February 10, 2006 a 2-for-1 stock split
in the form of a stock distribution of one common share for each common share
owned, payable to shareholders of record on January 30, 2006. As of December 31,
2005 and 2004, 31,103,766 and 2003, 15,236,049 and 15,032,19330,472,098 shares of EMCORour common stock were
outstanding, respectively. Pursuant to a program authorized by theour Board of
Directors, EMCORwe purchased 1,131,9852,263,970 shares of itsour common stock prior to January 1,
2000. The aggregate amount of $16.8 million paid for those shares
purchased prior to January 1, 2000 has been
classified as "Treasury stock, at cost" in the Consolidated Balance Sheet at
December 31, 2004. EMCOR2005, less the value of shares reissued pursuant to the exercise of
stock options or issuance of restricted stock units as described in Note I -
Stock Options and Stock Plans. Our management is authorized to expend up to an
additional $3.2 million to purchase EMCOR'sour common stock under this program.
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS
EMCOR hasWe have stock option plans and programs under which employees may receive
stock options, and certain executives have a stock bonus plan for executivesand a long-term
incentive plan pursuant to which the
executivesthey receive restricted stock units. EMCOR also
has stock option plans under which non-employee directors may receive stock
options. A summary of the general terms of the grants under stock option plans
and programs and stock plans are as follows:follows (adjusted for the February 10, 2006
2-for-1 stock split):
AUTHORIZED EXERCISE PRICE/
SHARES VESTING EXPIRATION VALUATION DATE
---------- ------------------- ----------------------------------------- --------------- -----------------
1994 Management Stock Option Plan 1,000,0002,000,000 Generally, 331/33 1/3% Ten years from Fair market value
(the "1994 Plan") on each anniversary grant date of common stock
of grant date on grant date
1995 Non-Employee Directors' Non- 200,000400,000 100% on grant date Ten years from Fair market value
QualifiedNon-Qualified Stock Option Plan grant date of common stock
(the "1995 Plan") on grant date
1997 Non-Employee Directors' Non- 300,000600,000 (1) Five years from Fair market value
QualifiedNon-Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock on grant date (3)
Option Plan")
1997 Stock Plan for Directors (the 150,000300,000 (2) Five years from Fair market value
(the "1997 Directors' Stock Plan") grant date of common stock
on grant date (3)
2003 Non-Employee Directors' 120,000240,000 100% on grant date Ten years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "2003 Directors' Stock Option Plan") on grant date
2003 Management Stock 330,000660,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2003 Management Plan") on grant date
Executive Stock Bonus Plan 220,000440,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
2005 Management Stock 900,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2005 Management Plan") on grant date
2005 Stock Plan for Directors 52,000 50% on grant or award Ten years from Fair market value
(the "2005 Directors' Stock Plan") date, 50% on the first grant date of common stock
anniversary of grant date on grant date
Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value
100% on first grant date of common stock
anniversary of grant on grant date
date or 25% on grant and
25% on each anniversary
of grant date
- ----------------------
(1) Until July 2000, non-employee directors could elect to receive one-third,
two-thirds or all of their retainer for a calendar year in the form of
stock options. Since then such directors have received and will receive all of their
retainer in the form of stock options. All options under this plan become
exercisable quarterly over the calendar year in which they are granted. In
addition, each director will receivereceived additional stock options equal to the
product of 0.5 times the amount of stock options otherwise issued.
(2) The plan terminated during 2003.
(3) Generally, the grant date was the first business day of a calendar year.
4045
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes EMCOR'sour stock option and stock bonus plan
activity since December 31, 2001:2002:
1997 DIRECTORS' STOCK
1994 PLAN 1995 PLAN OPTION PLAN
-------------------------- -------------------------- ---------------------------------------------- ------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- ---------------- -------- -------- ---------
Balance, December 31, 2001 ............ 584,401 $ 9.90 103,500 $ 23.39 139,885 $ 19.642002 ......... 1,158,402 $5.00 222,000 $15.05 265,044 $11.52
Granted ....................................................... -- -- 18,0006,000 $24.08 39,924 $26.82
Forfeited ........................ -- -- -- -- (12,148) $10.00
Exercised ........................ (64,000) $5.30 (30,000) $12.83 (104,964) $ 54.87 16,933 $ 46.818.84
--------- ------- --------
Balance, December 31, 2003 ......... 1,094,402 $4.99 198,000 $15.66 187,856 $16.37
Granted .......................... -- -- -- -- 51,300 $21.92
Forfeited ........................... (3,000) $ 19.75........................ (6,000) $5.31 -- -- -- --
Exercised ........................... (57,200)........................ (246,166) $3.17 -- -- (60,816) $ 14.46 (10,500) $ 6.34 (24,296) $ 20.008.78
--------- ------- -------- ------- -------
Balance, December 31, 2002 ............ 524,201 $ 9.35 111,000 $ 30.10 132,522 $ 23.042004 ......... 842,236 $5.52 198,000 $15.66 178,340 $20.55
Granted ............................. -- -- 3,000 $ 48.15 19,962 $ 53.63
Forfeited ..................................................... -- -- -- -- (6,074) $ 20.00
Exercised ........................... (32,000) $ 10.59 (15,000) $ 25.66 (52,482) $ 17.68
-------- ------- -------
Balance, December 31, 2003 ............ 492,201 $ 9.27 99,000 $ 31.32 93,928 $ 32.73
Granted .............................63,504 $22.47
Forfeited ........................ -- -- -- -- 25,650 $ 43.83
Forfeited ........................... (3,000) $ 10.62 -- -- -- --
Exercised ........................... (123,083)........................ (515,234) $3.09 (24,000) $ 6.33 -- -- (30,408) $ 17.568.88 (53,250) $12.72
--------- ------- -------- ------- -------
Balance, December 31, 2004 ............ 366,118 $ 10.25 99,000 $ 31.32 89,170 $ 41.10
========2005 ......... 327,002 $9.34 174,000 $16.60 188,594 $23.41
========= ======= ===============
1997 DIRECTORS' OTHER STOCK
STOCK PLAN ESBP OPTION GRANTS
-------------------------- -------------------------- ---------------------------------------------- ------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- --------- -------- --------- --------- ---------
Balance, December 31, 2001 ............ 330 $ 19.63 56,707 $ 21.62 652,434 $ 26.102002 ......... 660 $9.82 186,552 $15.66 1,479,934 $15.72
Granted ....................................................... -- -- 36,569 $ 46.35 157,700 $ 47.0074,660 $19.56 286,670 $27.32
Forfeited ........................... -- -- -- -- (2,000) $ 16.50
Exercised ........................... -- -- -- -- (13,167) $ 19.52
-------- ------- ---------
Balance, December 31, 2002 ............ 330 $ 19.63 93,276 $ 31.32 794,967 $ 30.38
Granted ............................. -- -- 37,330 $ 39.12 143,335 $ 54.64
Forfeited ................................................... -- -- -- -- -- --
Exercised ........................... (330) $ 19.63........................ (660) $9.82 -- -- (13,834)(27,668) $ 19.529.76
----- -------- ------- ---------
Balance, December 31, 2003 ..................... -- -- 130,606 $ 33.55 924,468 $ 34.30261,212 $16.78 1,738,936 $17.72
Granted ....................................................... -- -- 42,638 $ 38.35 222,398 $ 43.1485,276 $19.18 444,796 $21.57
Forfeited ................................................... -- -- -- -- (5,000) $ 31.63(10,000) $15.82
Exercised ................................................... -- -- (56,707)(113,414) $10.81 (36,000) $ 21.62 (18,000) $ 16.248.12
----- -------- ------- ---------
Balance, December 31, 2004 ..................... -- -- 116,537 $ 41.11 1,123,866 $ 36.35
======== ======= =========
2003 DIRECTORS'
STOCK OPTION PLAN 2003 MANAGEMENT PLAN
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
-------- --------- -------- ---------
Balance, December 31, 2003 ............ 30,000 $ 52.78 10,000 $ 41.61233,074 $20.56 2,137,732 $18.70
Granted ............................. 30,000 $ 43.96.......................... -- -- 31,276 $20.49 59,000 $24.04
Forfeited ................................................... -- -- -- -- -- --
Exercised ................................................... -- -- -- --(98,138) $22.20 (18,000) $12.75
----- -------- ----------------
Balance, December 31, 2004 ............ 60,000 $ 48.37 10,000 $ 41.612005 ......... -- -- 166,212 $19.57 2,178,732 $18.89
===== ======== ================
4146
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
2003 DIRECTORS'
STOCK OPTION PLAN 2003 MANAGEMENT PLAN
------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Balance, December 31, 2003 ......... 60,000 $26.39 20,000 $20.81
Granted .......................... 60,000 $21.98 -- --
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2004 ......... 120,000 $24.19 20,000 $20.81
Granted .......................... 60,000 $25.08 580,400 $22.54
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2005 ......... 180,000 $24.48 600,400 $22.48
======= =======
2005 DIRECTORS'
STOCK PLAN 2005 MANAGEMENT PLAN
------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Balance, December 31, 2004 ......... -- -- -- --
Granted .......................... -- -- -- --
Forfeited ........................ -- -- -- --
Exercised ........................ -- -- -- --
------- -------
Balance, December 31, 2005 ......... -- -- -- --
======= =======
At December 31, 2005, 2004 and 2003 approximately 2,866,000, 2,920,000 and
2002 approximately 1,460,000, 1,454,000 and
1,542,000 stock2,908,000 options were exercisable.exercisable, respectively. The weighted average exercise
price of exercisable options at December 31, 2005, 2004 2003 and 20022003 was
approximately $28.34, $23.77$17.83, $14.17 and $22.50,$11.89, respectively.
The following table summarizes information about EMCOR'sour stock options at
December 31, 2004:2005 (adjusted for the February 10, 2006 2-for-1 stock split):
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------------------------------------------------- -------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ------- ----------------
$4.75-$5.13 235,117 0.26 7.16 - $10.00 919,668 3.02 Years $4.88 235,117 $4.88
$14.31-$20.00 500,334 3.93 9.46 919,668 $ 9.46
$10.97 - $13.57 212,000 4.69 Years $18.91 500,334 $18.91
$21.62-$22.13 21,000 4.74$12.51 212,000 $12.51
$18.93 - $21.15 646,412 6.77 Years $22.08 21,000 $22.08
$25.44-$27.13 111,625 4.75$20.39 599,746 $20.46
$21.92 - $23.18 1,462,400 7.48 Years $25.67 111,625 $25.67
$38.68-$46.35 652,348 7.60$22.47 689,610 $22.57
$23.68 - $27.75 574,460 7.14 Years $43.54 434,961 $43.58
$48.15-$55.49 227,730 7.57 Years $54.23 157,067 $54.01$26.58 444,806 $26.80
The weighted average fair value of stock options granted during 2005, 2004 and
2003 were $8.02, $6.21 and 2002 were $12.41, $14.57 and $26.96,$7.29, respectively.
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The pro forma effect on EMCOR'sour net income, Basic EPS and Diluted EPS, had
compensation costs been determined consistent with the recognition of
compensation costs provisions of SFAS 123, is presented in Note B --- Summary of
Significant Accounting Policies. The associated pro forma compensation costs
related to the provisions of SFAS 123, net of tax effects, were $2.1 million,
$3.0 million $1.2 million and $2.7$1.2 million for the years ending December 31, 2005, 2004 2003 and
2002,2003, respectively. The pro forma effect was calculated using an estimated fair
value of each option grant on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2005, 2004 2003 and 2002:2003: risk-free interest rates of 1.9% to 4.0%4.3% (representing the
risk-free interest rate at the date of the grant); expected dividend yields of
zero percent; expected terms of 3.6 to 4.76.4 years; and average expected
volatility of 27.2%38.29%, 30.3%27.2% and 67.2%30.3% for options granted during 2005, 2004 2003 and
2002,2003, respectively.
During 2004, 227,927455,854 of out-of-the-money stock options were vested in full
in anticipation of a change in accounting rules requiring the expensing of stock
options beginning in July 2005as of January 1, 2006 (see New Accounting Pronouncements in
Note B - Summary of Significant Accounting Policies).
This vesting resulted in no impactNOTE J -- RETIREMENT PLANS
Our United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees (the "UK Plan"). The benefits under the UK Plan are based
on wages and years of service with the 2004 consolidated results of operations as EMCOR accounts for stock
options in accordance with APB 25, and such stock options were outsubsidiary. Our policy is to fund the
minimum amount required by law. The measurement date of the money.UK Plan is December
31 of each year.
The vesting did increasechange in benefit obligations and assets of the stock-based compensation expense inUK Plan for the pro forma
valuationyears
ended December 31, 2005 and 2004 consisted of stock options, as prepared in accordance with SFAS 123, by $1.7
million after tax (see Valuation of Stock Option Grants in Note B - Summary of
Significant Accounting Policies).
42the following components (in
thousands):
2005 2004
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year ......................... $ 192,360 $ 159,802
Service cost .................................................... 3,896 4,906
Interest cost ................................................... 9,701 8,891
Plan participants' contributions ................................ 3,226 3,656
Actuarial loss .................................................. 24,314 6,988
Benefits paid ................................................... (5,313) (4,674)
Foreign currency exchange rate changes .......................... (21,724) 12,791
--------- ---------
Benefit obligation at end of year ............................... $ 206,460 $ 192,360
========= =========
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year .................. $ 150,533 $ 121,262
Actual return on plan assets .................................... 25,365 13,050
Employer contributions .......................................... 6,933 7,329
Plan participants' contributions ................................ 3,226 3,656
Benefits paid ................................................... (5,313) (4,674)
Foreign currency exchange rate changes .......................... (17,114) 9,910
--------- ---------
Fair value of plan assets at end of year ........................ $ 163,630 $ 150,533
--------- ---------
Funded status ................................................... $ (42,830) $ (41,827)
Unrecognized transition amount .................................. -- --
Unrecognized prior service cost ................................. 67 165
Unrecognized losses ............................................. 40,984 37,787
--------- ---------
Net amount recognized ........................................... $ (1,779) $ (3,875)
========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued benefit liability ....................................... $ (18,743) $ (9,042)
Intangible asset ................................................ 67 165
Accumulated other comprehensive loss ............................ 16,897 5,002
--------- ---------
Net amount recognized ........................................... $ (1,779) $ (3,875)
========= =========
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS EMCOR's United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees. The benefits under the plan are based on wages and years
of service with the subsidiary. EMCOR's policy is to fund the minimum amount
required by law. The measurement date of the defined benefit pension plan is
December 31 of each year.
The change in benefit obligations and plan assets for the years ended
December 31, 2004 and 2003 consisted of the following components (in thousands):
2004 2003
--------- ---------
CHANGE IN PENSION BENEFIT OBLIGATION
Benefit obligation at beginning of year .............................................. $ 159,802 $ 136,181
Service cost ......................................................................... 4,906 4,837
Interest cost ........................................................................ 8,891 8,183
Plan participants' contributions ..................................................... 3,656 3,506
Actuarial loss (gain) ................................................................ 6,988 (4,595)
Benefits paid ........................................................................ (4,674) (3,951)
Foreign currency exchange rate changes ............................................... 12,798 15,662
--------- ---------
Benefit obligation at end of year .................................................... $ 192,367 $ 159,823
--------- ---------
CHANGE IN PENSION PLAN ASSETS
Fair value of plan assets at beginning of year ....................................... $ 121,262 $ 91,592
Actual return on plan assets ......................................................... 13,050 12,407
Employer contributions ............................................................... 7,329 6,026
Plan participants' contributions ..................................................... 3,656 3,506
Benefits paid ........................................................................ (4,674) (3,951)
Foreign currency exchange rate changes ............................................... 9,910 11,682
--------- ---------
Fair values of plan assets at end of year ............................................ $ 150,533 $ 121,262
--------- ---------
Funded status ........................................................................ $ (41,834) $ (38,561)
Unrecognized transition amount ....................................................... -- (61)
Unrecognized prior service cost ...................................................... 165 238
Unrecognized losses .................................................................. 37,794 33,759
--------- ---------
Net amount recognized ................................................................ $ (3,875) $ (4,625)
========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED FINANCIAL STATEMENTS
Accrued benefit liability ............................................................ $ (9,042) $ (13,484)
Intangible asset ..................................................................... 165 238
Accumulated other comprehensive income ............................................... 5,002 8,621
--------- ---------
Net amount recognized ................................................................ $ (3,875) $ (4,625)
========= =========
-- (CONTINUED)
The assumptions used as of December 31, 2005, 2004 2003 and 20022003 in determining
pension cost and liability shown above were as follows:
2004 2003 2002
------ ------ ------
Discount rate ..................................... 5.4% 5.5% 6.0%
Annual rate of salary provision ................... 3.1% 3.1% 4.0%
Annual rate of return on plan assets ..............
2005 2004 2003
---- ---- ----
Discount rate ......................................................................... 4.8% 5.4% 5.5%
Annual rate of salary provision ....................................................... 3.1% 3.1% 3.1%
Annual rate of return on plan assets .................................................. 6.3% 6.8% 7.0%
7.0%
The annual rate of return on plan assets is based on the United Kingdom
Government Bond yield, plus an estimated margin, at each year's measurement
date. This annual rate approximates the historical annual return on plan assets
and considers the expected asset allocation between equity and debt securities.
For measurement purposes, thea 2.5% annual ratesrate of increase in the per capita costinflation of covered pension
benefits was assumed for 20042005 and 2003 were 2.5% and 2.6%,
respectively.
43
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)2004.
The components of net periodic pension benefit cost for the years ended
December 31, 2005, 2004 2003 and 20022003 were as follows (in thousands):
2005 2004 2003
2002
------- ------- --------------- -------- --------
Service cost .................................................................................................................................. $ 3,896 $ 4,906 $ 4,837
$ 7,240
Interest cost ................................................................................................................................ 9,701 8,891 8,183 7,532
Expected return on plan assets .............................................................................................. (9,890) (8,933) (6,708) (7,144)
Net amortization of prior service cost and actuarial loss/loss (gain) .......................... 85 19 (5) (5)
Amortization of unrecognized loss ........................................................................................ 1,351 1,402 2,280
765
------- ------- --------------- -------- --------
Net periodic pension benefit cost ........................................................................................ $ 5,143 $ 6,285 $ 8,587
$ 8,388
======= ======= =============== ======== ========
UK PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 20042005 were as follows:
% OF PLAN ASSETS
-------------------------
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 2004 ALLOCATION
- -------------- ------------ -----------
Equity securities ........................ 65.1% 65.0%
Debt securities .......................... 33.4 35.0
Other .................................... 1.5 --
----- -----
Total .................................... 100.0% 100.0%
===== =====
TARGET
DECEMBER 31, ASSET
ASSET CATEGORY 2005 ALLOCATION
- ------------- ------------ ----------
Equity securities ............................................................... 65.2% 70.0%
Debt securities ................................................................. 31.7 30.0
Other ........................................................................... 3.1 --
------------ ----------
Total ........................................................................... 100.0% 100.0%
============ ==========
Plan assets of EMCOR's United Kingdom subsidiary pension planour 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
ensure that obligations to beneficiaries of the plan are met 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
EMCOR'SOur United Kingdom subsidiary expects to contribute $10.7$9.5 million to its pension planUK
Plan in 2005.2006.
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
ESTIMATED FUTURE BENEFIT PAYMENTS
The following estimated benefit payments, which reflect expected future
service, as appropriate, are expected to be paid in the following years (in
thousands):
PENSION
BENEFITS
----------------
2005 ........................................................--------
2006 ............................................. $ 5,040
2006 ........................................................ 5,4985,900
2007 ........................................................ 5,957............................................. 6,354
2008 ........................................................ 6,415............................................. 6,807
2009 ........................................................ 6,873............................................. 7,261
2010 ............................................. 7,715
Succeeding five years ....................................... 41,238
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)............................ 38,575
The accumulated benefit obligation for the defined benefit pension planUK Plan for the years ended
December 31, 2005 and 2004 was $182.4 million and 2003 was $159.6 million, and $134.7
million, respectively.
EMCOR contributesWe contribute to various union pension funds based upon wages paid to itsour
union employees. Such contributions approximated $133.5 million, $133.9 million
$134.8 million
and $101.2$134.8 million for the years ended December 31, 2005, 2004 and 2003,
and 2002,
respectively.
EMCOR hasWe have retirement and savings plans that cover U.S. eligible non-union
employees. Contributions to these profit sharing and voluntary savings planplans are
based on a percentage of the employee's base compensation. The expenseexpenses
recognized for the years ended December 31, 2005, 2004 and 2003 and 2002 for this plan
wasthese plans
were $6.2 million, $3.8$6.2 million and $3.5$3.8 million, respectively. The increase in
the 2004 and 2003 expense compared to the respective prior years2003 is primarily due to an increase in the number
of participants in these plans.
EMCOR'sOur United Kingdom subsidiary has a defined contribution retirement plan
that began in 2002. The expense recognized for the years ended December 31,
2005, 2004 and 2003 and 2002 was $1.7 million, $1.2 million and $0.7 million,
and $0.3 million
respectively.
EMCOR'sOur Canadian subsidiary has a defined contribution retirement plan. The
expense recognized for the years ended December 31, 2005, 2004 and 2003 and 2002 was $0.7
million, $0.6 million $0.4 million and $0.3$0.4 million, respectively.
NOTE K -- COMMITMENTS AND CONTINGENCIES
EMCOR and its subsidiariesWe lease land, buildings and equipment under various leases. The leases
frequently include renewal options and require EMCORus 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, 2004,2005, were as follows (in
thousands):
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
-------- --------- --------
2005 ......................................... $ 676 $ 39,568 $ 404
2006 ......................................... 418 32,151 22
2007 ......................................... 355 25,249 --
2008 ......................................... 285 19,249 --
2009 ......................................... 152 13,550 --
Thereafter ................................... -- 35,809 --
-------- -------- --------
Total minimum lease payment .................. 1,886 $165,576 $ 426
CAPITAL OPERATING SUBLEASE
LEASE LEASE INCOME
--------- ---------- -----------
2006 ............................................. $ 505 $ 40,112 $ 10
2007 ............................................. 459 33,754 --
2008 ............................................. 392 26,837 --
2009 ............................................. 256 19,025 --
2010 ............................................. 52 12,906 --
Thereafter ....................................... 21 28,603 --
-------- ---------- -----------
Total minimum lease payment ...................... 1,685 $ 161,237 $ 10
========== ===========
Amounts representing interest .................... (115)
--------
Present value of net minimum lease payments ...... $ 1,570
========
========
Amounts representing interest ................ (224)
--------
Present value of net minimum lease payments .. $ 1,662
========
Rent expense for operating leases and other rental items for the years
ended December 31, 2005, 2004 and 2003 and 2002 was $61.5 million, $54.9 million $52.9 million and
$36.5$52.9 million, respectively. Rent expense for the years ended December 31, 2005,
2004 2003
and 20022003 included sublease rental income of $0.5 million, $0.7 million and
$1.1 million, and $0.8
million, respectively.
Certain subsidiaries of50
EMCOR lease real estate from employees of such
subsidiaries.
EMCOR hasGROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
We have agreements with itsour executive officers and certain other key
management personnel providing for severance benefits to such employees upon
termination of their employment under certain circumstances.
EMCOR isWe 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 EMCORour payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain EMCORof our employees, bonds are sometimes provided
to secure such obligations for wages and benefits payable to or for such employees.
EMCOROur bonding requirements typically increase as the amount of public sector work
increases. As of December 31, 2004,2005, sureties had issued bonds for theour account of EMCOR in
the aggregate amount of approximately $1.6$1.5 billion. The bonds are issued by EMCOR'sour
sureties in return for a premium,premiums, which variesvary depending on the size and type of
the bonds.bond. The largest individualsingle bond outstanding for our account is approximately
$170.0 million. EMCOR hasWe have agreed to indemnify the sureties for amounts, if any,
payments madepaid by them in respect of bonds issued on EMCOR'sour behalf.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
EMCOR isWe 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. EMCOR'sOur practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, when remediation is required as part of itsour contract performance, EMCOR
believes it complieswe
believe we comply with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
A subsidiaryOne of EMCORour subsidiaries has guaranteed indebtedness of a venture in which
it has a 40% interest; the other venture partner, Baltimore Gas and Electric (a
subsidiary of Constellation Energy), has a 60% interest. The venture designs,
constructs, owns, operates, leases and maintains facilities to produce chilled
water for sale to customers for use in air conditioning private and publiccommercial properties.
These guarantees are not expected to have a material adverse affect on EMCOR'sour
financial position or results of operations. Each of the venturers is jointly
and severally liable, in the event of default, for the venture's $25.0 million
borrowing due December 2031. During September 2002, each venture partner
contributed equity to the venture, of which EMCOR'sour contribution was $14.0 million.
We presently employ approximately 26,000 people, approximately 69% of whom
are represented by various unions pursuant to more than 475 collective
bargaining agreements between our individual subsidiaries and local unions. We
believe that our employee relations are generally good. Only two of these
collective bargaining agreements are national or regional in scope.
Restructuring expenses, primarily relating to employee severance
obligations, were $1.8 million and $8.3 million for 2004. Approximately $7.0 million2005 and 2004, respectively.
As of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates2005, the balance of these obligations was $0.2 million,
which we anticipate paying substantially all of the remaining obligations in 2005.during 2006. There were no restructuring expenses for
the year ended December 31, 2003 or 2002.2003.
NOTE L -- ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest and income
taxes and non-cash financing activities for the years ended December 31, 2005, 2004 2003 and 20022003 (in thousands):
2004 2003 2002
------- ------- -------
Cash paid during the year for:
Interest ..................................... $ 7,486 $ 7,251 $ 7,042
Income taxes ................................. $ 1,759 $17,910 $45,785
Non-cash financing activities:
Borrowings under capital lease obligations ... $ 1,781 $ 314 $ 52
Debt assumed in acquisition ..................
2005 2004 2003
-------- -------- --------
Cash paid during the year for:
Interest ....................................... $ 8,573 $ 7,486 $ 7,251
Income taxes ................................... $ 9,858 $ 1,759 $ 17,910
Non-cash financing activities:
Borrowings under capital lease obligations ..... $ 412 $ 1,781 $ 314
Capital lease obligations terminated ........... $ (322) $ -- $ --
$22,115
51
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION
EMCOR hasWe have the following reportable segments: United States electrical
construction and facilities services,services; United States mechanical construction and
facilities services,services; United States facilities services,services; Canada construction and
facilities services,services; United Kingdom construction and facilities servicesservices; and
Other international construction and facilities services. The segment "United
States facilities services" principally consists of those operations which
primarily provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR'sour operations outside of the
United States, Canada and the United Kingdom (primarily in South Africa, the
Middle East and Western Europe) performing electrical construction, mechanical
construction and facilities services. EMCOR'sOur interest in the South African joint
venture was sold in August 2004. The following tables present information about
industry segments and geographic areas for the years ended December 31, 2005,
2004 2003 and 2002.
46
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
The tables also present unaudited pro forma revenues and operating income as
if2003. Insignificant reclassifications of certain business units among
the acquisitions had occurred at the beginning of fiscal 2002. The unaudited
pro forma revenues and operating income are not necessarily indicative of future
operating resultssegments have been made for all periods presented due to changes in our
internal reporting structure (in millions):
PRO FORMA
-----------
AS REPORTED
(UNAUDITED)
---------------------------------------- ---------------------------------------------
2005 2004 2003 2002 2002
---------- ---------- ----------
----------
Revenues from unrelated entities:
United States electrical construction and facilities services .............. $ 1,224.6 $ 1,235.3 $ 1,239.5 $ 1,152.4 $ 1,154.8
United States mechanical construction and facilities services .............. 1,718.5 1,825.7 1,715.8 1,715.4 1,846.5
United States facilities services .................................... 727.6 661.2 250.0 629.8
----------.................................. 756.2 697.7 627.0
---------- ---------- ----------
Total United States operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1..................................... 3,699.3 3,758.7 3,582.3
Canada construction and facilities services .................................................. 342.1 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................................. 673.1 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. --........... -- -- --
---------- ---------- ----------
----------
Total worldwide operations .................................................................................... $ 4,747.94,714.5 $ 4,534.64,718.0 $ 3,968.0 $ 4,481.3
==========4,500.4
========== ========== ==========
Total revenues:
United States electrical construction and facilities services .............. $ 1,236.7 $ 1,275.8 $ 1,264.6 $ 1,191.3 $ 1,193.6
United States mechanical construction and facilities services .............. 1,728.8 1,839.4 1,733.3 1,719.3 1,850.4
United States facilities services .................................... 728.9 665.4 252.0 631.9.................................. 758.6 699.0 631.2
Less intersegment revenues .................................................................................... (24.8) (55.5) (46.8) (44.8) (44.8)
----------
---------- ---------- ----------
Total United StatesState operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1...................................... 3,699.3 3,758.7 3,582.3
Canada construction and facilities services .................................................. 342.1 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................................. 673.1 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. --........... -- -- --
---------- ---------- ----------
----------
Total worldwide operations .................................................................................... $ 4,747.94,714.5 $ 4,534.64,718.0 $ 3,968.0 $ 4,481.3
==========4,500.4
========== ========== ==========
Operating income (loss):
United States electrical construction and facilities services .............. $ 79.7 $ 81.2 $ 57.8 $ 79.3 $ 79.6
United States mechanical construction and facilities services ........ (1.4)...... 22.0 (1.2) 25.6 59.9 62.4
United States facilities services .................................... 14.2 18.4 4.4 14.4
----------.................................. 24.6 14.1 17.4
---------- ---------- ----------
Total United States operations ....................................... 94.0 101.8 143.6 156.4..................................... 126.3 94.1 100.8
Canada construction and facilities services .................................................. (7.9) (11.9) 2.0 3.3 3.3
United Kingdom construction and facilities services .................................. 7.5 0.0 (22.4) 0.0 0.0
Other international construction and facilities services ........................ 0.0 0.5 0.3
(0.1) (0.1)
Corporate administration ........................................................................................ (43.0) (35.0) (34.7)
(31.3) (31.3)
Restructuring expenses ............................................................................................ (1.8) (8.3) 0.0 0.0 0.0--
Gain on sale of assets ............................................................................................ -- 2.8 0.0 0.0 0.0
------------
---------- ---------- ----------
Total worldwide operations ........................................... 42.1 47.0 115.5 128.3......................................... 81.1 42.2 46.0
Other corporate items:
Interest expense ........................................................................................................ (8.3) (8.9) (8.9)
(4.1) (10.7)
Interest income .......................................................................................................... 2.7 1.9 0.7 2.0 2.2
Gain on sale of equity investment ...................................................................... -- 1.8 0.0 0.0 0.0--
Minority interest ...................................................................................................... (4.5) (3.8) (1.9) (1.1) (1.1)
Income before taxes .................................................................................................. $ 33.271.0 $ 36.933.3 $ 112.3 $ 118.735.9
4752
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2005 2004 2003
2002
--------- --------- --------------- -------- --------
Capital expenditures:
United States electrical construction and facilities services .......................................... $ 2.4 $ 1.7 $ 4.6 $ 3.0
United States mechanical construction and facilities services .......................................... 2.5 2.9 4.5 5.1
United States facilities services .................................................................................................. 3.9 6.1 3.4
1.2
--------- --------- --------------- -------- --------
Total United States operations ........................................................................................................ 8.8 10.7 12.5
9.3
Canada construction and facilities services .................................................................................. 1.3 0.8 0.5 0.3
United Kingdom construction and facilities services .............................................................. 0.3 3.7 4.0 4.2
Other international construction and facilities services .................................................... -- -- --
Corporate administration .................................................................................................................... 2.0 0.9 0.9
1.8
--------- --------- --------------- -------- --------
Total worldwide operations ................................................................................................................ $ 12.4 $ 16.1 $ 17.9
$ 15.6
========= ========= =============== ======== ========
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services .......................................... $ 3.0 $ 3.3 $ 3.4 $ 3.5
United States mechanical construction and facilities services .......................................... 5.7 5.9 6.5 6.9
United States facilities services .................................................................................................. 5.7 5.8 6.4
1.9
--------- --------- --------------- -------- --------
Total United States operations ........................................................................................................ 14.4 15.0 16.3
12.3
Canada construction and facilities services .................................................................................. 0.9 0.9 0.7 0.6
United Kingdom construction and facilities services .............................................................. 2.8 4.3 4.0 2.4
Other international construction and facilities services .................................................... -- -- --
Corporate administration .................................................................................................................... 1.3 0.7 0.7
0.1
--------- --------- --------------- -------- --------
Total worldwide operations .................................................................................................................. $ 19.4 $ 20.9 $ 21.7
$ 15.4
========= ========= =============== ======== ========
2005 2004
2003
--------- ----------------- --------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services .......................................... $ 57.464.2 $ 60.457.4
United States mechanical construction and facilities services .......................................... 70.6 128.3 135.5
United States facilities services .................................................................................................. 10.2 11.4
9.4
--------- ----------------- --------
Total United States operations ........................................................................................................ 145.0 197.1 205.3
Canada construction and facilities services .................................................................................. 21.7 19.9 17.8
United Kingdom construction and facilities services .............................................................. 18.9 23.7 26.3
Other international construction and facilities services .................................................... -- --
--------- ----------------- --------
Total worldwide operations ................................................................................................................ $ 185.6 $ 240.7
$ 249.4
========= ================= ========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services .......................................... $ 129.6120.2 $ 152.7129.6
United States mechanical construction and facilities services .......................................... 136.2 131.1 126.6
United States facilities services .................................................................................................. 11.1 6.5
6.7
--------- ----------------- --------
Total United States operations ........................................................................................................ 267.5 267.2 286.0
Canada construction and facilities services .................................................................................. 13.1 10.1 9.5
United Kingdom construction and facilities services .............................................................. 49.6 82.4 49.7
Other international construction and facilities services .................................................... -- --
--------- ----------------- --------
Total worldwide operations ................................................................................................................ $ 330.2 $ 359.7
$ 345.2
========= ================= ========
4853
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2005 2004
2003
---------- ------------------ --------
Long-lived assets:
United States electrical construction and facilities services .......................................... $ 12.111.4 $ 13.712.1
United States mechanical construction and facilities services .......................................... 184.6 187.7 191.5
United States facilities services .................................................................................................. 136.4 140.2
---------- ----------136.4
-------- --------
Total United States operations ........................................................................................................ 332.4 336.2 345.4
Canada construction and facilities services .................................................................................. 4.8 5.7 3.9
United Kingdom construction and facilities services .............................................................. 7.1 10.6 14.9
Other international construction and facilities services .................................................... -- --
Corporate administration .................................................................................................................... 2.5 2.2
2.2
---------- ------------------ --------
Total worldwide operations ................................................................................................................ $ 346.8 $ 354.7
$ 366.4
========== ================== ========
Goodwill:
United States electrical construction and facilities services .......................................... $ 3.8 $ 3.8
United States mechanical construction and facilities services .......................................... 164.2 163.5 162.8
United States facilities services .................................................................................................. 115.4 112.1
111.4
---------- ------------------ --------
Total United States operations ........................................................................................................ 283.4 279.4 278.0
Canada construction and facilities services .................................................................................. -- --
United Kingdom construction and facilities services .............................................................. -- --
Other international construction and facilities services .................................................... -- --
Corporate administration .................................................................................................................... -- --
---------- ------------------ --------
Total worldwide operations ................................................................................................................ $ 283.4 $ 279.4
$ 278.0
========== ================== ========
Total assets:
United States electrical construction and facilities services .......................................... $ 358.1357.4 $ 362.3358.1
United States mechanical construction and facilities services .......................................... 680.1 776.4 771.6
United States facilities services .................................................................................................. 324.7 304.5
280.5
---------- ------------------ --------
Total United States operations ........................................................................................................ 1,362.2 1,439.0 1,414.4
Canada construction and facilities services .................................................................................. 137.2 108.8 98.2
United Kingdom construction and facilities services .............................................................. 154.6 199.2 198.4
Other international construction and facilities services .................................................... 3.0 3.9 4.5
Corporate administration .................................................................................................................... 121.9 67.1
79.7
---------- ------------------ --------
Total worldwide operations ............................................................. $ 1,818.0 $ 1,795.2
========== ==========................................................... $1,778.9 $1,818.0
======== ========
NOTE N -- SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
2004 QUARTERLY RESULTS
Revenues ....................................... $1,109,086 $1,193,213 $1,215,911 $1,229,670
Gross profit ................................... $ 101,163 $ 101,512 $ 114,980 $ 129,247
Net income ..................................... $ 5,717 $ 1,445 $ 15,466 $ 10,579
Basic EPS ...................................... $ 0.38 $ 0.10 $ 1.02 $ 0.69
========== ========== ========== ==========
Diluted EPS .................................... $ 0.37 $ 0.09 $ 0.99 $ 0.68
========== ========== ========== ==========
2003 QUARTERLY RESULTS
Revenues ....................................... $1,061,030 $1,144,378 $1,157,588 $1,171,650
Gross profit ................................... $ 116,769 $ 123,275 $ 118,206 $ 124,204
Net income ..................................... $ 3,256 $ 8,273 $ 6,468 $ 2,624
Basic EPS ...................................... $ 0.22 $ 0.55 $ 0.43 $ 0.17
========== ========== ========== ==========
Diluted EPS .................................... $ 0.21 $ 0.53 $ 0.42 $ 0.17
========== ========== ========== ==========
4954
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters may not
equal per share amounts for the year.
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
2005 QUARTERLY RESULTS
Revenues .................................... $ 1,088,083 $ 1,173,163 $ 1,215,415 $ 1,237,886
Gross profit ................................ $ 99,564 $ 112,343 $ 131,413 $ 156,444
Net income .................................. $ 1,913 $ 7,933 $ 30,864 $ 19,332
Basic EPS - continuing operations ........... $ 0.07 $ 0.25 $ 1.02 $ 0.62
Basic EPS - discontinued operations ......... (0.01) 0.00 (0.03) (0.00)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.99 $ 0.62
=========== =========== =========== ===========
Diluted EPS - continuing operations ......... $ 0.07 $ 0.24 $ 1.00 $ 0.61
Diluted EPS - discontinued operations ....... (0.01) 0.01 (0.03) (0.01)
----------- ----------- ----------- -----------
$ 0.06 $ 0.25 $ 0.97 $ 0.60
=========== =========== =========== ===========
2004 QUARTERLY RESULTS
Revenues .................................... $ 1,099,267 $ 1,183,137 $ 1,211,982 $ 1,223,624
Gross profit ................................ $ 100,604 $ 100,268 $ 115,354 $ 128,374
Net income .................................. $ 5,717 $ 1,445 $ 15,466 $ 10,579
Basic EPS - continuing operations ........... $ 0.20 $ 0.04 $ 0.52 $ 0.34
Basic EPS - discontinued operations ......... (0.01) 0.01 (0.01) 0.01
----------- ----------- ----------- -----------
$ 0.19 $ 0.05 $ 0.51 $ 0.35
=========== =========== =========== ===========
Diluted EPS - continuing operations ......... $ 0.19 $ 0.04 $ 0.51 $ 0.33
Diluted EPS - discontinued operations ....... (0.01) 0.01 (0.01) 0.01
----------- ----------- ----------- -----------
$ 0.18 $ 0.05 $ 0.50 $ 0.34
=========== =========== =========== ===========
NOTE O -- LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
EMCOR and three of its officers (Chairman of the Board and Chief Executive
Officer Frank T. MacInnis, Executive Vice President and Chief Financial Officer
Leicle E. Chesser, and Senior Vice President-Chief Accounting Officer and
Treasurer Mark A. Pompa) have been named as defendants in a purported
consolidated class action filed in the United States District Court of
Connecticut entitled IN RE EMCOR GROUP, INC SECURITIES LITIGATION. Plaintiff
purports to represent a class composed of all persons who purchased or otherwise
acquired EMCOR common stock and/or other securities between April 9, 2003 and
October 2, 2003, inclusive. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder and of Section 20(A) of
the Securities Exchange Act, relating to alleged misstatements and omissions in
certain of the Company's filings with the Securities and Exchange Commission,
press releases and other public statements between April 9 and October 2, 2003,
and seeks damages on behalf of the purported class in unspecified amounts. A
motion to dismiss the Complaint filed by EMCOR and the individual defendants is
currently under submission. As set forth in the motion, EMCOR and the individual
defendants believe that the plaintiff's allegations are without merit and are
vigorously defending against them.
In July 2003, EMCOR'sour subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneledempanelled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.
On September 6, 2005, a former employee of Poole & Kent and the employee's
wife pled guilty to federal fraud charges that they used an alleged woman-owned
business enterprise ("WBE") to help Poole & Kent qualify for public construction
projects. The former employee also pled guilty to filing a false federal
personal income tax return for his failure to report on his tax return the value
of free work done at his home by Poole & Kent. In addition, on October 19, 2005,
W. David Stoffregen, the former President and Chief Executive Officer of Poole &
Kent was indicted by a federal grand jury in Baltimore for racketeering,
conspiracy, fraud and obstruction of justice in connection with his role in
connection with the alleged WBE fraud scheme and for his role in a related
alleged scheme to provide benefits to a former Maryland state senator in
exchange for his help and using his influence on behalf of Poole & Kent. On
October 26, 2005, a former project manager of Poole & Kent pled guilty to giving
false statements to federal investigators in connection with such alleged scheme
to provide benefits to the former state senator. In conjunction with the federal
investigation, others, including present and former employees of Poole & Kent,
may be charged.
55
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS -- (CONTINUED)
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a
claim in arbitration against EMCOR'sour United Kingdom subsidiary, EMCOR Group (UK) plc
(formerly named EMCOR Drake & Scull Group plcplc) ("D&S"), in connection with a
subcontract D&S entered into with Mowlem with respect to a project for the
United Kingdom Ministry of Defence at Abbey Wood in Bristol, U.K. Mowlem seeks
damages arising out of alleged defects in the D&S design and construction of the
mechanical and electrical engineering services for the project. Mowlem's claim
is for 39.5 million British pounds sterling (approximately $75.8$68.0 million), which
includes costs allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption costs related to
such defects, and interest on such amounts. The claim also includes amounts in
respect of liabilities that Mowlem accepted in connection with a settlement
agreement it entered into with the Ministry of Defence and which it claims are
attributable to D&S. D&S believes it has good and meritorious defenses to the
Mowlem claim. D&S has denied liability and has asserted a counterclaim for
approximately 11.6 million British pounds sterling (approximately $22.3$20.0 million)
for certain design, labor and delay and disruption costs incurred by D&S in
connection with its subcontract with Mowlem.
EMCOR isWe are involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it hasus. We believe that we have a number of valid defenses to such
proceedings and claims and intendsintend to vigorously defend itselfourselves and doesdo not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCORwe or itsour
subsidiaries are involved range from a few thousand dollars to over $75.0$68.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR'sour financial position and/or results of operations.
These proceedings include the following: (a) aA civil action brought against EMCOR'sour
subsidiary Forest Electric Corp. ("Forest") and seven other defendants in the
United States District Court for the Southern District of New York under the
Sherman Act and New York common law by competitors whose employees are not
members of International Brotherhood of Electrical Workers, Local #3 (the
"IBEW"). The action alleges, among other things, that Forest, six other
electrical contractors and the IBEW conspired to prevent competition and to
monopolize the market for communications wiring services in the New York City
area thereby excluding plaintiffs from wiring jobs in that market. Plaintiffs
allege they have lost profits as a result of this concerted activity and seek
damages in the amount of $50 million after trebling plus attorney's fees.
However, plaintiffs' damages expert has stated in his pre-trial deposition that
he estimates plaintiffs' damages at $8.7 million before trebling. Forest has
denied the allegations of wrongdoing set forth in the complaint, and pre-trialpre-trail
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. In August 2005, Forest and the other
defendants moved for summary judgment dismissing all claims. The parties do not
know when the motion will be decided and there is no assurance that the motion
will be granted in the action. (b) A civil action brought by a joint venture
(the "JV") between EMCOR'sour subsidiary Poole & Kent Corporation
50
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS -- (CONTINUED)
("Poole & Kent") and an unrelated
company in the Fairfax, Virginia Circuit Court in which the JV seeks damages
from the Upper Occoquan Sewage Authority ("UOSA") resulting from material
breaches of a construction contract (the "Contract") entered into between the JV
and UOSA for construction of a wastewater treatment facility. Poole & Kent incurred unrecovered costsAs a result of a
jury decision on March 11, 2005 and a subsequent ruling on June 27, 2005 of the
trial judge in completing thisthe action, it was determined that the JV is entitled to be paid
approximately $17.0 million in connection with the UOSA project in addition to
the amounts it has already received from UOSA. The JV has asserted additional
claims against UOSA relating to the same project which are includedalso pending in the
balance sheet account "costsFairfax, Virginia Circuit Court and estimated earningswhich could result in excess of billings on uncompleted contracts" in
EMCOR's consolidated balance sheets as of December 31, 2004another trial between
the JV and 2003. A jury has
returnedUOSA to be held at a verdict finding that UOSA committed material breaches of the Contract
and a jury trial to establish the JV's damages is currently in process. The JV
claims total damages, based upon alternative measures of damages, in excess of
$75.0 million (exclusive of interest),date not yet determined and in a jury trial to be subsequently
heldwhich the JV
intends to claimwould seek damages in excess of $18.0 million (exclusive of
interest).million. In accordance with the joint
venture agreement establishing the JV, Poole & Kent would beis entitled to approximately
one-half of any damage award
receivedthe aggregate amounts paid and to be paid by UOSA to the JV. 51The JV
and UOSA are each seeking to have the determinations in the trial court reversed
on appeal to the Virginia Supreme Court. However, there is no assurance that the
Virginia Supreme Court will hear the appeals or, if the appeals are heard, that
they will be resolved in favor of the JV.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR
Group, Inc. and subsidiariesSubsidiaries as of December 31, 20042005 and 2003,2004, and the related
consolidated statements of operations, cash flows, and stockholders' equity and
comprehensive income for each of the three years in the period ended December
31, 2004.2005. Our audits also included the financial statement schedule listed on
Schedule II in Item 15. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the auditsaudit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EMCOR Group,
Inc. and subsidiariesSubsidiaries at December 31, 20042005 and 2003,2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004,2005, in conformity with accounting principlesU.S. generally accepted
in the United States.accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of EMCOR
Group, Inc.'s internal control over financial reporting as of December 31, 2004,2005,
based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 8, 2005February 21, 2006 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
March 8, 2005
52February 21, 2006
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theThe Board of Directors and StockholdersShareholders of EMCOR Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report onof Internal Control over Financial Reporting, that EMCOR
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2004,2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). EMCOR Group, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company,company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that EMCOR Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2004,2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, EMCOR Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004,2005, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EMCOR Group, Inc. as of December 31, 20042005 and 20032004, 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, 20042005 of EMCOR Group, Inc. and our report dated March 8, 2005February 21, 2006 expressed
an unqualified opinion thereon.
Stamford, Connecticut /S/ ErnstERNST & YoungYOUNG LLP
March 8, 2005
53February 21, 2006
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on an evaluation of EMCOR'sour disclosure controls and procedures (as
required by RuleRules 13a-15(b) of the Securities Exchange Act of 1934), theour
Chairman of the Board and Chief Executive Officer, of EMCOR , Frank T. MacInnis, and theour
Chief Financial Officer, of EMCOR , Leicle E. Chesser, have concluded that EMCOR'sour 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
Management of EMCOROur 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). EMCOR'sOur internal control
over financial reporting is a process designed with the participation of EMCOR'sour
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 EMCOR'sour financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.
EMCOR'sOur 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 of
EMCOR;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 of
EMCOR
are being made only in accordance with authorizations of our management and
the directorsBoard of EMCOR;Directors; and (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of EMCOR'sour assets
that could have a material effect on EMCOR'sour financial statements.
Because of its inherent limitations, EMCOR'sour 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, 2004,2005, our management conducted an evaluation of the
effectiveness of EMCOR'sour internal control over financial reporting based on the
framework established in Internal ControlINTERNAL CONTROL - Integrated FrameworkINTEGRATED 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, 2004.2005.
Management's assessment of the effectiveness of EMCOR'sour internal control over
financial reporting as of December 31, 20042005 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in its report
appearing in this Annual Report on Form 10-K, which such report expressed
unqualified opinions on our management's assessment and on the effectiveness of
EMCOR'sour internal control over financial reporting as of December 31, 2004.2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In addition, our management with the participation of EMCOR'sour principal
executive officer and principal financial officer or persons performing similar
functions has determined that no change in EMCOR'sour internal control over financial
reporting occurred during the fourth quarter of EMCOR'sour fiscal year ended December
31, 20042005 that has materially affected, or is (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably
likely to materially affect, EMCOR'sour internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
5459
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with respect to directors is
incorporated herein by reference to the sections of the Company'sour definitive Proxy
Statement for the 20052006 Annual Meeting of Stockholders entitled "Election of
Directors," which Proxy Statement is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates (the "Proxy Statement").
The information required by this Item 10 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
to the section of the Proxy Statement entitled "Section 16(a) Beneficial
Ownership Reporting Compliance." The information required by this Item 10
concerning the Audit Committee of the Company'sour Board of Directors is incorporated by
reference to the Section of the Proxy Statement entitled "Audit Committee."
Information regarding our executive officers is contained in Part I of this Form
10-K following Item 4 under the heading "Executive Officers of the Registrant."
The Company hasWe have adopted a Code of Ethics that applies to itsour chief executive officer and
itsour senior financial officers, a copy of which is filed as an Exhibit hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the sections of the Proxy Statement entitled "Executive
Compensation," "Employment and Change of Control Arrangements," "Director
Compensation," "Compensation Committee Interlocks and Insider Participation,"Participation" and
"Compensation Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 (other than the information
required by Section 201 (d) of Regulation S-K, which is set forth in Part I,II,
Item 5 of this Form 10-K) is incorporated herein by reference to the sections of
the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the section of the Proxy Statement entitled "Other Matters -
Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Except as set forth below, the information required by this Item 14 is
incorporated herein by reference to the section of the Proxy Statement entitled
"Ratification of Appointment of Independent Auditors."
The Company has recently been informed by its independent registered public
accounting firm, Ernst & Young LLP ("E&Y"), that Boardroom Limited
("Boardroom"), an entity which provided certain secretarial and directorship
services in Singapore during the period from July 1, 2002 to August 31, 2004 to
an inactive subsidiary of the Company, JWP Technical Services Pte Ltd ("JWP
Singapore"), would be considered an affiliate of E&Y for independence purposes
during such time period because 80% of Boardroom was owned in a personal
capacity by certain E&Y Singapore partners. In September 2004, the services of
Boardroom were terminated as JWP Singapore was dissolved. In addition, as of
November 1, 2004, Boardroom no longer would be considered an affiliate of E&Y
under the independence rules as on such date the E&Y Singapore partners sold
their interests in Boardroom. Regardless, because Boardroom would be considered
an affiliate of E&Y during the period from July 1, 2002 to August 31, 2004, the
non-audit services rendered by Boardroom may raise issues under the auditor
independence rules of Regulation S-X.
Based upon E&Y's disclosure, the Company, its Audit Committee and E&Y have
considered the impact the provision of such non-audit services may have had on
E&Y's independence with respect to the Company and have concluded there has been
no impairment of E&Y's independence as (a) such services were administrative in
nature, (b) the associated fees over the period during which the services were
provided aggregated to approximately $7,000.00, (c) the Company's subsidiary
involved was not material to the consolidated financial statements of the
Company and (d) the services have been discontinued.
5560
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, 20042005 and 20032004
Consolidated Statements of Operations -- Years Ended December 31, 2005,
2004 2003 and 20022003
Consolidated Statements of Cash Flows -- Years Ended December 31, 2005,
2004 2003 and 20022003
Consolidated Statements of Stockholders' Equity and Comprehensive Income
-- Years Ended December 31, 2005, 2004 2003 and 20022003
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.
5661
SCHEDULE II
EMCOR GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2)ACCOUNTS (1) DEDUCTIONS (2) END OF YEAR
- --------------------------------------------------- --------------------------------------------- --------- ----------------- ------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS--------- ------------------ -------------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 2005 ...... $ 36,185 8,457 (540) (14,129) $ 29,973
Year Ended December 31, 2004 ...................... $43,706...... $ 43,706 7,026 -- (14,547) $36,185$ 36,185
Year Ended December 31, 2003 ...................... $40,611...... $ 40,611 11,249 376 (8,530) $43,706
Year Ended December 31, 2002 ...................... $35,091 3,354 5,129 (2,963) $40,611$ 43,706
- ----------------------
(1) Amount principally relates to business acquisitions.acquisitions and divestitures.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
5762
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
2(a) -- Disclosure Statement and Third Amended Joint Plan of Exhibit 2(a) to EMCOR's
Reorganization (the "Plan of Reorganization") proposed by Registration Statement on Form 10 as
EMCOR Group, Inc. (formerly JWP INC.) (the "Company" or originally filed March 17, 1995 or("Form 10")
"EMCOR") and its subsidiary SellCo Corporation ("SellCo"), ("Form 10")
as approved for dissemination by the United States Bankruptcy
Court, Southern District of New York (the "Bankruptcy Court"),
on August 22, 1994.
2(b) -- Modification to the Plan of Reorganization dated September 29, 1994 Exhibit 2(b) to Form 10
29, 1994
2(c) -- Second Modification to the Plan of Reorganization dated Exhibit 2(c) to Form 10
September 30, 1994
2(d) -- Confirmation Order of the Bankruptcy Court dated September 30, Exhibit 2(d) to Form 10
September 30, 1994 (the "Confirmation Order") confirming
the Plan of Reorganization, as amended
2(e) -- Amendment to the Confirmation Order dated December 8, 1994 Exhibit 2(e) to Form 10
2(f) -- Post-confirmation modification to the Plan of Reorganization Exhibit 2(f) to Form 10
entered on December 13, 1994
2.1 --2(g) Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR's Report on Form 8-K dated
among Comfort Systems USA, Inc. and EMCOR-CSI Holding Co. Form 8-K dated February 14, 2002
3(a-1) -- Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10
December 15, 1994
3(a-2) -- Amendment dated November 28, 1995 to the Restated Certificate Exhibit 3(a-2) to EMCOR's Annual Report
of Incorporation of EMCOR Report 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 Report on Form 10-K for the year ended December 31,
1997 ("1997 Form 10-K")
3(a-4) Amendment dated January 27, 2006 to the Restated Certificate Page ___
of Incorporation*
3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on
Form 10-K for the year ended December 31, 1998
("1998 Form 10-K")
3(c) -- Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on
the Bank of New York Form 8-K dated March 3, 1997
4.1(a) --4(a) U.S. $275,000,000$375,000,000 Credit Agreement dated October 14, Exhibit 4 to EMCOR's Report on Form 8-K (Date of
2005 by and among EMCOR Exhibit 4.1(a) to EMCOR's Report on
Group, Inc.Inc and certain of Report October 17, 2005)
its Subsidiariessubsidiaries on and Harris Trust and Form 8-K
Savings BankN.A. individually and
as Agent andfor the Lenders which dated October 4, 2002 are or become parties
thereto dated as of September 26, 2002
(the "Credit Agreement")
4.1(b) -- Amendment4(b) Assignment and Waiver letterAcceptance dated December 10, 2002 toOctober 14, 2005 between Page ___
Harris Nesbitt Financing, Inc. ("HNF") as assignor, and Bank of
Montreal, as assignee of 100% interest of HNF in the Exhibit 4.1(b) to EMCOR's Annual Credit
Agreement Report on Form 10-K for the year
ended December 31, 2002 ("2002 Form
10-K")to Bank of Montreal *
5863
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
4.1(c) -- First Amendment to Credit Agreement dated as of June 2003 Exhibit 4.1(c) to EMCOR's Quarterly
Report on Form 10-Q for the quarter
ended June 30, 2003 ("June 2003
Form 10-Q")
4.1(d) -- Second Amendment to Credit Agreement dated as of June 2003 Exhibit 4.1(d) to June 2003 Form 10-Q
4.1(e) --4(c) Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(e)November 21, 2005 Page ___
between EMCOR and the Northern Trust Company effective
November 29, 2005 pursuant to June 2003 Form 10-Q
Harris, National City Bank and EMCOR
4.1(f) --Section 1.10 of the Credit
Agreement *
4(d) Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(f)November 21, 2005 Page ___
between EMCOR and Bank of Montreal effective November 29,
2005 pursuant to June 2003 Form 10-Q
Harris, Webster Bank and EMCOR
4.1(g) --Section 1.10 of the Credit Agreement *
4(e) Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(g) to June 2003 Form 10-Q
Harris, UnionNovember 21, 2005 Page ___
between EMCOR and National City Bank of California, N.A.Indiana effective
November 29, 2005 pursuant to Section 1.10 of the Credit
Agreement *
4(f) Assignment and EMCOR
4.1(h) -- Commitment Amount Increase RequestAcceptance dated June 26, 2003 among Exhibit 4.1(h) to June 2003 Form 10-Q
Harris, SovereignNovember 29, 2005 between Page ___
Bank of Montreal, as assignor, and EMCOR
4.1(i) -- Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(i) to June 2003 Form 10-Q
Harris,Fifth Third Bank, Hapoalim B.M. and EMCOR
4.1(j) -- Commitments Amount Increase Request dated July 9, 2003 among Exhibit 4.1(j) to June 2003 Form 10-Q
Harris, The Governor and Companyas
assignee, of 30% interest of Bank of ScotlandMontreal in the Credit
Agreement to Fifth Third Bank *
4(g) Assignment and EMCOR
4.1(k) - Commitment Amount Increase RequestAcceptance dated July 9, 2003 among Exhibit 4.1(k) to June 2003 Form 10-Q
Harris, U.S.November 29, 2005 between Page ___
Bank National Associationof Montreal, as assignor, and EMCOR
4.2 -- Subordinated Indenture dated as of March 18, 1998 Exhibit 4(b) to EMCOR's Quarterly
("Indentured") between EMCOR and State Street Bank and Report on Form 10-Q for the quarterNorthern Trust Company,
as Trustee ("State Street Bank") ended March 31, 1998 ("March 1998
Form 10-Q")
4.3 -- First Supplemental Indenture dated asassignee, of March 18, 1998 to Exhibit 4(c) to March 1998 Form 10-Q
Indenture between EMCOR and State Street Bank
4.4 -- Indenture dated as20% interest of December 15, 1994, between SellCo and Exhibit 4.4 to Form 10
Fleet National Bank of Connecticut, as trustee,Montreal in respect of SellCo's 12% Subordinated Contingent Payment
Notes, Due 2004the Credit
Agreement to Northern Trust Company *
10(a) -- EmploymentSeverance Agreement made as of January 1, 2002 between Exhibit 10(a) to EMCOR's Annual EMCOR and Frank T. MacInnis Exhibit 10.2 to EMCOR's Report on Form
8-K (Date of Report April 25, 2005)
("April 2005 Form 8-K")
10(b) Form of Severance Agreement between EMCOR and each Exhibit 10.1 to the April 2005 Form 8-K
of Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz
and Mark A. Pompa
10(c) Letter Agreement dated October 12, 2004 between Anthony Exhibit 10.1 to EMCOR's Report on Form
Guzzi and EMCOR (the "Guzzi Letter Agreement") 8-K (Date of Report October 12, 2004)
10(d) Form of Confidentiality Agreement Exhibit C to Guzzi Letter Agreement
10(e) Form of Indemnification Agreement between EMCOR and Exhibit F to Guzzi Letter Agreement
each of its officers and directors
10(f) Severance Agreement dated October 25, 2005 between Exhibit D to the Guzzi Letter Agreement
Anthony Guzzi and EMCOR
10(g-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10
10(g-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report on
Form 10-K for the year ended December 31, 2001
("2001 Form 10-K")
10(b) -- Employment10(g-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2001 Form 10-K
10(h-1) 1995 Non-Employee Directors" Non-Qualified Stock Option Exhibit 10(p) to 2001 Form 10-K
Plan ("1995 Option Plan")
64
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- --------------------------------
10(h-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2001 Form 10-K
10(i-1) 1997 Non-Employee Directors' Non-Qualified Stock Option Exhibit 10(k) to EMCOR's Annual Report
Plan ("1997 Option Plan") on Form 10-K for the year ended December 31,
1999 ("1999 Form 10-K")
10(i-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2001 Form 10-K
10(j) 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K
10(k-1) Continuity Agreement madedated as of June 22, 1998 between Exhibit 10(a) to EMCOR's Quarterly
Frank T. MacInnis and EMCOR ("MacInnis Continuity Report on Form 10-Q for the quarter ended
Agreement") June 30, 1998 ("June 1998 Form 10-Q")
10(k-2) Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) for the quarter
Agreement ended June 30, 1999 (June 1999 Form 10-Q)
10(l-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q
Sheldon I. Cammaker and EMCOR ("Cammaker Continuity
Agreement")
10(l-2) Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to the June 1999 Form 10-Q
Agreement
10(m-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(d) to the June 1998 Form 10-Q
Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement")
10(m-2) Amendment dated as of May 4, 1999 to Chesser Continuity Exhibit 10(j) to the June 1999 Form 10-Q
Agreement
10(n-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form 10-Q
R. Kevin Matz and EMCOR ("Matz Continuity Agreement")
10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q
Agreement
10(n-3) Amendment dated as of January 1, 2002 to Matz Continuity Exhibit 10(o-3) to Form 10-Q for the
Agreement quarter ended March 31, 2002 ("March 2002
Form 10-Q")
10(o-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(b)10(g) to 2001the June 1998 Form 10-K10-Q
Mark A. Pompa and EMCOR and Sheldon I. Cammaker
10(c) -- Employment("Pompa Continuity Agreement")
10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Exhibit 10(n) to the June 1999 Form 10-Q
Agreement
made10(o-3) Amendment dated as of January 1, 2002 to Pompa Continuity Exhibit 10(p-3) to the March 2002 Form 10-Q
Agreement
10(p) Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
between Anthony Guzzi ("Guzzi") and EMCOR
10(q) Release and Settlement Agreement dated December 22, 1999 Exhibit 10(c)10(q) to 20011999 Form 10-K
EMCORbetween Thomas D. Cunningham and Leicle E. Chesser
10(d) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(d) to 2001 Form 10-K
EMCOR and Jeffrey M. Levy
10(e) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(e) to 2001 Form 10-K
EMCOR and R. Kevin Matz
10(f) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(f) to 2001 Form 10-K
EMCOR and Mark A. Pompa
5965
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(g) -- Letter Agreement dated October 12, 2004 between EMCOR Exhibit 10.1 to Form 8-K (Date of
and Anthony Guzzi (the "Guzzi Letter Agreement") Report October 12, 2004)
10(h) -- Severance Agreement dated October 25, 2005 between EMCOR Exhibit D to the Guzzi Letter
and Anthony Guzzi Agreement
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 10(g-2) to 2001 Form 10-K
10(h-3) -- Amendment to Section 13 of the 1994 Option Plan Exhibit 10(g-3) to 2001 Form 10-K
10(i-1) -- 1995 Non-Employee Directors' Non-Qualified Stock Option Plan Exhibit 10(p) to Form 10
("1995 Option Plan")
10(i-2) -- Amendment to Section 10 of the 1995 Option Plan Exhibit 10(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
("1997 Option Plan") Report on Form 10-K for the year
ended December 31, 1999 (the "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
Frank T. MacInnis and EMCOR ("MacInnis Continuity Agreement") Report 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(m-1) -- Continuity Agreement dated as of June 22, 1998 between Sheldon I. Exhibit 10(c) to the June 1998 Form
Cammaker and EMCOR ("Cammaker Continuity Agreement") 10-Q
10(m-2) -- Amendment dated as of May 4, 1999 to Cammaker Continuity Exhibit 10(i) to June 1999 Form 10-Q
Agreement
10(n-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(d) to the June 1998 Form
Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement") 10-Q
10(n-2) -- Amendment dated as of May 4, 1999 to Chesser Continuity Agreement Exhibit 10(j) to June 1999 Form 10-Q
10(o-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(b) to the June 1998 Form
Jeffrey M. Levy and EMCOR ("Levy Continuity Agreement") 10-Q
10(o-2) -- Amendment dated as of May 4, 1999 to Levy Continuity Agreement Exhibit 10(l) to June 1999 Form 10-Q
10(p-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form
R. Kevin Matz and EMCOR ("Matz Continuity Agreement") 10-Q
10(p-2) -- Amendment dated as of May 4, 1999 to Matz Continuity Agreement Exhibit 10(m) to June 1999 Form 10-Q
10(p-3) -- Amendment dated as of January 1, 2002 to Matz Exhibit 10(o-3) to Form 10-Q for the
Continuity Agreement quarter ended ("March 2002 10-Q")
10(p-1) -- Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form
Mark A. Pompa and EMCOR ("Pompa Continuity Agreement") 10-Q
10(p-2) -- Amendment dated as of May 4, 1999 to Pompa Continuity Agreement Exhibit 10(n) to June 1999 Form 10-Q
60
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(p-3) -- Amendment dated as of January 1, 2002 to Pompa Exhibit 10(p-3) to March 2002
Continuity Agreement Form 10-Q
10(p-4) -- Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement
between Anthony Guzzi and EMCOR
10(q) -- Release and Settlement Agreement dated December 22, 1999 Exhibit 10(q) to 1999 Form 10-K
between EMCOR and Thomas D. Cunningham
10(r) --10(r-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Plan") Exhibit 4.1 to EMCOR's Registration
Statement on Form S-8)S-8 (No. 333-112940)333-112940 filed
with the Securities and Exchange Commission
on February 18, 2004 (the "2004("2004 Form S-8")
10(r-2) Form of Certificate Representing Restrictive Stock Units Exhibit 10.1 to EMCOR's Report on
("RSU's") issued under the Stock Bonus Plan Manditorily Awarded Form 8-K (Date of Report March 4, 2005) (the
"March 4, 2005 Form 8-K")
10(r-3) Form of Certificate Representing RSU's issued under the Stock Exhibit 10.2 to March 4, 2005 Form 8-K
Bonus Plan Voluntarily Awarded
10(s) --Incentive Plan for Senior Executive Officers of EMCOR Group, Exhibit 10.3 to March 4, 2005 Form 8-K
Inc. ("Incentive Plan for Senior Executives")
10(t) First Amendment to Incentive Plan for Senior Executives* Page ___
10(u) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of Report
December 15, 2005)
10(v) 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's proxy statement ("2003
Proxy Statement") Plan for its annual
meeting held June 12, 2003
("2003 Proxy Statement")
10(t-1) --10(w-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement
10(t-2) --10(w-2) Amendments to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report on
Form 10-K for the year ended December 31,
2003 ("2003 Form 10-K")
10(u) --10(x) Form of Stock Option Agreement evidencing grant of stock Exhibit 10.1 to Form 8-K (Date of
options under the 2003 Management Stock Incentive Plan Report January 5, 2005)
10(y) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for
its annual meeting held June 16, 2005
("2005 Proxy Statement")
10(z) 2005 Management Stock Incentive Plan Exhibit C to EMCOR's 20032005 Proxy Statement
10(v) --10(a)(a) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement
10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(w) --10(c)(c) Form of EMCOR Option Agreement for Messrs. Frank T. MacInnis, Exhibit 4.5 to 2004 Form S-8
MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E.
Chesser, R. Kevin Matz and Mark A. Pompa (collectively the
"Executive Officers") for options granted January 4, 1999,
January 3, 2000 and January 2, 2001
10(x) --10(d)(d) Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.6 to 2004 Form S-8
December 14, 2001
10(y) -- Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.7 to 2004 Form S-8
January 2, 2002, January 2, 2003, and January 2, 2004
10(z) -- Form of EMCOR Option Agreement for Directors granted June 19, Exhibit 4.8 to 2004 Form S-8
2002, October 25, 2002, and February 27, 2003
10(aa) -- Form of Option Agreement between EMCOR and Anthony Guzzi Exhibit A to Guzzi Letter Agreement
dated October 25, 2004
10(bb) -- Form of Option Agreement between EMCOR and executive
officers Exhibit 10.1 to Form 8-K (Date of dated January
3, 2005 Report January 3, 2005)
10(cc) -- Restricted Stock Unit Agreement between EMCOR and Anthony Guzzi Exhibit B to Guzzi Letter Agreement
dated October 25, 2004
10(d)(d) -- Release and Settlement Agreement dated February 25, 2004 Page
between Jeffrey M. Levy*December 14, 2001
6166
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(e)(e) --Form of EMCOR Option Agreement for Executive Officers Exhibit 4.7 to 2004 Form S-8
granted January 2, 2002, January 2, 2003 and January 2, 2004
10(f)(f) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8
June 19, 2002, October 25, 2002 and February 27, 2003
10(g)(g) Form of EMCOR Option Agreement for Executive Officers and Page ___
Guzzi dated January 3, 2005 *
10(h)(h) Release and Settlement Agreement dated February 25, 2004 Exhibit 10 (a)(a) to EMCOR's Annual Report
between Jeffrey M. Levy and EMCOR on Form 10-K for the year ended December 31,
2004 ("2004 Form 10-K")
10(i)(i) Form of letter agreement between EMCOR and each executive officer PageExecutive Exhibit 10(b)(b) to 2004 Form 10-K
Officer with respect to acceleration of options granted
January 2, 2003 and January 2, 2004*
10(ff) -- Form of Confidentiality Agreement between EMCOR and Executive Exhibit C to Guzzi Letter Agreement
Officers
10(gg) -- Form of Indemnification Agreement between EMCOR and each of Exhibit F to Guzzi Letter Agreement
its officers and directors2004
11 -- Computation of Basic EPS and Diluted EPS for the years ended Page ___
December 20042005 and 2003*2004*
14 -- Code of Ethics of EMCOR for Chief Executive Officer and Exhibit 14 to EMCOR's 2003 Form 10-K
Senior Financial Officers
10-K
16 -- Current Report on Form 8-K - Changes in Registrant's Certifying Exhibit 16 to EMCOR's Report on
Accountant, dated May 15, 2002 Form 8-K dated May 15, 2002
21 -- List of Significant Subsidiaries*Subsidiaries * Page ___
23.1 -- Consent of Ernst & Young LLP*LLP * Page ___
31.1 -- Certification Pursuant to Section 302 of the Sarbanes -- OxleySarbanes-Oxley Page ___
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer*Officer *
31.2 -- Certification Pursuant to Section 302 of the Sarbanes -- OxleySarbanes-Oxley Page ___
Act of 2002 by the Executive Vice President and Chief
Financial Officer*Officer *
32.1 -- Certification Pursuant to Section 906 of the Sarbanes -- OxleySarbanes-Oxley Page ___
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer**Officer **
32.2 -- Certification Pursuant to Section 906 of the Sarbanes -- OxleySarbanes-Oxley Page ___
Act Page of 2002 by the Executive Vice President and Chief Financial
Officer**Officer **
- --------------------------
* Filed Herewith
** Furnished Herewith
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Registrant hereby undertakes to furnish
a copy of any unfiledunfilled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
6267
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: March 8, 2005February 23, 2006 by /s/ FRANK T. MACINNIS
----------------------------------
FRANK T. MACINNIS
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 8, 2005.FEBRUARY 23, 2006.
/s/ FRANK T. MACINNIS Chairman of the Board of Directors and
-
-------------------------------- Chief Executive Officer
Frank T. MacInnis
/s/ STEPHEN W. BERSHAD Director
- --------------------------------
Stephen W. Bershad
/s/ DAVID A. B. BROWN Director
- --------------------------------
David A. B. Brown
/s/ LARRY J. BUMP Director
- --------------------------------
Larry J. Bump
/s/ ALBERT FRIED, JR. Director
-
--------------------------------
Albert Fried, Jr.
/s/ RICHARD F. HAMM, JR. Director
- --------------------------------
Richard F. Hamm, Jr.
/s/ MICHAEL T. YONKER Director
-
--------------------------------
Michael T. Yonker
/s/ LEICLE E. CHESSER Executive Vice President and
-
-------------------------------- Chief Financial Officer
Leicle E. Chesser (Principal Financial Officer)
/s/ MARK A. POMPA Senior Vice President,
- -------------------------------- Chief Accounting Officer and Treasurer
Mark A. Pompa (Principal Accounting Officer)
6368