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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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-2315
EMCOR GROUP, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
301 MERRITT SEVEN CORPORATE PARK 06851-1060
Norwalk, Connecticut (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 849-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any as an amendment
to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No | |
The aggregate market value of the registrant's voting common equity held by
non-affiliates of the registrant on June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$670,000,000 based on that day's closing price.
Number of shares of the registrant's common stock outstanding as of the
close of business on March 4, 2005: 15,294,118 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2005 Annual
Meeting of Stockholders, which document will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates, are incorporated by
reference into Items 10 through 14 of Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business
General ......................................................................................................... 1
Operations ...................................................................................................... 2
Competition ..................................................................................................... 4
Employees ....................................................................................................... 4
Backlog ......................................................................................................... 4
Item 2. Properties ........................................................................................................ 5
Item 3. Legal Proceedings. ................................................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders ............................................................... 10
Executive Officers of the Registrant .............................................................................. 11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .. 12
Item 6. Selected Financial Data ........................................................................................... 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................ 25
Item 8. Financial Statements and Supplementary Data ....................................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 54
Item 9A. Controls and Procedures ........................................................................................... 54
Item 9B. Other Information ................................................................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................................ 55
Item 11. Executive Compensation ............................................................................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................... 55
Item 13. Certain Relationships and Related Transactions .................................................................... 55
Item 14. Principal Accounting Fees and Services ............................................................................ 55
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................ 56
PART I
ITEM 1. BUSINESS
The Internet website address of EMCOR Group, Inc. ("EMCOR" or the "Company")
is http://www.emcorgroup.com. The Company's annual report on Form 10-K,
quarterly reports on Forms 10-Q and current reports on Forms 8-K (and any
amendments to those reports) are available free of charge on or through its
Internet website as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
GENERAL
EMCOR is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2004, EMCOR had revenues of approximately $4.75 billion. The
Company provides services to a broad range of commercial, industrial, utility,
and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. EMCOR has offices in 42 states and the
District of Columbia in the United States, eight provinces in Canada and 12
primary locations in the United Kingdom. In the United Arab Emirates, the
Company carries on business through two joint ventures. Its executive offices
are located at 301 Merritt Seven Corporate Park, Norwalk, Connecticut
06851-1060, and its telephone number at those offices is (203) 849-7800.
EMCOR specializes in providing construction services relating to mechanical
and electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services."
EMCOR designs, integrates, installs, starts up, operates and maintains
various mechanical and electrical 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;
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's facilities services businesses, which support the operation of a
customer's facilities, include:
o Site-based operations and maintenance;
o Mobile maintenance and services;
o Facilities management;
o Remote monitoring;
o Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development and management for energy systems.
These facilities services are provided to a wide range of commercial,
industrial, utility and institutional facilities, including those at which EMCOR
provided construction services and others at which services were provided by
others. EMCOR's varied facilities services are frequently combined to provide
integrated service packages which include operations and maintenance, mobile
services and facility improvement programs.
EMCOR provides construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. It also provides these services indirectly by acting
as a subcontractor to general contractors, systems suppliers and other
subcontractors. Worldwide, EMCOR has approximately 26,000 employees.
EMCOR's revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of
EMCOR's 2004 revenues, approximately 80% were generated in the United States and
approximately 20% were generated internationally. In 2004, approximately 49% of
revenues were derived from new construction projects, 21% were derived from
renovation and retrofit of customer's existing facilities and 30% were derived
from facilities services operations.
1
The broad scope of EMCOR's operations are more particularly described below.
For information regarding the revenues, operating income and total assets of
each of EMCOR's segments with respect to each of the last three fiscal years,
and EMCOR's revenues and assets attributable to the United States, Canada, the
United Kingdom and all other foreign countries, see Note M to EMCOR's financial
statements included herein.
OPERATIONS
The mechanical and electrical construction services industry has a higher
growth rate than the overall non-residential construction industry, due
principally to the ever increasing content and complexity of mechanical and
electrical systems in all types of projects. This increasing content and
complexity is, in part, a result of the expanded use of computers and more
technologically advanced voice and data communications, lighting and
environmental control systems in all types of facilities. For these reasons,
buildings of all types consume more electricity per square foot than in the past
and thus need more extensive electrical distribution systems. In addition,
advanced voice and data communication systems require more sophisticated power
supplies and extensive low voltage and fiber-optic communications cabling.
Moreover, the need for greater environmental controls within a building, such as
the heightened need for climate control to maintain extensive computer systems
at optimal temperatures, and the growing demand for environmental control in
individual spaces have created expanded opportunities for the mechanical and
electrical construction services and facilities services businesses.
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)
plumbing, process and high-purity piping systems; (c) 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) lighting systems, including
fixtures and controls; (e) low-voltage systems, including fire alarm, security
and process control systems; and (f) 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's United States mechanical and electrical construction services
operations accounted for about 60% of its 2004 revenues, of which revenues
approximately 72% were related to new construction and approximately 28% were
related to renovation and retrofit projects. EMCOR's United Kingdom and Canada
mechanical and electrical construction services operations accounted for
approximately 10% of its 2004 revenues, of which revenues approximately 56% were
related to new construction and approximately 44% were related to renovation and
retrofit projects. EMCOR provides mechanical and electrical construction
services for both large and small installation and renovation projects. Its
largest projects include those (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's largest projects, which typically range in size
from $10.0 million up to and occasionally exceeding $50.0 million and are
usually multi-year projects, represented about 33% of EMCOR's construction
services revenues in 2004.
EMCOR's projects of less than $10.0 million accounted for approximately 67%
of 2004 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, special environmental controls and
high-purity air systems, sophisticated mechanical and electrical systems for
data centers, including those associated with internet service providers and
electronic commerce, trading floors in financial services businesses, new
production lines in manufacturing plants and office arrangements in existing
office buildings. They are not usually dependent upon the new construction
market. Demand for these projects and types of services is often prompted by the
expiration of leases, changes in technology or changes in the customer's plant
or office layout in the normal course of a customer's business.
EMCOR performs its services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term complex projects that require
significant technical and management skills and the financial strength to obtain
bid and performance bonds, which are often a condition to bidding for and
winning these projects.
2
EMCOR also installs and maintains lighting for streets, highways, bridges and
tunnels, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactures and installs sheet metal air
handling systems for both its own mechanical construction operations and for
unrelated mechanical contractors. EMCOR also maintains welding and pipe
fabrication shops in support of some of its own mechanical operations.
Facilities services are provided to a wide range of commercial, industrial
and institutional facilities, including both those for which EMCOR provided
construction services and those for which construction services were provided by
others. Facilities services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by customer site-based EMCOR
employees.
These facilities services, which generated approximately 30% of 2004
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, EMCOR established a subsidiary to expand its facilities services
operations in North America. This division has built on EMCOR's traditional
mechanical and electrical construction services operations, facilities services
activities at its mechanical and electrical contracting subsidiaries, and
EMCOR's client relationships, as well as acquisitions, to expand the scope of
services currently offered and to develop packages of services for customers on
a regional, national and global basis.
As a consequence, EMCOR's United States facilities services division offers a
broad range of facilities services, including maintenance and service of
mechanical and electrical systems, which EMCOR has historically provided to
customers following completion of construction projects, and site-based
operations and maintenance, mobile maintenance and service, facilities
management, remote monitoring, installation and support for building systems,
technical consulting and diagnostic services, small modification and retrofit
projects, and program development and management for energy systems.
EMCOR has experienced an expansion in the demand for its facilities services
which it believes is driven by customers' decisions to focus on their own core
competencies, the increasing technical complexity of their facilities and their
mechanical, electrical, voice and data and other systems, and the need for
increased reliability, especially in mechanical and electrical systems. These
trends have led to outsourcing and privatization programs whereby customers in
both the private and public sectors seek to contract out those activities that
support, but are not directly associated with, the customer's core business.
EMCOR clients requiring facilities services include 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 with (a) Bank One under which EMCOR provides facilities
services for approximately 2,200 Bank One locations encompassing 32.0 million
square feet of space in 30 states; (b) LAM Research under which EMCOR provides
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 provides facilities services to over 1,200 Fifth Third locations
with over 9.5 million square feet in seven states; (d) Exelon Corp. under which
EMCOR provides 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 provides integrated services to approximately 2.5 million
square feet of office and data center space; and (g) Hewlett-Packard Company
under which EMCOR provides integrated services to approximately 20.0 million
square feet of production, distribution and office space in seven states.
Through a limited liability Company owned by EMCOR 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 December 2002, EMCOR 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. As part of
its operations, CES is responsible for (a) the oversight of all or most of a
business' facilities operations, including operation and maintenance; (b) the
oversight of logistical processes; (c) tenant services and management; (d)
servicing upgrade and retrofit of HVAC, electrical, plumbing, and industrial
piping and sheet metal systems in existing facilities; and (e) diagnostic and
solution engineering for building systems and their components. 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's United Kingdom subsidiary also has a division dedicated to 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, EMCOR also
provides facilities services at several manufacturing facilities, including BAE
Systems manufacturing plants. In addition, the United Kingdom operations provide
on-call and mobile service support on a task-order or contract basis, small
renovation and alteration project work, and installation and maintenance
services for data communications and security systems.
3
EMCOR's Energy & Technologies business designs and constructs customers'
energy-related projects and for certain of these projects also provides plant
staffing. This business' recent projects include the design and construction of
a $15.6 million 14 megawatt control 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 will also provide plant staffing to these
projects under long-term contracts. Over the past five years, EMCOR has
completed more than 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 the United
States facilities services segment.
EMCOR believes mechanical and electrical construction services and facilities
services activities are complementary, permitting it to offer customers a
comprehensive package of services. The ability to offer both construction and
facilities services enhances EMCOR's competitive position with customers.
Furthermore, EMCOR's facilities services operations tend to be less cyclical
than its construction operations because facilities services are more responsive
to the needs of an industry's operational requirements rather than its
construction requirements.
COMPETITION
EMCOR believes that the mechanical and electrical construction services
business is highly fragmented and competitive consisting of thousands of small
companies across the United States and around the world. EMCOR competes with
national, regional and local companies, many of which are small, owner-operated
entities that operate in a limited geographic area. However, there are a few
public companies focused on providing mechanical and electrical construction
services, such as Integrated Electrical Services, Inc. and Comfort Systems USA,
Inc. A majority of EMCOR's revenues are derived from projects requiring
competitive bids; however, an invitation to bid is often conditioned upon prior
experience, technical capability and financial strength. Because EMCOR has total
assets, annual revenues, net worth, access to bank credit and surety bonding,
and expertise significantly greater than most of its competitors, EMCOR believes
it has a significant competitive advantage over its competitors. 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, a number of
large corporations such as Johnson Controls, Inc., Fluor Corp., Unicco Service
Company, Trammel Crow and Jones Lang LaSalle are engaged in this field.
EMPLOYEES
EMCOR presently employs approximately 26,000 people, approximately 71% of
whom are represented by various unions pursuant to more than 460 collective
bargaining agreements between EMCOR's individual subsidiaries and local unions.
EMCOR believes that its employee relations are generally good. None of these
collective bargaining agreements are national or regional in scope.
BACKLOG
EMCOR had contract backlog as of December 31, 2004 of approximately $2.8
billion, compared with backlog of approximately $3.0 billion as of December 31,
2003. Backlog is not a term recognized under accounting principles generally
accepted in the United States; however, it is a common measurement used in
EMCOR's industry. Backlog includes 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, except 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. Backlog increased by $0.1 billion as of
December 31, 2003 compared to December 31, 2002. For the year ended December 31,
2004, EMCOR had approximately $4.75 billion in revenues compared to
approximately $4.53 billion in revenues for the year ended December 31, 2003.
4
ITEM 2. PROPERTIES
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities, both leased and owned, and identifies
the business segment that is the principal user of each such facility.
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven Corporate Park
Norwalk, Connecticut ............................................... 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona (a) ............................................... 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, California (c) ........................................ 11,368 3/31/09
3208 Landco Drive
Bakersfield, California (c) ........................................ 49,875 6/30/07
555 Anton Boulevard
Costa Mesa, California (a) ......................................... 17,058 5/31/08
1168 Fesler Street
El Cajun, California (b) ........................................... 48,360 8/31/10
24041 Amador Street
Hayward, California (b) ............................................ 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) ............................................ 34,800 6/30/14
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 1/31/06
5
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 8/31/08
2118 W. Harry
Wichita, Kansas (b) ................................................ 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky (c) ............................................ 20,600 1/07/09
4530 Hollins Ferry Road
Baltimore, Maryland (b) ............................................ 26,792 Owned
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 1/14/06
348 New Country Road
Secaucus, New Jersey (b) ........................................... 37,905 12/31/07
26 West Street
Brooklyn, New York (b) ............................................. 15,000 Owned
301 and 305 Suburban Avenue
Deer Park, New York (b) ............................................ 33,535 3/31/05
24-37 46th Street
Long Island City, New York (a) ..................................... 10,000 1/31/07
111-01 and 109-15 14th Avenue
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 (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, 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 Carolina (a) ....................................... 11,850 2/28/07
7520 Bartlett Corp. Avenue, East
Bartlett, Tennessee (c) ............................................ 9,000 12/31/05
4067 New Getwell Road
Memphis, Tennessee (b) ............................................. 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas (c) ................................................. 18,028 1/31/07
5550 Airline Drive
Houston, Texas (b) ................................................. 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) ................................................. 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ........................................... 120,904 12/31/06
320 23rd Street
Arlington, Virginia (a) ............................................ 43,028 3/05/10
109-D Executive Drive
Dulles, Virginia (c) ............................................... 19,000 8/31/09
22930 Shaw Road
Dulles, Virginia (c) ............................................... 32,616 2/28/15
7
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 Logan Avenue
Winnipeg, Manitoba, Canada (e) ..................................... 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada (e) .................................... 16,100 Owned
EMCOR believes that all of its property, plant and equipment are well
maintained, in good operating condition and suitable for the purposes for which
they are used.
See Note K -- Commitments and Contingencies of the notes to consolidated
financial statements for additional information regarding lease costs. EMCOR
utilizes substantially all of its leased or owned facilities and believes there
will be no difficulty either in negotiating the renewal of its real property
leases as they expire or in finding alternative space, if necessary.
- ------------------
(a) Principally used by a company engaged in the "United States facilities
services" segment.
(b) Principally used by a company engaged in the "United States mechanical
construction and facilities services" segment.
(c) Principally used by a company engaged in the "United States electrical
construction and facilities services" segment.
(d) Principally used by a company engaged in the "United Kingdom construction
and facilities services" segment.
(e) Principally used by a company engaged in the "Canada construction and
facilities services" segment.
8
ITEM 3. LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
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's subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneled 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 March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim
in arbitration against EMCOR's United Kingdom subsidiary, EMCOR Drake & Scull
Group plc ("D&S"), in connection with a subcontract D&S entered into with Mowlem
with respect to a project for the United Kingdom Ministry of Defence at Abbey
Wood in Bristol, U.K. Mowlem seeks damages arising out of alleged defects in the
D&S design and construction of the mechanical and electrical engineering
services for the project. Mowlem's claim is for 39.5 million British pounds
sterling (approximately $75.8 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 million) for certain design, labor
and delay and disruption costs incurred by D&S in connection with its
subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCOR or its
subsidiaries are involved range from a few thousand dollars to over $75.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR's financial position and/or results of
operations. These proceedings include the following: (a) a civil action brought
against EMCOR's 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. (b) A civil action brought by a joint
venture (the "JV") between EMCOR's 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 costs in completing this project, which are
included in the balance sheet account "costs and estimated earnings in excess of
billings on uncompleted contracts" in EMCOR's consolidated balance sheets as of
December 31, 2004 and 2003. A jury has returned 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), and in
a jury trial to be subsequently held the JV intends to claim damages in excess
of $18.0 million (exclusive of interest). In accordance with the joint venture
agreement establishing the JV, Poole & Kent would be entitled to approximately
one-half of any damage award received by the JV.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 58; 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; 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; 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; 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; 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; 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.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION. EMCOR's common stock trades on the New York Stock
Exchange under the symbol "EME".
The following table sets forth high and low sales prices for the common stock
for the periods indicated as reported by the New York Stock Exchange:
2004 HIGH LOW
---- ---- ---
First Quarter .......................... $45.12 $34.06
Second Quarter ......................... $46.01 $35.80
Third Quarter .......................... $44.00 $37.52
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
HOLDERS. As of March 4, 2005, there were 127 stockholders of record and, as
of that date, EMCOR estimates there were approximately 7,600 beneficial owners
holding stock in nominee or "street" name.
DIVIDENDS. EMCOR did not pay dividends on its common stock during 2004 or
2003, and it does not anticipate that it will pay dividends on its common stock
in the foreseeable future. EMCOR's working capital credit facility limits the
payment of dividends on its common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes equity compensation plans that were approved by
stockholders and equity compensation plans that were not approved by
stockholders as of December 31, 2004:
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)
Equity Compensation
Plans Not Approved
by Security Holders 1,440,403(1) $34.43 103,463(3)
--------- -------
Total 2,064,691 $32.56 572,677
========= =======
- --------------
(1) 50,468 shares relate to options to purchase shares of Company common stock
which are held by employees (other than executive officers) of the Company
(the "Employee Options"), 1,259,398 shares relate to options to purchase
shares of Company common stock which are held by executive officers of the
Company (the "Executive Options"), 14,000 shares relate to options to
purchase shares of Company common stock which are held by Directors of the
Company (the "Director Options"), and 116,537 shares relate to restricted
common stock units ("RSUs") described below under "Restricted Share Units."
(2) Includes 89,214 shares of Company common stock reserved for issuance under
the 1997 Non-Employee Directors' Non-Qualified Stock Option Plan, 60,000
shares of Company common stock reserved for issuance under the 2003
Non-Employee Directors' Stock Option Plan, and 320,000 shares of Company
common stock reserved for issuance under the 2003 Management Stock
Incentive Plan. Subsequent to December 31, 2004, options to purchase
290,200 shares of Company common stock were granted under the 2003
Management Stock Incentive Plan.
(3) Represents shares relating to the grant of RSU's.
12
EMPLOYEE OPTIONS
The Employee Options referred to in note (1) to the immediately preceding
table under Equity Compensation Plan Information (the "Table") vest over three
years in equal annual installments, commencing with the first anniversary of the
date of grant of the Employee Options. The Board of Directors granted such
Employee Options to certain key employees of the Company based upon the
performance of such employees. Such Employee Options have an exercise price per
share equal to the fair market value of a share of Company common stock on their
respective grant dates and have a term of ten years from the grant date.
EXECUTIVE OPTIONS
140,000 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 Company 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 and
$25.44 per share; in addition, Mr. MacInnis, Chairman of the Board and Chief
Executive Officer of the Company, received an additional grant under his 1998
Employment Agreement of an option to purchase 200,000 shares with an exercise
price of $19.75 per share. Such Executive Options vested on the first
anniversary of the grant date, other than the option granted to Mr. MacInnis for
200,000 shares which vested in four equal installments based upon the Company's
common stock reaching target stock prices of $25, $30, $35 and $40.
488,135 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 Company dated January 1, 2002 (the "2002 Employment Agreements") and 30,000
of the Executive Options were granted to Mr. Anthony Guzzi, President and Chief
Operating Officer of the Company when he joined the Company in October 2004. Of
these Executive Options, (a) an aggregate amount of 171,100 of such Executive
Options were granted on December 14, 2001 with an exercise price of $41.70 per
share, (b) an aggregate amount of 145,700 of such Executive Options were granted
on January 2, 2002 with an exercise price of $46.35 per share, (c) an aggregate
amount of 141,335 of such Executive Options were granted on January 2, 2003 with
an exercise price of $54.73 and (d) 30,000 of such Executive Options were
granted on October 25, 2004 with an exercise price of $38.68. The Executive
Options referred to above in clause (a) were exercisable in full on the grant
date. The Executive Options referred to above in clauses (b) and (c) were
originally exercisable as follows; one-fourth on the grant date, one-fourth on
the first anniversary of the grant date, one-fourth on the second anniversary of
the grant date and one-fourth on the last business day of the calendar year
immediately preceding the third anniversary of the grant date. However, on June
10, 2004, the Executive Options referred to in classes (b) and (c) were amended
so that they became exercisable in full on that date in anticipation of a change
in accounting rules requiring the expensing of stock options beginning in July
2005. The options granted to Mr. Guzzi vest 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
During 2002, each non-employee director of the Company received 2,000
Director Options and in 2003 Mr. Larry J. Bump, upon his election to the Board,
received 2,000 Director Options. These options were in addition to the 3,000
options to purchase common stock granted to each non-employee director under the
Company's 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, which
plan has been approved by the Company's stockholders. The price at which such
Director Options are exercisable is equal to the fair market value per share of
common stock on the grant date. The exercise price per share of the Director
Options is $55.49 per share, except those granted to Mr. Yonker, upon his
election to the Board on October 25, 2002, which have an exercise price of
$51.75 per share, and those granted to Mr. Bump, upon his election to the Board
on February 27, 2003, which have an exercise price of $48.15 per share. All of
these options vested in full on the grant date and have a term of ten years from
the grant date.
RESTRICTED SHARE UNITS
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by the
Board of Directors in October 2000 and amended December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of units ("RSUs")
that will subsequently be converted into common stock at a 15% discount from the
fair market value of common stock as of the date the annual bonus is determined.
The units are to be converted into shares of common stock and delivered to the
executive officer on the earliest of (a) the first business day following the
day upon which the Company releases to the public generally its results in
respect of the fourth quarter of the third calendar year following the year in
respect of which the RSUs were granted ("Release Date"), (b) the executive
officer's termination of employment for any reason or (c) 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) the date elected
by the executive officer, but in no event earlier than the Release Date, (b) the
executive officer's termination of employment or (c) immediately prior to a
"change of control." In addition, on October 25, 2004, when he joined the
Company, Mr. Guzzi was granted 25,000 restricted stock units, and 12,500 of
these units will be converted into an equal number of shares of the Company's
common stock on the first business day immediately following the day upon which
the Company releases to the public its results for the fourth quarter of each of
2004 and 2005, respectively.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from audited financial
statements and should be read in conjunction with the consolidated financial
statements, the related notes thereto and the Report of Independent Registered
Public Accounting Firm thereon included elsewhere in this and in previously
filed annual reports on Form 10-K of EMCOR.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues ................................. $4,747,880 $4,534,646 $3,968,051 $3,419,854 $3,460,204
Gross profit ............................. 446,902 482,454 482,634 391,823 357,817
Operating income ......................... 42,129 47,057 115,539 88,682 78,925
Net income ............................... $ 33,207 $ 20,621 $ 62,902 $ 50,012 $ 40,089
========== ========== ========== ========== ==========
Basic earnings per share ................. $ 2.18 $ 1.38 $ 4.23 $ 3.86 $ 3.84
========== ========== ========== ========== ==========
Diluted earnings per share ............... $ 2.13 $ 1.33 $ 4.07 $ 3.40 $ 2.95
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ..................................... $ 562,361 $ 521,356 $ 489,870 $ 421,933 $ 233,503
Total assets ................................................. $1,817,969 $1,795,247 $1,758,491 $1,349,664 $1,261,864
Goodwill ..................................................... $ 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 ........... $ 476 $ 589 $ 1,015 $ 973 $ 116,056
Capital lease obligations .................................... $ 1,662 $ 339 $ 351 $ 249 $ 573
- ---------------
(a) No cash dividends on EMCOR's common stock have been paid during the past
five years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Revenues for the year ended December 31, 2004 were $4.75 billion compared to
$4.53 billion and $3.97 billion for the years ended December 31, 2003 and 2002,
respectively. Net income was $33.2 million for 2004 compared to $20.6 million
for 2003 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 2003 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 which reported breakeven results for 2004 compared to an operating loss
of $22.4 million for 2003, increased gross profits from transportation
infrastructure, financial services, healthcare and hospitality work for the
United States electrical construction and facilities services segment and a
reduction in the provision for income taxes of approximately $16.3 million in
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; (b) continued decreased
availability of higher margin discretionary small project spending and repair
and maintenance work in certain geographical markets in the United States; (c)
continued heightened price competition for commercial, industrial and public
sector work in the United States; and (d) increased prices for certain fixed
price construction project materials, particularly in Canada.
14
The 2004 results were also positively affected by the implementation of
significant strategic decisions and management changes initiated by EMCOR Group,
Inc. senior management in late 2003 and during 2004. These actions included a
curtailment in bidding for public sector work, replacement of senior management
at certain business units and reductions in selling, general and administrative
expenses in all segments. Related to these actions were $8.3 million of
restructuring expenses in 2004, principally 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 has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: (a) United States electrical construction and facilities
services (involving systems for generation and distribution of electrical power,
lighting systems, low-voltage systems such as fire alarm, security,
communications and process control systems and voice and data systems); (b)
United States mechanical construction and facilities services (involving systems
for heating, ventilation, air conditioning, refrigeration, and clean-room
ventilation systems, and plumbing, process and high-purity piping systems); (c)
United States facilities services; (d) Canada construction and facilities
services; (e) United Kingdom construction and facilities services; and (f) Other
international construction and facilities services. The segment "United States
facilities services" principally consists of those operations which provide a
portfolio of services needed to support the operation and maintenance of
customers' facilities (mobile operation and maintenance services, site-based
operation and maintenance services, facility planning and consulting services,
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's
operations outside of the United States, Canada and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
EMCOR's interest in its South African joint venture was sold in July 2004.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. EMCOR's significant accounting policies are described
in Note B - Summary of Significant Accounting Policies of the notes to
consolidated financial statements included in Item 8 of this Form 10-K. There
was no initial adoption of any accounting policies during 2004. EMCOR believes
that some of the more critical judgment areas in the application of accounting
policies that affect the financial condition and results of operations are the
impact of changes in the estimates and judgments pertaining to: (a) revenue
recognition from (i) long-term construction contracts for which the percentage
of completion method of accounting is used and (ii) services contracts; (b)
collectibility or valuation of accounts receivable; (c) insurance liabilities;
(d) income taxes; and (e) intangible assets.
15
REVENUE RECOGNITION FROM LONG-TERM CONSTRUCTION CONTRACTS AND SERVICES CONTRACTS
EMCOR believes its most critical accounting policy is revenue recognition
from long-term construction contracts for which EMCOR uses the
percentage-of-completion method of accounting. Percentage-of-completion
accounting is the prescribed method of accounting for long-term contracts in
accordance with accounting principles generally accepted in the United States,
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts," and accordingly, the method used for
revenue recognition within EMCOR's industry. Percentage-of-completion for each
contract is measured principally by the ratio of costs incurred to date to
perform each contract to the estimated total costs to perform such contract at
completion. Certain of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to perform such
contract at completion. Provisions for the entirety of estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Application of percentage-of-completion accounting results in the
recognition of costs and estimated earnings in excess of billings on uncompleted
contracts in EMCOR's consolidated balance sheets. Costs and estimated earnings
in excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers 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 seeks or will seek to collect from customers or others for
errors or changes in contract specifications or design, contract change orders
in dispute or unapproved as to both scope and price, or other customer-related
causes of unanticipated additional contract costs (unapproved change orders and
claims). 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, 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 claims of approximately $53.5
million and $51.4 million, respectively. In addition, accounts receivable as of
December 31, 2004 and 2003 include claims of approximately $5.4 million and $9.4
million, respectively, and contractually billed amounts related to such
contracts of approximately $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. Due to uncertainties inherent in
estimates employed in applying percentage-of-completion accounting, estimates
may be revised as project work progresses. Application of
percentage-of-completion accounting requires that the impact of revised
estimates be reported prospectively in the consolidated financial statements. In
addition to revenue recognition for long-term construction contracts, EMCOR
recognizes revenues from services contracts as such contracts are performed in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition, revised
and updated" ("SAB 104"). There are two basic types of services contracts: (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 there may be EMCOR employees on 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 is 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's prior collection history with the customer and related aging
of past due balances. The provisions for bad debts during 2004, 2003, and 2002
amounted to approximately $7.0 million, $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,
2004 and 2003, accounts receivable of $1,073.5 million and $1,009.2 million,
respectively, included allowances for doubtful accounts of $36.2 million and
$43.7 million, respectively. Specific accounts receivable are evaluated when
EMCOR believes a customer may not be able to meet its financial obligations due
to a deterioration of its financial condition or 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 has deductibles for certain workers' compensation, auto liability,
general liability and property claims, has self-insured retentions for certain
other casualty claims and is self-insured for employee-related health care
claims. Losses are recorded based upon estimates of the liability for claims
incurred and an estimate of claims incurred but not reported. The liabilities
are derived from known facts, historical trends and industry averages utilizing
the assistance of an actuary to determine the best estimate of these
obligations. EMCOR believes its liabilities for these obligations are adequate.
However, such obligations are difficult to assess and estimate due to numerous
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 actual experience differs from the
assumptions and estimates used for recording the liabilities, adjustments may be
required and would be recorded in the period that the experience becomes known.
INCOME TAXES
EMCOR had net deferred tax assets primarily resulting from deductible
temporary differences of $2.5 million and $18.8 million at December 31, 2004 and
2003, 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, 2004
and 2003, the total valuation allowance on net deferred tax assets was
approximately $10.9 million and $2.0 million, respectively. The increase in the
valuation allowance was recorded to reduce net deferred tax assets related to
net operating losses and other temporary differences of the United Kingdom
construction and facilities services segment inasmuch as there is uncertainty of
sufficient future income to realize the benefit of such deferred tax assets.
INTANGIBLE ASSETS
As of December 31, 2004, EMCOR had goodwill and net identifiable intangible
assets (primarily the market value of its backlog, customer relationships and
trademarks and tradenames) of $279.4 million and $18.8 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, and be 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, no indicators of impairment of its goodwill
or identifiable intangible assets resulted from EMCOR's annual impairment
review, which was performed in accordance with the provisions of SFAS 142 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, reclassifications of
certain expenses within the income statement for the prior years and
reclassifications of certain business units among the segments due to changes in
EMCOR's internal reporting structure.
REVENUES
As described below in more detail, revenues for 2004 increased 4.7% to $4.75
billion compared to $4.53 billion for 2003. This revenue growth was principally
due to: (a) increased work on United States transportation infrastructure,
financial services, healthcare, and hospitality construction projects; (b) the
impact of favorable foreign exchange rate changes on revenues amounting to $19.7
million in the Canada construction and facilities services segment (despite
reduced revenues 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; and (c) an increase
in the number of United States site-based facilities services contracts. This
growth in 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.
Contract backlog as of December 31, 2004 was approximately $2.8 billion, a
$0.2 billion decrease compared with backlog of approximately $3.0 billion as of
December 31, 2003. Backlog is not a term recognized under accounting principles
generally accepted in the United States; however, it is a common measurement
used in EMCOR's industry. Backlog includes 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, except
if the remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues. The 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, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
2004 TOTAL 2003 TOTAL 2002 TOTAL
---------- ----- ---------- ----- ---------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3 26% $ 1,239.5 27% $ 1,152.4 29%
United States mechanical construction and facilities services ........ 1,825.7 38% 1,715.8 38% 1,715.4 43%
United States facilities services .................................... 727.6 15% 661.2 15% 250.0 6%
---------- ---------- ----------
Total United States operations ....................................... 3,788.6 80% 3,616.5 80% 3,117.8 79%
Canada construction and facilities services .......................... 280.8 6% 346.8 8% 316.3 8%
United Kingdom construction and facilities services .................. 678.5 14% 571.3 13% 533.9 13%
Other international construction and facilities services ............. -- -- -- -- -- --
---------- ---------- ----------
Total worldwide operations ............................................. $ 4,747.9 100% $ 4,534.6 100% $ 3,968.0 100%
========== ========== ==========
Revenues of the United States electrical construction and facilities services
segment 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.
Revenues of the United States mechanical construction and facilities services
segment 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 commercial 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's
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 increased $66.4 million
for 2004 compared to 2003. The increase in revenues was primarily attributable
to increased site-based facilities services contracts as a result of increased
sales efforts. Revenues increased by $411.2 million for 2003 compared to 2002.
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 projects due to increased competition resulting in fewer projects
awarded to EMCOR. Additionally, a reduction in demand for mobile services, which
services had been adversely affected by cooler than normal 2003 summer weather
conditions in parts of the United States, contributed to a decrease in 2003
revenues.
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 for
Canadian dollars to 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 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 for
British pounds to United States dollars because of 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's interest in a
South African joint venture in July 2004) and in the Middle East. During 2004,
2003 and 2002, 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 continues to pursue new business
selectively in the Middle Eastern and European markets; however, the
availability of opportunities there 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, 2004, 2003
and 2002 (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%
2004 gross profit (revenues less cost of sales) decreased $35.6 million for
2004 compared to 2003. Gross profit as a percentage of revenues was 9.4% for
2004 compared to 10.6% for 2003. Gross profit for 2004 was lower than in the
prior year, despite greater revenues than in 2003, primarily due to: (a) greater
than originally estimated labor requirements to perform work as well as
continued reduced labor productivity due to the uncertain construction job
market; (b) reduced availability of higher margin discretionary small project
spending and repair and maintenance work; (c) increased competition for, and a
related decrease in gross profit margin on, commercial, industrial and public
sector work in the United States; and (d) increased prices for material required
for certain construction projects, which price increases particularly negatively
impacted the Canada construction and facilities services segment gross profit.
Positively impacting 2004 gross profit was improved 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, 2004, 2003 and 2002 (in millions,
except for percentages):
2004 2003 2002
-------- -------- --------
Selling, general and administrative expenses .......................................... $ 399.3 $ 435.4 $ 367.1
Selling, general and administrative expenses as a percentage of revenues .............. 8.4% 9.6% 9.3%
Selling, general and administrative expenses for 2004 decreased $36.1 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 $8.3 million for 2004. Approximately $7.0 million of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates paying
substantially all of the remaining obligations in 2005. There were no
restructuring expenses for the year ended December 31, 2003 or 2002.
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's United Kingdom
Delcommerce equipment rental services division. Contemporaneously with the sale,
EMCOR 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 on 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. There were no sales of assets or equity investments in
either 2003 or 2002 other than the disposal of property, plant and equipment in
the normal course of business.
OPERATING INCOME
The following table presents EMCOR's operating income by segment, and each
segment's operating income as a percentage of its segment's revenues, for the
years ended December 31, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2004 REVENUES 2003 REVENUES 2002 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services ...... $ 81.2 6.6% $ 57.8 4.7% $ 79.3 6.9%
United States mechanical construction and facilities services ...... (1.4) -- 25.6 1.5% 59.9 3.5%
United States facilities services .................................. 14.2 2.0% 18.4 2.8% 4.4 1.8%
------ ------ ------
Total United States operations ..................................... 94.0 2.5% 101.8 2.8% 143.6 4.6%
Canada construction and facilities services ........................ (11.9) -- 2.0 0.6% 3.3 1.0%
United Kingdom construction and facilities services ................ 0.0 -- (22.4) -- 0.0 --
Other international construction and facilities services ........... 0.5 -- 0.3 -- (0.1) --
Corporate administration ........................................... (35.0) -- (34.7) -- (31.3) --
Restructuring expense .............................................. (8.3) -- -- -- -- --
Gain on sale of assets ............................................. 2.8 -- -- -- -- --
------ ------ ------
Total worldwide operations ......................................... 42.1 0.9% 47.0 1.0% 115.5 2.9%
Other corporate items:
Interest expense ................................................... (8.9) (8.9) (4.1)
Interest income .................................................... 1.9 0.7 2.0
Gain on sale of equity investment .................................. 1.8 -- --
Minority interest .................................................. (3.8) (1.9) (1.1)
Income before taxes ................................................ $ 33.2 $ 36.9 $112.3
As described in more detail below, operating income was $42.1 million for
2004, $47.0 million for 2003 and $115.5 million for 2002. 2004 operating income
decreased $4.9 million compared to 2003, primarily due to restructuring expenses
of $8.3 million. Excluding 2004 restructuring expenses of $8.3 million and a
gain on the sale of assets of $2.8 million, operating income increased $0.5
million compared to 2003. Operating income for 2004 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 $9.8
million, $4.5 million and $2.3 million 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
United States electrical construction and facilities services operating
income for 2004 increased $23.4 million compared to 2003. This segment's
increased operating income in 2004 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 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.
The United States mechanical construction and facilities services operating
loss for 2004 was $1.4 million compared to operating income of $25.6 million for
2003. The segment's 2004 operating loss was primarily attributable to: (a)
decreases in the expected recovery of estimated costs upon completion of certain
projects, principally in the Western United 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; (c) a continued
decrease in the availability of generally more profitable discretionary small
projects and repair and maintenance work due to general economic conditions
negatively impacting commercial construction spending; and (d) increased
competition for, and a related decrease in gross profit margin on, commercial,
industrial and public sector work. Partially offsetting these operating results
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's 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 was primarily due to the 2003 Unfavorable United States
Market Conditions (previously discussed in the Overview above). The mid-western
markets were negatively impacted by a significant reduction in 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 was 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 mostly
related to a reduction in incentive compensation related to less favorable
financial performance, reduction in personnel and reduction in other variable
expenses.
United States facilities services operating income for 2004 decreased $4.2
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
its acquisition by EMCOR. The decrease in operating income for 2004 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.
Canada construction and facilities services operating loss for 2004 was $11.9
million compared to operating income of $2.0 million for 2003. The 2004 losses
were 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 present 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.
United Kingdom construction and facilities services operating income was
breakeven for 2004 compared to an operating loss of $22.4 million for 2003. This
improvement was primarily attributable to an improvement in the 2004 gross
profit as there was profitable performance of work in 2004 in contrast to
contracts causing large losses in 2003, which 2003 contracts were substantially
completed by December 31, 2003. The improvement in 2004 operating income was
also attributable to 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: (a) net unfa-
21
vorable settlements and closeouts of certain construction projects completed
during that year; (b) increased bad debt expense of $5.8 million in 2003
primarily related to the potential non-payment of a large customer account
receivable (which account receivable was 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; 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 million for 2004 compared to operating income of $0.3 million for 2003 and
$0.1 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.
General corporate expenses for 2004 increased by $0.3 million compared to
2003 and increased by $3.4 million for 2003 compared to 2002. General corporate
expenses for 2004 compared to 2003 have been negatively impacted by higher audit
fees and other costs of complying with the provisions of the Sarbanes - Oxley
Act of 2002. However, these increased costs have been 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.
Interest expense was $8.9 million for both 2004 and 2003. The decrease in
borrowings under EMCOR's revolving credit facility for 2004 was offset by the
impact of increases in interest rates during the year. Interest expense
increased by $4.8 million in 2003 compared to 2002 principally due to increased
borrowing under EMCOR's revolving credit facility as a result of the 2002
acquisition of CES.
Interest income increased by $1.2 million for 2004 compared to 2003 due to
interest earned on cash provided by the United Kingdom construction and
facilities services segment, as such cash was invested in the United Kingdom at
interest rates greater than the net cost of borrowing under EMCOR's revolving
credit facility. Interest income decreased by $1.3 million for 2003 compared to
2002 due to repayment of increased borrowings for working capital under EMCOR's
revolving credit facility.
The income tax benefit of less than $0.05 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 sufficient future income to
realize the benefit of such deferred tax assets and (c) the partial offset of
such income tax provisions by $22.1 million of income tax benefits for income
tax reserves no longer required based on current analysis of probable exposures.
The provision on income before income taxes for 2004, 2003 and 2002 was recorded
at an effective income tax rate of approximately 42%.
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, 2004 and 2003 (in millions):
2004 2003
------- -------
Net cash provided by operating activities .............. $ 54.5 $ 1.6
Net cash used in investing activities .................. $ (4.0) $ (23.6)
Net cash (used in) provided by financing activities .... $ (58.4) $ 7.1
The Company's consolidated cash balance decreased by $7.9 million from $78.3
million at December 31, 2003 to $70.4 million at December 31, 2004. 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 2004 compared to
2003 was primarily due to an increase in net income of $12.6 million, a decrease
in 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 in 2004 of $4.0 million consisted
primarily of earn-out payments of $1.6 million for acquisitions in prior
periods, net disbursements for other investments of $1.3 million and $16.1
million for purchases of property, plant and equipment, offset by $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
million of proceeds from the sale of property, plant and equipment. Net cash
used in financing activities for 2004 of $58.4 million was primarily
attributable to net payments under working capital credit lines of $59.4
million, offset by proceeds from the exercise of stock options of $1.6 million.
22
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 ........................................... $ 0.5 $ 0.1 $ 0.2 $ 0.2 $ --
Capital lease obligations ...................................... 1.9 0.7 0.8 0.4 --
Operating leases ............................................... 165.6 39.6 57.4 32.8 35.8
Minimum funding requirement for pension plan ................... 10.7 10.7 -- -- --
Open purchase obligations (1) .................................. 661.2 514.1 142.1 5.0 --
Other long-term obligations (2) ................................ 88.5 17.6 70.9 -- --
-------- -------- -------- ------- -------
Total Contractual Obligations .................................. $ 928.4 $ 582.8 $ 271.4 $ 38.4 $ 35.8
======== ======== ======== ======= =======
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
------------------------------------------------------------
TOTAL LESS
OTHER COMMERCIAL AMOUNTS THAN 1-3 4-5 AFTER
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
------------------ --------- -------- -------- ------- -------
Revolving Credit Facility (3) ...................... $ 80.0 $ -- $ 80.0 $ -- $ --
Letters of credit .................................. 54.3 -- 54.3 -- --
Guarantees ......................................... 25.0 -- -- -- 25.0
-------- -------- -------- ------- -------
Total Commercial Commitments ....................... $ 159.3 $ -- $ 134.3 $ -- $ 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, the timing for which
payments beyond one year is not practical to estimate.
(3) EMCOR classifies these borrowings as short-term on its consolidated balance
sheet because of EMCOR's intent and ability to repay the amounts on a
short-term basis.
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain direct and
indirect subsidiaries of EMCOR, is secured by substantially all of the assets of
EMCOR and most of its subsidiaries and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to payment of dividends,
common stock repurchases, investments, acquisitions, indebtedness and capital
expenditures. A commitment fee is payable on the average daily unused amount of
the Revolving Credit Facility. The fee ranges from 0.3% to 0.5% of the unused
amount, based on certain financial tests. Borrowings under the Revolving Credit
Facility bear interest at (a) a rate which is the prime commercial lending rate
announced by Harris Nesbitt from time to time (5.25% at December 31, 2004) plus
0% to 1.0%, based on certain financial tests or (b) United States dollar LIBOR
(at December 31, 2004 the rate was 2.42%) plus 1.5% to 2.5%, based on certain
financial tests. The interest rates in effect at December 31, 2004 were 5.50%
and 4.17% 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% to 2.5% of the respective face amounts of the letters of credit issued and
are charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2004 and 2003, EMCOR had approximately $54.3 million
and $49.2 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $80.0 million and $139.4 million outstanding under the Revolving
Credit Facility at December 31, 2004 and 2003, respectively.
In August 2001, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed a credit agreement with a bank providing for an overdraft facility of up
to Cdn. $0.5 million. The facility is secured by a standby letter of credit and
provides for interest at the bank's prime rate (4.25% at December 31, 2004).
There were no borrowings outstanding under this credit agreement at December 31,
2004 or 2003.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it
has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a
60% interest. The venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to customers for use in
air conditioning private and public properties. These guarantees are not
expected to have a material effect on EMCOR's financial position or results of
operations. Each of the venturers is jointly and severally liable, in the event
of default, for the venture's $25.0 million borrowing due December 2031. During
September 2002, each venture partner contributed equity to the venture, of which
EMCOR's contribution was $14.0 million.
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 which secure EMCOR payment and performance
obligations under contracts for such projects. In addition, at the request of
labor unions representing certain EMCOR employees, bonds are sometimes provided
to secure obligations for wages and benefits payable to or for such employees.
EMCOR bonding requirements typically increase as the amount of public sector
work increases. As of December 31, 2004, sureties had issued bonds for the
account of EMCOR in the aggregate amount of approximately $1.6 billion. The
bonds are issued by EMCOR's sureties in return for a premium which varies
depending on the size and type of the bonds. The largest individual bond is
approximately $170.0 million. EMCOR has agreed to indemnify the sureties for any
payments made by them in respect of bonds issued on EMCOR's behalf.
EMCOR does not have any other material financial guarantees or off-balance
sheet arrangements other than those disclosed herein.
The primary source of liquidity for EMCOR has been, and is expected to
continue to be, cash generated by operating activities. EMCOR also maintains the
Revolving Credit Facility that may be utilized, among other things, to meet
short-term liquidity needs in the event cash generated by operating activities
is insufficient or to enable EMCOR to seize opportunities to participate in
joint ventures or to make acquisitions that may require access to cash on short
notice or for any other reason. EMCOR may also increase liquidity through an
equity offering or other debt instruments. Short-term changes in macroeconomic
trends may have an effect, positively or negatively, on liquidity. In addition
to managing borrowings, EMCOR's focus on the facilities services market is
intended to provide an additional buffer against economic downturns as the
facilities services market is characterized by annual and multi-year contracts
that provide a more predictable stream of cash flow than the construction
market. The acquisition in December 2002 of CES, which is primarily focused on
the facilities services market, is part of EMCOR's plan to grow its facilities
services business. Short-term liquidity is also impacted by the type and length
of construction contracts in place. During economic downturns, such as the 2001
through 2004 period for the commercial construction industry, there are
typically fewer small and discretionary projects from the private sector, and
companies such as EMCOR more aggressively bid more large long-term
infrastructure and public sector contracts. Performance of long duration
contracts typically requires working capital until initial billing milestones
are achieved. While EMCOR strives to maintain a net over-billed position with
its customers, there can be no assurance that a net over-billed position can be
maintained. EMCOR's net over-billings, defined as the balance sheet accounts
billings in excess of costs and estimated earnings on uncompleted contracts less
cost and estimated earnings in excess of billings on uncompleted contracts, was
$119.0 million and $95.8 million as of December 31, 2004 and 2003, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the Revolving Credit Facility, and the sale
of various secured or unsecured debt and/or equity interests in the public and
private markets. Based upon EMCOR's current credit ratings and financial
position, EMCOR can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, EMCOR's primary revenue risk
factor continues to be the level of demand for non-residential construction
services, which is in turn influenced by macroeconomic trends including interest
rates and governmental economic policy. In addition to the primary revenue risk
factor, EMCOR's ability to perform work at profitable levels is critical to
meeting long-term liquidity requirements.
EMCOR believes that current cash balances and borrowing capacity available
under the Revolving Credit Facility or other forms of financing available
through debt or equity offerings, combined with cash expected to be generated
from operations, will be sufficient to provide short-term and foreseeable
long-term liquidity and meet expected capital expenditure requirements. However,
EMCOR is a party to lawsuits and other proceedings in which other parties seek
to recover from it amounts ranging from a few thousand dollars to over $70.0
million. If EMCOR was required to pay damages in one or more such proceedings,
such payments could have a material adverse effect on its financial position,
results of operations and/or cash flows.
CERTAIN INSURANCE MATTERS
As of December 31, 2004, EMCOR utilized approximately $43.7 million of
letters of credit issued pursuant to its Revolving Credit Facility as collateral
for its insurance obligations.
NEW ACCOUNTING PRONOUNCEMENT
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("123(R)"), which is
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will no longer
be an alternative. Statement 123(R) must be adopted no later than July 1, 2005.
EMCOR will adopt Statement 123(R) on July 1, 2005.
As permitted by Statement 123, EMCOR currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our result 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. The impact of the standard on
future operating results cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future. Statement 123(R)
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 EMCOR 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 has not used derivative financial instruments for any purpose during
the years ended December 31, 2004 and 2003, including trading or speculating on
changes in interest rates or commodity prices of materials used in its business.
EMCOR is exposed to market risk for changes in interest rates for borrowings
under the Revolving Credit Facility. Borrowings under that facility bear
interest at variable rates, and the fair value of this borrowing is not
significantly affected by changes in market interest rates. As of December 31,
2004, there was $80.0 million of borrowings outstanding under the facility, and
these borrowings bear interest at (a) a rate which is the prime commercial
lending rate announced by Harris Nesbitt from time to time (5.25% at December
31, 2004) plus 0% to 1.0%, based on certain financial tests or (b) United States
dollar LIBOR (at December 31, 2004, the rate was 2.42%) plus 1.5% to 2.5%, 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 Revolving Credit Facility expires in September 2007. There is no
guarantee that EMCOR will be able to renew the facility at its expiration.
EMCOR is also exposed to market risk and the market's potential related
impact on accounts receivable or costs and estimated earnings in excess of
billings on uncompleted contracts. The amounts recorded may be at risk if
customers' ability to pay these obligations is negatively impacted by economic
conditions. EMCOR continually monitors the credit worthiness of its customers
and maintains on-going discussions with customers regarding contract status with
respect to change orders and billing terms. Therefore, EMCOR believes it takes
appropriate action to manage market and other risks, but there is no assurance
that it will be able to reasonably identify all risks with respect to
collectibility of these assets. See also the previous discussion of Accounts
Receivable under the heading "Application of Critical Accounting Policies" in
the Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Amounts invested in EMCOR's foreign operations are translated into U. S.
dollars at the exchange rates in effect at year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income, a component
of stockholders' equity, in its consolidated balance sheets. EMCOR believes the
exposure to the effects that fluctuating foreign currencies may have on its
consolidated results of operations is limited because the foreign operations
primarily invoice customers and collect obligations in their respective local
currencies. Additionally, expenses associated with these transactions are
generally contracted and paid for in their same local currencies.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995. 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.
25
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,
---------------------------
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................................................................ $ 70,404 $ 78,260
Accounts receivable, less allowance for doubtful accounts of $36,185
and $43,706, respectively ...................................................................... 1,073,454 1,009,170
Costs and estimated earnings in excess of billings on uncompleted contracts ...................... 240,716 249,393
Inventories ...................................................................................... 10,580 9,863
Prepaid expenses and other ....................................................................... 30,417 42,470
----------- -----------
Total current assets ........................................................................... 1,425,571 1,389,156
Investments, notes and other long-term receivables ................................................. 26,472 26,452
Property, plant and equipment, net ................................................................. 56,468 66,156
Goodwill ........................................................................................... 279,432 277,994
Identifiable intangible assets, less accumulated amortization of $7,017 and $3,573, respectively ... 18,782 22,226
Other assets ....................................................................................... 11,244 13,263
----------- -----------
Total assets ....................................................................................... $ 1,817,969 $ 1,795,247
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line ..................................................... $ 80,000 $ 139,400
Current maturities of long-term debt and capital lease obligations ............................... 806 367
Accounts payable ................................................................................. 467,415 451,713
Billings in excess of costs and estimated earnings on uncompleted contracts ...................... 359,667 345,207
Accrued payroll and benefits ..................................................................... 138,771 131,623
Other accrued expenses and liabilities ........................................................... 115,714 110,147
----------- -----------
Total current liabilities ...................................................................... 1,162,373 1,178,457
Long-term debt and capital lease obligations ....................................................... 1,332 561
Other long-term obligations ........................................................................ 91,903 94,873
----------- -----------
Total liabilities .................................................................................. 1,255,608 1,273,891
----------- -----------
Stockholders' equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding ......... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized, 16,324,335 and
16,155,844 shares issued, respectively ........................................................... 163 162
Capital surplus .................................................................................... 318,122 316,729
Accumulated other comprehensive income ............................................................. 7,699 1,257
Retained earnings .................................................................................. 253,128 219,921
Treasury stock, at cost, 1,088,286 and 1,123,651 shares, respectively .............................. (16,751) (16,713)
----------- -----------
Total stockholders' equity ......................................................................... 562,361 521,356
----------- -----------
Total liabilities and stockholders' equity ......................................................... $ 1,817,969 $ 1,795,247
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
26
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002
----------- ----------- -----------
Revenues ......................................................... $ 4,747,880 $ 4,534,646 $ 3,968,051
Cost of sales .................................................... 4,300,978 4,052,192 3,485,417
----------- ----------- -----------
Gross profit ..................................................... 446,902 482,454 482,634
Selling, general and administrative expenses ..................... 399,338 435,397 367,095
Restructuring expenses ........................................... 8,274 -- --
Gain on sale of assets ........................................... 2,839 -- --
----------- ----------- -----------
Operating income ................................................. 42,129 47,057 115,539
Interest expense ................................................. (8,883) (8,939) (4,096)
Interest income .................................................. 1,886 703 1,997
Gain on sale of equity investment ................................ 1,844 -- --
Minority interest ................................................ (3,814) (1,905) (1,114)
----------- ----------- -----------
Income before income taxes ....................................... 33,162 36,916 112,326
Income tax (benefit) provision ................................... (45) 16,295 49,424
----------- ----------- -----------
Net income ....................................................... $ 33,207 $ 20,621 $ 62,902
=========== =========== ===========
Basic earnings per share ......................................... $ 2.18 $ 1.38 $ 4.23
=========== =========== ===========
Diluted earnings per share ....................................... $ 2.13 $ 1.33 $ 4.07
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
27
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income ............................................................................ $ 33,207 $ 20,621 $ 62,902
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 20,939 21,717 15,371
Amortization of identifiable intangible assets ...................................... 3,444 2,818 755
Provision for doubtful accounts ..................................................... 7,026 11,249 3,354
Minority interest ................................................................... 3,814 1,905 1,114
Deferred income taxes ............................................................... 13,704 7,451 7,432
Gain on sale of assets and equity investment ........................................ (4,683) -- --
(Gain) loss on sale of property, plant and equipment ................................ (196) 314 (190)
Non-cash expense for amortization of debt issuance costs ............................ 1,925 1,416 630
Non-cash expense for Restricted Stock Units ......................................... -- -- 557
----------- ----------- -----------
79,180 67,491 91,925
Change in operating assets and liabilities excluding effect of businesses acquired:
(Increase) decrease in accounts receivable .......................................... (55,244) (49,171) 28,464
Decrease (increase) in inventories and contracts in progress, net ................... 21,130 (29,018) (14,174)
Increase in accounts payable ........................................................ 6,912 40,931 32,653
Increase (decrease) in accrued payroll and benefits and other accrued
expenses and liabilities .......................................................... 10,459 (27,351) 14,860
Changes in other assets and liabilities, net ........................................ (7,954) (1,258) 779
----------- ----------- -----------
Net cash provided by operating activities ............................................. 54,483 1,624 154,507
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets and equity investment .................................. 10,061 -- --
Proceeds from sale of property, plant and equipment ................................. 4,964 1,872 2,009
Purchase of property, plant and equipment ........................................... (16,134) (17,940) (15,585)
Payments for acquisitions of businesses and related earn-out agreements ............. (1,568) (10,943) (343,358)
Net disbursements for other investments ............................................. (1,281) (1,810) (7,679)
Payments received pursuant to indemnity provisions of acquisition agreements ........ -- 5,244 --
----------- ----------- -----------
Net cash used in investing activities ................................................. (3,958) (23,577) (364,613)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit lines .......................................... 1,365,950 1,445,904 248,000
Repayments of working capital credit lines .......................................... (1,425,350) (1,418,504) (136,000)
Borrowings for long-term debt ....................................................... 31 -- 70
Repayments for long-term debt ....................................................... (144) (22,241) (1,100)
Repayments for capital lease obligations ............................................ (458) (12) (34)
Net proceeds from exercise of stock options ......................................... 1,590 1,963 2,507
----------- ----------- -----------
Net cash (used in) provided by financing activities ................................... (58,381) 7,110 113,443
----------- ----------- -----------
Decrease in cash and cash equivalents ................................................. (7,856) (14,843) (96,663)
Cash and cash equivalents at beginning of year ........................................ 78,260 93,103 189,766
----------- ----------- -----------
Cash and cash equivalents at end of year .............................................. $ 70,404 $ 78,260 $ 93,103
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
28
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS)
ACCUMULATED
TOTAL OTHER
STOCK- COMPREHENSIVE
HOLDERS' COMMON CAPITAL INCOME RETAINED TREASURY COMPREHENSIVE
EQUITY STOCK SURPLUS (LOSS)(1) EARNINGS STOCK INCOME
---------- --------- --------- ------------- --------- --------- -------------
Balance, December 31, 2001 ................ $ 421,933 $ 159 $ 307,636 $ (5,424) $ 136,398 $ (16,836)
Net income .............................. 62,902 -- -- -- 62,902 -- $ 62,902
Foreign currency translation
adjustments ........................... 3,725 -- -- 3,725 -- -- 3,725
Pension plan additional
minimum liability, net of
tax benefit of $1.9 million ........... (3,449) -- -- (3,449) -- -- (3,449)
---------
Comprehensive income .................... $ 63,178
=========
Common stock issued under
stock option plans, net ............... 2,507 2 2,505 -- -- --
Value of Restricted Stock
Units (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 2,902 -- -- 123
Value of Restricted Stock
Units (4) ............................. 1,434 -- 1,434 -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 ................ 521,356 162 316,729 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 1,561 -- -- 28
Value of Restricted Stock
Units (4) ............................. 668 -- 668 -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2004 ................ $ 562,361 $ 163 $ 318,122 $ 7,699 $ 253,128 $ (16,751)
========= ========= ========= ========= ========= =========
- -------------
(1) 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 plus the related compensation expense in the current year due to an
increase in market value of the underlying common stock. As of October
2002, the terms of the restricted stock unit plan were changed resulting in
fixed plan accounting after the grant date from the date of this change for
both existing and new grants.
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
29
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS
EMCOR Group, Inc., a Delaware corporation, and subsidiaries (collectively
"EMCOR"), is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. EMCOR specializes in providing services relating to mechanical and
electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services." EMCOR
designs, integrates, installs, starts up, operates and maintains various
mechanical and electrical systems, 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; (d) lighting systems; (e) low-voltage
systems such as fire alarm, security, communication and process control systems;
and (f) voice and data communications systems. EMCOR provides mechanical and
electrical construction services and facilities services directly to
corporations, municipalities and other governmental entities, owners/developers
and tenants of buildings. It also provides these services indirectly by acting
as a subcontractor to general contractors, systems suppliers and other
subcontractors. Mechanical and electrical construction services generally fall
into one of two categories: (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's facilities services, which are needed to support the operation of a
customer's facilities, include site-based operations and maintenance, mobile
maintenance and service, facilities management, remote monitoring, small
modification and retrofit projects, technical consulting and diagnostic
services, installation and support for building systems, and program
development, 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 EMCOR provided construction services.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EMCOR and its
majority-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated. All investments over which EMCOR exercises significant
influence, but does not control (a 20% to 50% ownership interest), are accounted
for using the equity method of accounting.
The results of operations for the year ended December 31, 2002 include, from
the respective dates of acquisition, the results of a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc.
("Comfort") on March 1, 2002 and the results of Consolidated Engineering
Services, Inc. ("CES") acquired on December 19, 2002. The results of operations
of other acquisitions, which are not material, have been included in the results
of operations from the date of the respective acquisition by EMCOR.
PRINCIPLES OF PREPARATION
The preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States, requires EMCOR to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications of the prior years presentations of minority interest in
the consolidated statements of operations have been made in the accompanying
consolidated financial statements where appropriate to conform to the current
year presentation.
REVENUE RECOGNITION
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method. Percentage-of-completion is measured
principally by the percentage of costs incurred to date for each contract to the
estimated total costs for such contract at completion. Certain of EMCOR's
electrical contracting business units measure percentage-of-completion by the
percentage of labor costs incurred to date for each contract to the estimated
total labor costs for such contract. Revenues from services contracts are
recognized as services are provided. There are two basic types of services
contracts: (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 EMCOR 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
arise when revenues have been recorded but the amounts cannot be billed under
the terms of the contracts. Such amounts are recoverable from customers upon
various measures of performance, including achievement of certain milestones,
completion of specified units or completion of the contract. Also included in
costs and estimated earnings on uncompleted contracts are amounts EMCOR seeks or
will seek to collect from customers or others for errors or changes in contract
specifications or design, contract change orders in dispute or unapproved as to
both scope and price, or other customer-related causes of unanticipated
additional contract costs (unapproved change orders and claims). These amounts
are recorded at their estimated net realizable value when realization is
probable and can be reasonably estimated. No profit is recognized on the
construction costs incurred in connection with claim amounts. Claims made by
EMCOR involve negotiation and, in certain cases, litigation. In the event
litigation costs are incurred by EMCOR in connection with claims, such
litigation costs are expensed as incurred although EMCOR may seek to recover
these costs. EMCOR believes that it has established legal bases for pursuing
recovery of its recorded 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 unapproved change orders and claims may be made in the near-term. If
EMCOR does not successfully resolve these matters, a net expense (recorded as a
reduction in revenues), may be required, in addition to amounts that have been
previously provided for. Claims against EMCOR are recognized when a loss is
considered probable and amounts are reasonably determinable.
Costs and estimated earnings on uncompleted contracts and related amounts
billed as of December 31, 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.
31
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CLASSIFICATION OF CONTRACT AMOUNTS
In accordance with industry practice, EMCOR classifies as current all assets
and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year,
and accordingly, collection or payment of amounts related to these contracts may
extend beyond one year. Accounts receivable at December 31, 2004 and 2003
included $212.3 million and $189.5 million, respectively, of retainage billed
under terms of the contracts. EMCOR estimates that approximately 86.2% of
retainage recorded at December 31, 2004 will be collected during 2005.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, EMCOR considers all
highly liquid instruments with original maturities of three months or less to be
cash equivalents. EMCOR maintains a centralized cash management program whereby
its excess cash balances are invested in high quality, short-term money market
instruments, which are considered cash equivalents. At times, cash balances in
EMCOR's bank accounts may exceed federally insured limits.
INVENTORIES
Inventories, which consist primarily of construction materials, are stated at
the lower of cost or market. Cost is determined principally using the average
cost method. Inventories increased by $0.7 million to $10.6 million at December
31, 2004 compared to $9.9 million at December 31, 2003.
INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
Investments, notes and other long-term receivables was $26.5 million at
December 31, 2004 and 2003 and primarily consists 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
million and $18.9 million as of December 31, 2004 and 2003, respectively,
relating to a venture with Baltimore Gas & Electric. This joint venture designs,
constructs, owns, operates, leases and maintains facilities to produce chilled
water for use in air conditioning commercial properties.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation, including
amortization of assets under capital leases, is recorded principally using the
straight-line method over estimated useful lives ranging from 2 to 40 years. As
events and circumstances indicate, EMCOR reviews the carrying amount of
property, plant and equipment for impairment. In performing this review for
recoverability, long-lived assets are assessed for possible impairment by
comparing their carrying values to their undiscounted net pre-tax cash flows
expected to result from the use of the asset. Impaired assets are written down
to their fair values, generally determined based on their estimated future
discounted cash flows. Through December 31, 2004, 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, 2004 and 2003 (in
thousands):
2004 2003
--------- ---------
Machinery and equipment ........................... $ 69,902 $ 78,609
Furniture and fixtures ............................ 45,540 40,425
Land, buildings and leasehold improvements ........ 45,375 41,586
--------- ---------
160,817 160,620
Accumulated depreciation and amortization ......... (104,349) (94,464)
--------- ---------
$ 56,468 $ 66,156
========= =========
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2004 and 2003 was approximately $279.4 million and
$278.0 million, respectively, and reflects the excess of cost over fair market
value of net identifiable assets of companies acquired. EMCOR has adopted the
following accounting standards issued by the Financial Accounting Standards
Board ("FASB"): Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets"
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. SFAS 142 requires that goodwill be
allocated to the reporting units. The fair value of the reporting unit is
compared to the carrying amount on an annual basis to determine if there is a
potential impairment. If the fair value of the reporting unit is less than its
carrying value, an impairment loss is recorded to the extent that the fair value
of the goodwill within the reporting unit is less than the carrying value. The
fair value of the reporting unit 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, 2004 were as follows (in thousands):
2004
---------
Balance at beginning of period ................................... $ 277,994
Earn-out payments on prior year acquisitions ..................... 1,568
Goodwill allocated to the sale of assets and other items, net .... (130)
---------
Balance at end of period ......................................... $ 279,432
=========
There are no material remaining contingent payments related to acquisitions
as of December 31, 2004.
Identifiable intangible assets are comprised of $12.4 million in market value of
customer backlog, $7.0 million in market value of customer relationships and
$6.4 million in market value of trademarks and tradenames, all acquired as a
result of acquisitions in 2002. The $12.4 million attributable to backlog and
$7.0 million attributable to customer relationships are being amortized on a
straight-line method over periods from one to seven years. The backlog and
customer relationships presented in the consolidated balance sheets are net of
accumulated amortization of $7.0 million and $3.6 million at December 2004 and
2003, respectively. The $6.4 million attributable to trademarks and tradenames
is not being amortized as trademarks and tradenames have indefinite lives, but
are subject to an annual review for impairment in accordance with SFAS 142. See
Note C - Acquisitions of Businesses for additional information. The following
table presents the estimated future amortization expense of identifiable
intangible assets (in thousands):
2005 ................................................................ $ 3,092
2006 ................................................................ 2,740
2007 ................................................................ 2,740
2008 ................................................................ 2,740
Thereafter .......................................................... 1,070
-------
$12,382
=======
INSURANCE LIABILITIES
EMCOR's insurance liabilities are determined actuarially based on claims
filed and an estimate of claims incurred but not yet reported. At December 31,
2004 and 2003, the estimated current portion of undiscounted insurance
liabilities of $17.6 million and $16.0 million, respectively, were included in
"Other accrued expenses and liabilities" in the accompanying Consolidated
Balance Sheets. The estimated non-current portion of the undiscounted insurance
liabilities were included in "Other long-term obligations" and at December 31,
2004 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's 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's foreign subsidiaries are
maintained in their functional currency and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Translation adjustments have been recorded as Accumulated
other comprehensive income, a separate component of Stockholders'equity.
INCOME TAXES
EMCOR accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach which
requires the recognition of deferred tax assets and deferred tax liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce net deferred tax assets to
the amount expected to be realized.
DERIVATIVES AND HEDGING ACTIVITIES
Gains and losses on contracts designated as hedges of net investments in
foreign subsidiaries are recognized in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income as a component of Accumulated
other comprehensive income.
As of December 31, 2004, 2003 and 2002, EMCOR did not have any derivative
instruments.
VALUATION OF STOCK OPTION GRANTS
At December 31, 2004, EMCOR has stock-based compensation plans and programs,
which are described more fully in Note I - Stock Options and Stock Plans. EMCOR
applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized in the
accompanying Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002 in respect of stock options granted during those years
inasmuch as EMCOR grants stock options at fair market value. Had compensation
cost for these options been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), EMCOR's net income, basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS") would have been reduced from the following
"as reported amounts" to the following "pro forma amounts" (in thousands, except
per share amounts):
FOR THE YEARS ENDED
------------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income:
As reported ...................................................................... $ 33,207 $ 20,621 $ 62,902
Less: Total stock-based compensation expense determined under fair
value based method, (described in Note I), net of related tax effects .......... 2,981 1,199 2,690
---------- ---------- ----------
Pro forma ........................................................................ $ 30,226 $ 19,422 $ 60,212
========== ========== ==========
Basic EPS:
As reported ...................................................................... $ 2.18 $ 1.38 $ 4.23
Pro forma ........................................................................ $ 1.99 $ 1.30 $ 4.05
Diluted EPS:
As reported ...................................................................... $ 2.13 $ 1.33 $ 4.07
Pro forma ........................................................................ $ 1.94 $ 1.26 $ 3.90
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 ("123(R)"), which is
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will no longer
be an alternative. Statement 123(R) must be adopted no later than July 1, 2005.
EMCOR will adopt Statement 123(R) on July 1, 2005.
As permitted by Statement 123, EMCOR currently accounts for share-based payments
to employees using Opinion 25's intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method will have a significant impact
on our result 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 the standard on future operating results cannot be predicted at this
time because it will depend on levels of share-based payments granted in the
future. Statement 123(R) 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 EMCOR 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.
35
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- ACQUISITIONS OF BUSINESSES AND DISPOSITIONS OF ASSETS -- (CONTINUED)
During 2004 and 2003, EMCOR paid an aggregate of $1.6 million and $2.0
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's United
Kingdom Delcommerce equipment rental services division. Contemporaneously with
the sale, EMCOR 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 on 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 in the Other international segment.
There were no sales of assets or equity investments in either of the years ended
December 31, 2003 and 2002 other than disposal of property, plant and equipment
in the normal course of business.
The following tables present unaudited pro forma results of operations
including all companies acquired during 2002 as if the acquisitions had occurred
at the beginning of fiscal 2002. The unaudited pro forma results of operations
for companies acquired during 2003 have been excluded due to immateriality. The
unaudited pro forma results of operations are not necessarily indicative of the
results of operations had the acquisitions actually occurred at the beginning of
fiscal 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 forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of March 1, 2002.
(2) Adjustments to arrive at pro forma results of operations for the year ended
December 31, 2002 represent results from January 1, 2002 through the
acquisition date of December 19, 2002.
(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)
NOTE D -- EARNINGS PER SHARE
The following tables summarize EMCOR's calculation of Basic and Diluted
Earnings per Share ("EPS") for the years ended December 31, 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 $2.13
=========== ========== =====
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, which were excluded from the
computation of Diluted EPS for the years ended December 31, 2004, 2003 and 2002
because they would be antidilutive, were 886,647, 425,499 and 45,000,
respectively.
NOTE E -- CURRENT DEBT
2002 CREDIT FACILITY
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, is guaranteed by certain direct and
indirect subsidiaries of EMCOR, is secured by substantially all of the assets of
EMCOR and most of its subsidiaries and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to payment of dividends,
common stock repurchases, investments, acquisitions, indebtedness and capital
expenditures. A commitment fee is payable on the average daily unused amount of
the Revolving Credit Facility. The fee ranges from 0.3% to 0.5% of the unused
amount, based on certain financial tests. Loans under the Revolving Credit
Facility bear interest at (a) a rate which is the prime commercial lending rate
announced by Harris Nesbitt from time to time (5.25% at December 31, 2004) plus
0% to 1.0%, based on certain financial tests or (b) United States dollar LIBOR
(at December 31, 2004, the rate was 2.42%) plus 1.5% to 2.5%, based on certain
financial tests. The interest rates in effect at December 31, 2004 were 5.50%
and 4.17% 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% to 2.5% of the respective face amounts of the letters of credit issued and
are charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2004 and 2003, EMCOR had approximately $54.3 million
and $49.2 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $80.0 million and $139.4 million outstanding under the 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)
FOREIGN BORROWINGS
In August 2001, EMCOR's Canadian subsidiary, Comstock Canada Ltd., renewed a
credit agreement with a bank providing for an overdraft facility of up to Cdn.
$0.5 million. The facility is secured by a standby letter of credit and provides
for interest at the bank's prime rate, which was 4.25% at December 31, 2004.
There were no borrowings outstanding under this credit agreement at December 31,
2004 or 2003.
NOTE F -- LONG-TERM DEBT
Long-term debt in the accompanying Consolidated Balance Sheets consisted of
the following amounts as of December 31, 2004 and 2003 (in thousands):
2004 2003
------ ------
Capitalized Lease Obligations at weighted average interest rates from 2.0% to 8.25%,
payable in varying amounts through 2009 ............................................................ $1,662 $ 339
Other, at weighted average interest rates of approximately 10.0%, payable in varying
amounts through 2012 ............................................................................... 476 589
------ ------
2,138 928
Less: current maturities ............................................................................. 806 367
------ ------
$1,332 $ 561
====== ======
CAPITALIZED LEASE OBLIGATIONS
See Note K -- Commitments and Contingencies.
OTHER LONG-TERM DEBT
Other long-term debt consists primarily of loans for real estate, office
equipment, automobiles and building improvements. The aggregate amount of other
long-term debt maturing is approximately $0.1 million in each of the next five
years.
NOTE G -- INCOME TAXES
The income tax benefit of less than $0.05 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 files a consolidated federal income tax return including all its U.S.
subsidiaries. At December 31, 2004, EMCOR had net operating loss carryforwards
("NOLs") for U.S. income tax purposes of approximately $2.0 million, which
expire in the year 2009. In addition, at December 31, 2004, EMCOR had NOLs for
United Kingdom income tax purposes of approximately $21.8 million, which have no
expiration date and NOLs for Canadian income tax purposes of approximately $9.0
million, which expire in 2011. The NOLs are subject to review by taxing
authorities.
38
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, 2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
-------- ------- -------
Federal income taxes at the statutory rate .......................................... $ 11,607 $12,921 $39,314
State and local income taxes, net of federal tax benefits ........................... 3,242 3,242 7,742
Foreign income taxes ................................................................ (2,086) (158) 85
Adjustments to valuation allowance for deferred tax assets .......................... 7,387 (153) --
Reversal of tax reserves ............................................................ (22,083) -- --
Other ............................................................................... 1,888 443 2,283
-------- ------- -------
$ (45) $16,295 $49,424
======== ======= =======
The components of the net deferred income tax asset are included in "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, 2004 and 2003 were as follows (in thousands):
2004 2003
-------- --------
Deferred income tax assets:
Net operating loss carryforwards ................................................................... $ 11,496 $ 7,079
Excess of amounts expensed for financial statement purposes over amounts
deducted for income tax purposes ................................................................. 34,451 46,240
-------- --------
Total deferred income tax assets ................................................................... 45,947 53,319
Valuation allowance for deferred tax assets ........................................................ (10,859) (1,971)
-------- --------
Net deferred income tax assets ..................................................................... 35,088 51,348
-------- --------
Deferred income tax liabilities:
Costs capitalized for financial statement purposes and deducted for income tax purposes ............ (32,595) (32,565)
-------- --------
Total deferred income tax liabilities .............................................................. (32,595) (32,565)
-------- --------
Net deferred income tax asset ...................................................................... $ 2,493 $ 18,783
======== ========
Income (loss) before income taxes for the years ended December 31, 2004, 2003
and 2002 consisted of the following (in thousands):
2004 2003 2002
--------- --------- ---------
United States ................................... $ 39,604 $ 55,013 $ 108,733
Foreign ......................................... (6,442) (18,097) 3,593
--------- --------- ---------
$ 33,162 $ 36,916 $ 112,326
========= ========= =========
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiaries because of management's intent to
indefinitely reinvest such earnings. Upon distribution of these earnings in the
form of dividends or otherwise, EMCOR may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to estimate the amount
of taxes that may be payable on the eventual remittance of these earnings.
39
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- COMMON STOCK
As of December 31, 2004 and 2003, 15,236,049 and 15,032,193 shares of EMCOR
common stock were outstanding, respectively. Pursuant to a program authorized by
the Board of Directors, EMCOR purchased 1,131,985 shares of its common stock
prior to January 1, 2000. The aggregate amount of $16.8 million 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. EMCOR management
is authorized to expend up to an additional $3.2 million to purchase EMCOR's
common stock under this program.
NOTE I -- STOCK OPTIONS AND STOCK PLANS
EMCOR has stock option plans and programs under which employees may receive
stock options and a stock bonus plan for executives pursuant to which the
executives receive restricted stock units. EMCOR also has stock option plans
under which non-employee directors may receive stock options. A summary of the
general terms of the grants under stock option plans and programs and stock
plans are as follows:
AUTHORIZED EXERCISE PRICE/
SHARES VESTING EXPIRATION VALUATION DATE
---------- ------------------- ---------------- -----------------
1994 Management Stock Option Plan 1,000,000 Generally, 331/3% Ten years from Fair market value
(the "1994 Plan") on each anniversary grant date of common stock
of grant date on grant date
1995 Non-Employee Directors' Non- 200,000 100% on grant date Ten years from Fair market value
Qualified Stock Option Plan grant date of common stock
(the "1995 Plan") on grant date
1997 Non-Employee Directors' Non- 300,000 (1) Five years from Fair market value
Qualified Stock Option Plan grant date of common stock
(the "1997 Directors' Stock on grant date (3)
Option Plan")
1997 Stock Plan for Directors (the 150,000 (2) Five years from Fair market value
"1997 Directors' Stock Plan") grant date of common stock
on grant date (3)
2003 Non-Employee Directors' 120,000 100% on grant date Ten years from Fair market value
Non-Qualified Stock Option Plan grant date of common stock
(the "2003 Directors' Stock Option Plan") on grant date
2003 Management Stock 330,000 To be determined by the Ten years from Fair market value
Incentive Plan Compensation Committee grant date of common stock
("2003 Management Plan") on grant date
Executive Stock Bonus Plan 220,000 100% on grant date Ten years from Fair market value
("ESBP") grant date of common stock
on grant date
Other Stock Option Grants Not applicable Generally, either Ten years from Fair market value
100% on first grant date of common stock
anniversary of grant on grant date
date or 25% on grant and
25% on each anniversary
of grant date
- ------------
(1) Until July 2000, non-employee directors could elect to receive one-third,
two-thirds or all of their retainer for a calendar year in the form of
stock options. Since then such directors have received and will receive all
of their retainer in the form of stock options. All options under this plan
become exercisable quarterly over the calendar year in which they are
granted. In addition, each director will receive additional stock options
equal to the product of 0.5 times the amount of stock options otherwise
issued.
(2) The plan terminated during 2003.
(3) Generally, the grant date was the first business day of a calendar year.
40
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
The following table summarizes EMCOR's stock option and stock bonus plan
activity since December 31, 2001:
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 $ 19.64
Granted ............................. -- -- 18,000 $ 54.87 16,933 $ 46.81
Forfeited ........................... (3,000) $ 19.75 -- -- -- --
Exercised ........................... (57,200) $ 14.46 (10,500) $ 6.34 (24,296) $ 20.00
-------- ------- -------
Balance, December 31, 2002 ............ 524,201 $ 9.35 111,000 $ 30.10 132,522 $ 23.04
Granted ............................. -- -- 3,000 $ 48.15 19,962 $ 53.63
Forfeited ........................... -- -- -- -- (6,074) $ 20.00
Exercised ........................... (32,000) $ 10.59 (15,000) $ 25.66 (52,482) $ 17.68
-------- ------- -------
Balance, December 31, 2003 ............ 492,201 $ 9.27 99,000 $ 31.32 93,928 $ 32.73
Granted ............................. -- -- -- -- 25,650 $ 43.83
Forfeited ........................... (3,000) $ 10.62 -- -- -- --
Exercised ........................... (123,083) $ 6.33 -- -- (30,408) $ 17.56
-------- ------- -------
Balance, December 31, 2004 ............ 366,118 $ 10.25 99,000 $ 31.32 89,170 $ 41.10
======== ======= =======
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 $ 26.10
Granted ............................. -- -- 36,569 $ 46.35 157,700 $ 47.00
Forfeited ........................... -- -- -- -- (2,000) $ 16.50
Exercised ........................... -- -- -- -- (13,167) $ 19.52
-------- ------- ---------
Balance, December 31, 2002 ............ 330 $ 19.63 93,276 $ 31.32 794,967 $ 30.38
Granted ............................. -- -- 37,330 $ 39.12 143,335 $ 54.64
Forfeited ........................... -- -- -- -- -- --
Exercised ........................... (330) $ 19.63 -- -- (13,834) $ 19.52
-------- ------- ---------
Balance, December 31, 2003 ............ -- -- 130,606 $ 33.55 924,468 $ 34.30
Granted ............................. -- -- 42,638 $ 38.35 222,398 $ 43.14
Forfeited ........................... -- -- -- -- (5,000) $ 31.63
Exercised ........................... -- -- (56,707) $ 21.62 (18,000) $ 16.24
-------- ------- ---------
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 $ 41.61
Granted ............................. 30,000 $ 43.96 -- --
Forfeited ........................... -- -- -- --
Exercised ........................... -- -- -- --
-------- -------
Balance, December 31, 2004 ............ 60,000 $ 48.37 10,000 $ 41.61
======== =======
41
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTIONS AND STOCK PLANS -- (CONTINUED)
At December 31, 2004, 2003 and 2002 approximately 1,460,000, 1,454,000 and
1,542,000 stock options were exercisable. The weighted average exercise price of
exercisable options at December 31, 2004, 2003 and 2002 was approximately
$28.34, $23.77 and $22.50, respectively.
The following table summarizes information about EMCOR's stock options at
December 31, 2004:
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 Years $4.88 235,117 $4.88
$14.31-$20.00 500,334 3.93 Years $18.91 500,334 $18.91
$21.62-$22.13 21,000 4.74 Years $22.08 21,000 $22.08
$25.44-$27.13 111,625 4.75 Years $25.67 111,625 $25.67
$38.68-$46.35 652,348 7.60 Years $43.54 434,961 $43.58
$48.15-$55.49 227,730 7.57 Years $54.23 157,067 $54.01
The weighted average fair value of stock options granted during 2004, 2003
and 2002 were $12.41, $14.57 and $26.96, respectively.
The pro forma effect on EMCOR's net income, Basic EPS and Diluted EPS, had
compensation costs been determined consistent with the recognition of
compensation costs provisions of SFAS 123, is presented in Note B - Summary of
Significant Accounting Policies. The associated pro forma compensation costs
related to the provisions of SFAS 123, net of tax effects, were $3.0 million,
$1.2 million and $2.7 million for the years ending December 31, 2004, 2003 and
2002, 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
2004, 2003 and 2002: risk-free interest rates of 1.9% to 4.0% (representing the
risk-free interest rate at the date of the grant); expected dividend yields of
zero percent; expected terms of 3.6 to 4.7 years; and average expected
volatility of 27.2%, 30.3% and 67.2% for options granted during 2004, 2003 and
2002, respectively.
During 2004, 227,927 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 2005 (see New Accounting Pronouncements in Note B -
Summary of Significant Accounting Policies). This vesting resulted in no impact
on the 2004 consolidated results of operations as EMCOR accounts for stock
options in accordance with APB 25, and such stock options were out of the money.
The vesting did increase the stock-based compensation expense in the pro forma
valuation 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).
42
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS
EMCOR's United Kingdom subsidiary has a defined benefit pension plan covering
all eligible employees. The benefits under the plan are based on wages and years
of service with the subsidiary. EMCOR's policy is to fund the minimum amount
required by law. The 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)
========= =========
The assumptions used as of December 31, 2004, 2003 and 2002 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 .............. 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 allocation between equity and debt securities. For
measurement purposes, the annual rates of increase in the per capita cost of
covered pension benefits assumed for 2004 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)
The components of net periodic pension benefit cost for the years ended
December 31, 2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
------- ------- -------
Service cost .................................................................... $ 4,906 $ 4,837 $ 7,240
Interest cost ................................................................... 8,891 8,183 7,532
Expected return on plan assets .................................................. (8,933) (6,708) (7,144)
Net amortization of prior service cost and actuarial loss/(gain) ................ 19 (5) (5)
Amortization of unrecognized loss ............................................... 1,402 2,280 765
------- ------- -------
Net periodic pension benefit cost ............................................... $ 6,285 $ 8,587 $ 8,388
======= ======= =======
PLAN ASSETS
The weighted average asset allocations and weighted average target
allocations at December 31, 2004 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%
===== =====
Plan assets of EMCOR's United Kingdom subsidiary pension plan include
marketable equity securities in both United Kingdom and United States companies.
Debt securities consist mainly of fixed interest bonds.
The investment policies and strategies for plan assets are established to
ensure that obligations to beneficiaries of the plan are met to achieve a
reasonable balance between risk, likely return and administration, as well as to
maintain funds at a level to meet minimum funding requirements. In order to
ensure that an appropriate investment strategy is in place, an analysis of the
Plan's assets and liabilities is completed periodically.
CASH FLOWS:
CONTRIBUTIONS
EMCOR'S United Kingdom subsidiary expects to contribute $10.7 million to its
pension plan in 2005.
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 ........................................................ $ 5,040
2006 ........................................................ 5,498
2007 ........................................................ 5,957
2008 ........................................................ 6,415
2009 ........................................................ 6,873
Succeeding five years ....................................... 41,238
44
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RETIREMENT PLANS -- (CONTINUED)
The accumulated benefit obligation for the defined benefit pension plan for
the years ended December 31, 2004 and 2003 was $159.6 million and $134.7
million, respectively.
EMCOR contributes to various union pension funds based upon wages paid to its
union employees. Such contributions approximated $133.9 million, $134.8 million
and $101.2 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
EMCOR has retirement and savings plans that cover U.S. eligible non-union
employees. Contributions to these profit sharing and voluntary savings plan are
based on a percentage of the employee's base compensation. The expense
recognized for the years ended December 31, 2004, 2003 and 2002 for this plan
was $6.2 million, $3.8 million and $3.5 million, respectively. The increase in
the 2004 and 2003 expense compared to the respective prior years is primarily
due to an increase in the number of participants in these plans.
EMCOR's United Kingdom subsidiary has a defined contribution retirement plan
that began in 2002. The expense recognized for the years ended December 31,
2004, 2003, and 2002 was $1.2 million, $0.7 million and $0.3 million
respectively.
EMCOR's Canadian subsidiary has a defined contribution retirement plan. The
expense recognized for the years ended December 31, 2004, 2003 and 2002 was $0.6
million, $0.4 million and $0.3 million, respectively.
NOTE K -- COMMITMENTS AND CONTINGENCIES
EMCOR and its subsidiaries lease land, buildings and equipment under various
leases. The leases frequently include renewal options and require EMCOR to pay
for utilities, taxes, insurance and maintenance expenses.
Future minimum payments, by year and in the aggregate, under capital leases,
non-cancelable operating leases and related subleases with initial or remaining
terms of one or more years at December 31, 2004, 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
======== ========
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, 2004, 2003 and 2002 was $54.9 million, $52.9 million and $36.5
million, respectively. Rent expense for the years ended December 31, 2004, 2003
and 2002 included sublease rental income of $0.7 million, $1.1 million and $0.8
million, respectively.
Certain subsidiaries of EMCOR lease real estate from employees of such
subsidiaries.
EMCOR has agreements with its executive officers and certain other key
management personnel providing for severance benefits to such employees upon
termination of their employment under certain circumstances.
EMCOR is contingently liable to sureties in respect of performance and
payment bonds issued by sureties, usually at the request of customers in
connection with construction projects, which secure EMCOR payment and
performance obligations under contracts for such projects. In addition, at the
request of labor unions representing certain EMCOR employees, bonds are
sometimes provided to secure such obligations for wages and benefits payable to
or for such employees. EMCOR bonding requirements typically increase as the
amount of public sector work increases. As of December 31, 2004, sureties had
issued bonds for the account of EMCOR in the aggregate amount of approximately
$1.6 billion. The bonds are issued by EMCOR's sureties in return for a premium,
which varies depending on the size and type of the bonds. The largest individual
bond is approximately $170.0 million. EMCOR has agreed to indemnify the sureties
for any payments made by them in respect of bonds issued on EMCOR's behalf.
45
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
EMCOR is subject to regulation with respect to the handling of certain
materials used in construction which are classified as hazardous or toxic by
Federal, State and local agencies. EMCOR's practice is to avoid participation in
projects principally involving the remediation or removal of such materials.
However, when remediation is required as part of its contract performance, EMCOR
believes it complies with all applicable regulations governing the discharge of
material into the environment or otherwise relating to the protection of the
environment.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it
has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a
60% interest. The venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to customers for use in
air conditioning private and public properties. These guarantees are not
expected to have a material adverse affect on EMCOR's financial position or
results of operations. Each of the venturers is jointly and severally liable, in
the event of default, for the venture's $25.0 million borrowing due December
2031. During September 2002, each venture partner contributed equity to the
venture, of which EMCOR's contribution was $14.0 million.
Restructuring expenses, primarily relating to employee severance obligations,
were $8.3 million for 2004. Approximately $7.0 million of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates paying
substantially all of the remaining obligations in 2005. There were no
restructuring expenses for the year ended December 31, 2003 or 2002.
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, 2004,
2003 and 2002 (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 .................. $ -- $ -- $22,115
NOTE M -- SEGMENT INFORMATION
EMCOR has the following reportable segments: United States electrical
construction and facilities services, United States mechanical construction and
facilities services, United States facilities services, Canada construction and
facilities services, United Kingdom construction and facilities services and
Other international construction and facilities services. The segment "United
States facilities services" principally consists of those operations which
primarily provide consulting and maintenance services, and "Other international
construction and facilities services" represents EMCOR's operations outside of
the United States, Canada, and the United Kingdom (primarily in South Africa,
the Middle East and Western Europe) performing electrical construction,
mechanical construction and facilities services. EMCOR's 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, 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
if 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 results (in millions):
PRO FORMA
-----------
AS REPORTED (UNAUDITED)
---------------------------------------- -----------
2004 2003 2002 2002
---------- ---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3 $ 1,239.5 $ 1,152.4 $ 1,154.8
United States mechanical construction and facilities services ........ 1,825.7 1,715.8 1,715.4 1,846.5
United States facilities services .................................... 727.6 661.2 250.0 629.8
---------- ---------- ---------- ----------
Total United States operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1
Canada construction and facilities services .......................... 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................. 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. -- -- -- --
---------- ---------- ---------- ----------
Total worldwide operations ........................................... $ 4,747.9 $ 4,534.6 $ 3,968.0 $ 4,481.3
========== ========== ========== ==========
Total revenues:
United States electrical construction and facilities services ........ $ 1,275.8 $ 1,264.6 $ 1,191.3 $ 1,193.6
United States mechanical construction and facilities services ........ 1,839.4 1,733.3 1,719.3 1,850.4
United States facilities services .................................... 728.9 665.4 252.0 631.9
Less intersegment revenues ........................................... (55.5) (46.8) (44.8) (44.8)
---------- ---------- ---------- ----------
Total United States operations ....................................... 3,788.6 3,616.5 3,117.8 3,631.1
Canada construction and facilities services .......................... 280.8 346.8 316.3 316.3
United Kingdom construction and facilities services .................. 678.5 571.3 533.9 533.9
Other international construction and facilities services ............. -- -- -- --
---------- ---------- ---------- ----------
Total worldwide operations ........................................... $ 4,747.9 $ 4,534.6 $ 3,968.0 $ 4,481.3
========== ========== ========== ==========
Operating income (loss):
United States electrical construction and facilities services ........ $ 81.2 $ 57.8 $ 79.3 $ 79.6
United States mechanical construction and facilities services ........ (1.4) 25.6 59.9 62.4
United States facilities services .................................... 14.2 18.4 4.4 14.4
---------- ---------- ---------- ----------
Total United States operations ....................................... 94.0 101.8 143.6 156.4
Canada construction and facilities services .......................... (11.9) 2.0 3.3 3.3
United Kingdom construction and facilities services .................. 0.0 (22.4) 0.0 0.0
Other international construction and facilities services ............. 0.5 0.3 (0.1) (0.1)
Corporate administration ............................................. (35.0) (34.7) (31.3) (31.3)
Restructuring expenses ............................................... (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
Other corporate items:
Interest expense ..................................................... (8.9) (8.9) (4.1) (10.7)
Interest income ...................................................... 1.9 0.7 2.0 2.2
Gain on sale of equity investment .................................... 1.8 0.0 0.0 0.0
Minority interest .................................................... (3.8) (1.9) (1.1) (1.1)
Income before taxes .................................................. $ 33.2 $ 36.9 $ 112.3 $ 118.7
47
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2004 2003 2002
--------- --------- -------
Capital expenditures:
United States electrical construction and facilities services .......................... $ 1.7 $ 4.6 $ 3.0
United States mechanical construction and facilities services .......................... 2.9 4.5 5.1
United States facilities services ...................................................... 6.1 3.4 1.2
--------- --------- -------
Total United States operations ......................................................... 10.7 12.5 9.3
Canada construction and facilities services ............................................ 0.8 0.5 0.3
United Kingdom construction and facilities services .................................... 3.7 4.0 4.2
Other international construction and facilities services ............................... -- -- --
Corporate administration ............................................................... 0.9 0.9 1.8
--------- --------- -------
Total worldwide operations ............................................................. $ 16.1 $ 17.9 $ 15.6
========= ========= =======
Depreciation and amortization of Property, plant and equipment:
United States electrical construction and facilities services .......................... $ 3.3 $ 3.4 $ 3.5
United States mechanical construction and facilities services .......................... 5.9 6.5 6.9
United States facilities services ...................................................... 5.8 6.4 1.9
--------- --------- -------
Total United States operations ......................................................... 15.0 16.3 12.3
Canada construction and facilities services ............................................ 0.9 0.7 0.6
United Kingdom construction and facilities services .................................... 4.3 4.0 2.4
Other international construction and facilities services ............................... -- -- --
Corporate administration ............................................................... 0.7 0.7 0.1
--------- --------- -------
Total worldwide operations ............................................................... $ 20.9 $ 21.7 $ 15.4
========= ========= =======
2004 2003
--------- ---------
Costs and estimated earnings in excess of billings on uncompleted contracts:
United States electrical construction and facilities services .......................... $ 57.4 $ 60.4
United States mechanical construction and facilities services .......................... 128.3 135.5
United States facilities services ...................................................... 11.4 9.4
--------- ---------
Total United States operations ......................................................... 197.1 205.3
Canada construction and facilities services ............................................ 19.9 17.8
United Kingdom construction and facilities services .................................... 23.7 26.3
Other international construction and facilities services ............................... -- --
--------- ---------
Total worldwide operations ............................................................. $ 240.7 $ 249.4
========= =========
Billings in excess of costs and estimated earnings on uncompleted contracts:
United States electrical construction and facilities services .......................... $ 129.6 $ 152.7
United States mechanical construction and facilities services .......................... 131.1 126.6
United States facilities services ...................................................... 6.5 6.7
--------- ---------
Total United States operations ......................................................... 267.2 286.0
Canada construction and facilities services ............................................ 10.1 9.5
United Kingdom construction and facilities services .................................... 82.4 49.7
Other international construction and facilities services ............................... -- --
--------- ---------
Total worldwide operations ............................................................. $ 359.7 $ 345.2
========= =========
48
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)
2004 2003
---------- ----------
Long-lived assets:
United States electrical construction and facilities services .......................... $ 12.1 $ 13.7
United States mechanical construction and facilities services .......................... 187.7 191.5
United States facilities services ...................................................... 136.4 140.2
---------- ----------
Total United States operations ......................................................... 336.2 345.4
Canada construction and facilities services ............................................ 5.7 3.9
United Kingdom construction and facilities services .................................... 10.6 14.9
Other international construction and facilities services ............................... -- --
Corporate administration ............................................................... 2.2 2.2
---------- ----------
Total worldwide operations ............................................................. $ 354.7 $ 366.4
========== ==========
Goodwill:
United States electrical construction and facilities services .......................... $ 3.8 $ 3.8
United States mechanical construction and facilities services .......................... 163.5 162.8
United States facilities services ...................................................... 112.1 111.4
---------- ----------
Total United States operations ......................................................... 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 ............................................................. $ 279.4 $ 278.0
========== ==========
Total assets:
United States electrical construction and facilities services .......................... $ 358.1 $ 362.3
United States mechanical construction and facilities services .......................... 776.4 771.6
United States facilities services ...................................................... 304.5 280.5
---------- ----------
Total United States operations ......................................................... 1,439.0 1,414.4
Canada construction and facilities services ............................................ 108.8 98.2
United Kingdom construction and facilities services .................................... 199.2 198.4
Other international construction and facilities services ............................... 3.9 4.5
Corporate administration ............................................................... 67.1 79.7
---------- ----------
Total worldwide operations ............................................................. $ 1,818.0 $ 1,795.2
========== ==========
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
========== ========== ========== ==========
49
EMCOR GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
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's subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneled 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 March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim
in arbitration against EMCOR's United Kingdom subsidiary, EMCOR Drake & Scull
Group plc ("D&S"), in connection with a subcontract D&S entered into with Mowlem
with respect to a project for the United Kingdom Ministry of Defence at Abbey
Wood in Bristol, U.K. Mowlem seeks damages arising out of alleged defects in the
D&S design and construction of the mechanical and electrical engineering
services for the project. Mowlem's claim is for 39.5 million British pounds
sterling (approximately $75.8 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 million) for certain design, labor
and delay and disruption costs incurred by D&S in connection with its
subcontract with Mowlem.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the various lawsuits and arbitrations in which EMCOR or its
subsidiaries are involved range from a few thousand dollars to over $75.0
million, the outcome of which cannot be predicted, adverse results could have a
material adverse effect on EMCOR's financial position and/or results of
operations. These proceedings include the following: (a) a civil action brought
against EMCOR's 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-trial
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. (b) A civil action brought by a joint
venture (the "JV") between EMCOR's 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 costs in
completing this project, which are included in the balance sheet account "costs
and estimated earnings in excess of billings on uncompleted contracts" in
EMCOR's consolidated balance sheets as of December 31, 2004 and 2003. A jury has
returned 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), and in a jury trial to be subsequently
held the JV intends to claim damages in excess of $18.0 million (exclusive of
interest). In accordance with the joint venture agreement establishing the JV,
Poole & Kent would be entitled to approximately one-half of any damage award
received by the JV.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited the accompanying consolidated balance sheets of EMCOR Group,
Inc. and subsidiaries as of December 31, 2004 and 2003, 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. 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EMCOR Group, Inc.
and subsidiaries at December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
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, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 8, 2005 expressed an unqualified opinion thereon.
Stamford, Connecticut /S/ ERNST & YOUNG LLP
March 8, 2005
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of EMCOR Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that EMCOR
Group, Inc. maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). EMCOR Group, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that EMCOR Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, 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, 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, 2004 and 2003 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 of
EMCOR Group, Inc. and our report dated March 8, 2005 expressed an unqualified
opinion thereon.
Stamford, Connecticut /S/ Ernst & Young LLP
March 8, 2005
53
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's disclosure controls and procedures (as
required by Rule 13a-15(b) of the Securities Exchange Act of 1934), the Chairman
of the Board and Chief Executive Officer of EMCOR , Frank T. MacInnis, and the
Chief Financial Officer of EMCOR , Leicle E. Chesser, have concluded that
EMCOR's disclosure controls and procedures (as defined in 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 EMCOR 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's internal
control over financial reporting is a process designed with the participation of
EMCOR's 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's financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.
EMCOR's 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 transactions and dispositions of assets of
EMCOR; (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 receipts and expenditures of
EMCOR are being made only in accordance with authorizations of management and
the directors of EMCOR; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of EMCOR's assets that could have a material effect on EMCOR's financial
statements.
Because of its inherent limitations, EMCOR's 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, management conducted an evaluation of the
effectiveness of EMCOR's internal control over financial reporting based on the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this evaluation, management has determined that EMCOR's internal control over
financial reporting is effective as of December 31, 2004.
Management's assessment of the effectiveness of EMCOR's internal control over
financial reporting as of December 31, 2004 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 management's assessment and on the effectiveness of
EMCOR's internal control over financial reporting as of December 31, 2004.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In addition, management with the participation of EMCOR's principal executive
officer and principal financial officer or persons performing similar functions
has determined that no change in EMCOR's internal control over financial
reporting occurred during the fourth quarter of EMCOR's fiscal year ended
December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, EMCOR's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with respect to directors is
incorporated herein by reference to the sections of the Company's definitive
Proxy Statement for the 2005 Annual Meeting of Stockholders entitled "Election
of Directors," which Proxy Statement is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates (the "Proxy Statement").
The information required by this Item 10 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
to the section of the Proxy Statement entitled "Section 16(a) Beneficial
Ownership Reporting Compliance." The information required by this Item 10
concerning the Audit Committee of the Company's Board of Directors is
incorporated by reference to the Section of the Proxy Statement entitled "Audit
Committee." Information regarding executive officers is contained in Part I of
this Form 10-K following Item 4 under the heading "Executive Officers of the
Registrant." The Company has adopted a Code of Ethics that applies to its chief
executive officer and its senior financial officers, a copy of which is filed as
an Exhibit hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
to the sections of the Proxy Statement entitled "Executive Compensation,"
"Employment and Change of Control Arrangements," "Director Compensation,"
"Compensation Committee Interlocks and Insider Participation," and "Compensation
Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 (other than the information required
by Section 201 (d) of Regulation S-K, which is set forth in Part I, Item 5 of
this Form 10-K) is incorporated herein by reference to the sections of the Proxy
Statement entitled "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
55
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, 2004 and 2003
Consolidated Statements of Operations -- Years Ended December 31, 2004,
2003 and 2002
Consolidated Statements of Cash Flows -- Years Ended December 31, 2004,
2003 and 2002
Consolidated Statements of Stockholders' Equity and Comprehensive
Income -- Years Ended December 31, 2004, 2003 and 2002
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.
56
SCHEDULE II
EMCOR GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) END OF YEAR
- --------------------------------------------------- ---------- --------- ----------------- ------------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 2004 ...................... $43,706 7,026 -- (14,547) $36,185
Year Ended December 31, 2003 ...................... $40,611 11,249 376 (8,530) $43,706
Year Ended December 31, 2002 ...................... $35,091 3,354 5,129 (2,963) $40,611
- ------------
(1) Amount principally relates to business acquisitions.
(2) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
57
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" originally filed March 17, 1995
or "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
2(c) -- Second Modification to the Plan of Reorganization dated Exhibit 2(c) to Form 10
September 30, 1994
2(d) -- Confirmation Order of the Bankruptcy Court dated September 30, Exhibit 2(d) to Form 10
1994 (the "Confirmation Order") confirming the Plan of
Reorganization, as amended
2(e) -- Amendment to the Confirmation Order dated December 8, 1994 Exhibit 2(e) to Form 10
2(f) -- Post-confirmation modification to the Plan of Reorganization Exhibit 2(f) to Form 10
entered on December 13, 1994
2.1 -- Purchase Agreement dated as of February 11, 2002 by and among Exhibit 2.1 to EMCOR's Report on
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
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
of Incorporation Report on Form 10-K for the year
ended December 31, 1997
("1997 Form 10-K")
3(b) -- Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual
Report on Form 10-K for the year
ended December 31, 1998 ("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) -- U.S. $275,000,000 Credit Agreement by and among EMCOR Exhibit 4.1(a) to EMCOR's Report on
Group, Inc. and certain of its Subsidiaries and Harris Trust and Form 8-K
Savings Bank individually and as Agent and the Lenders which dated October 4, 2002
are or become parties thereto dated as of September 26, 2002
(the "Credit Agreement")
4.1(b) -- Amendment and Waiver letter dated December 10, 2002 to the Exhibit 4.1(b) to EMCOR's Annual
Credit Agreement Report on Form 10-K for the year
ended December 31, 2002 ("2002 Form
10-K")
58
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) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(e) to June 2003 Form 10-Q
Harris, National City Bank and EMCOR
4.1(f) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(f) to June 2003 Form 10-Q
Harris, Webster Bank and EMCOR
4.1(g) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(g) to June 2003 Form 10-Q
Harris, Union Bank of California, N.A. and EMCOR
4.1(h) -- Commitment Amount Increase Request dated June 26, 2003 among Exhibit 4.1(h) to June 2003 Form 10-Q
Harris, Sovereign Bank and EMCOR
4.1(i) -- Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(i) to June 2003 Form 10-Q
Harris, Bank Hapoalim B.M. and EMCOR
4.1(j) -- Commitments Amount Increase Request dated July 9, 2003 among Exhibit 4.1(j) to June 2003 Form 10-Q
Harris, The Governor and Company of Bank of Scotland and
EMCOR
4.1(k) - Commitment Amount Increase Request dated July 9, 2003 among Exhibit 4.1(k) to June 2003 Form 10-Q
Harris, U.S. Bank, National Association and EMCOR
4.2 -- Subordinated Indenture dated as of March 18, 1998 Exhibit 4(b) to EMCOR's Quarterly
("Indentured") between EMCOR and State Street Bank and Report on Form 10-Q for the quarter
Trust Company, as Trustee ("State Street Bank") ended March 31, 1998 ("March 1998
Form 10-Q")
4.3 -- First Supplemental Indenture dated as of March 18, 1998 to Exhibit 4(c) to March 1998 Form 10-Q
Indenture between EMCOR and State Street Bank
4.4 -- Indenture dated as of December 15, 1994, between SellCo and Exhibit 4.4 to Form 10
Fleet National Bank of Connecticut, as trustee, in
respect of SellCo's 12% Subordinated Contingent Payment
Notes, Due 2004
10(a) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(a) to EMCOR's Annual
EMCOR and Frank T. MacInnis Report on Form 10-K for the year
ended December 31, 2001 ("2001 Form
10-K")
10(b) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(b) to 2001 Form 10-K
EMCOR and Sheldon I. Cammaker
10(c) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(c) to 2001 Form 10-K
EMCOR and Leicle E. Chesser
10(d) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(d) to 2001 Form 10-K
EMCOR and Jeffrey M. Levy
10(e) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(e) to 2001 Form 10-K
EMCOR and R. Kevin Matz
10(f) -- Employment Agreement made as of January 1, 2002 between Exhibit 10(f) to 2001 Form 10-K
EMCOR and Mark A. Pompa
59
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) -- Executive Stock Bonus Plan, as amended Exhibit 4.1 to EMCOR's Registration
Statement on Form S-8) (No.
333-112940) filed with the
Securities and Exchange Commission
on February 18, 2004 (the "2004 Form
S-8")
10(s) -- 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's proxy statement
for its annual meeting held June 12, 2003 ("2003 Proxy Statement")
10(t-1) -- 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy
Statement
10(t-2) -- Amendments to 2003 Management Stock Incentive Plan 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) -- Key Executive Incentive Bonus Plan Exhibit C to EMCOR's 2003 Proxy
Statement
10(v) -- Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8
dated May 5, 1999
10(w) -- Form of EMCOR Option Agreement for Messrs. Frank T. MacInnis, Exhibit 4.5 to 2004 Form S-8
Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin
Matz, and Mark A. Pompa (collectively the "Executive Officers") for
options granted January 4, 1999, January 3, 2000, and January 2, 2001
10(x) -- Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.6 to 2004 Form S-8
December 14, 2001
10(y) -- Form of EMCOR Option Agreement for Executive Officers granted Exhibit 4.7 to 2004 Form S-8
January 2, 2002, January 2, 2003, and January 2, 2004
10(z) -- Form of EMCOR Option Agreement for Directors granted June 19, Exhibit 4.8 to 2004 Form S-8
2002, October 25, 2002, and February 27, 2003
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*
61
EMCOR GROUP, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INCORPORATED BY REFERENCE TO OR
NO. DESCRIPTION PAGE NUMBER
------- ----------- -------------------------------
10(e)(e) -- Form of letter agreement between EMCOR and each executive officer Page
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 directors
11 -- Computation of Basic EPS and Diluted EPS for the years ended Page
December 2004 and 2003*
14 -- Code of Ethics of EMCOR for Chief Executive Officer and Exhibit 14 to EMCOR's 2003 Form
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* Page
23.1 -- Consent of Ernst & Young LLP* Page
31.1 -- Certification Pursuant to Section 302 of the Sarbanes -- Oxley Page
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer*
31.2 -- Certification Pursuant to Section 302 of the Sarbanes -- Oxley Page
Act of 2002 by the Executive Vice President and Chief
Financial Officer*
32.1 -- Certification Pursuant to Section 906 of the Sarbanes -- Oxley Page
Act of 2002 by the Chairman of the Board of Directors and
Chief Executive Officer**
32.2 -- Certification Pursuant to Section 906 of the Sarbanes -- Oxley Act Page
of 2002 by the Executive Vice President and Chief Financial Officer**
- ----------------
* Filed Herewith
** Furnished Herewith
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Registrant hereby undertakes to furnish
a copy of any unfiled instrument which defines the rights of holders of
long-term debt of the Registrant's subsidiaries.
62
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, 2005 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.
/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)
63