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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-2315
EMCOR Group, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2125338
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
301 Merritt Seven Corporate Park
Norwalk, Connecticut 06851-1060
- --------------------------------- ----------------------------------
(Address of Principal Executive (Zip Code)
Offices)
(203) 849-7800
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 and 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
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on
October 22, 2004: 15,158,157 shares.
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
as of September 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Operations -
three months ended September 30, 2004 and 2003 3
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2004 and 2003 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income -
nine months ended September 30, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 Controls and Procedures 27
PART II - Other Information
Item 1 Legal Proceedings 27
Item 6 Exhibits 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 101,025 $ 78,260
Accounts receivable, net 1,114,532 1,009,170
Costs and estimated earnings in excess
of billings on uncompleted contracts 240,779 249,393
Inventories 9,480 9,863
Prepaid expenses and other 26,757 42,470
---------- ----------
Total current assets 1,492,573 1,389,156
Investments, notes and other long-term
receivables 29,367 26,452
Property, plant and equipment, net 57,467 66,156
Goodwill 280,761 277,994
Identifiable intangible assets, net 19,643 22,226
Other assets 14,666 13,263
---------- ----------
Total assets $1,894,477 $1,795,247
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line $ 127,300 $ 139,400
Current maturities of long-term debt and capital
lease obligations 261 367
Accounts payable 441,304 451,713
Billings in excess of costs and estimated
earnings on uncompleted contracts 447,719 345,207
Accrued payroll and benefits 132,925 131,623
Other accrued expenses and liabilities 92,493 110,147
---------- ----------
Total current liabilities 1,242,002 1,178,457
Long-term debt and capital lease obligations 588 561
Other long-term obligations 106,387 94,873
---------- ----------
Total liabilities 1,348,977 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, 16,246,048 and 16,155,844 shares
issued, respectively 162 162
Capital surplus 317,530 316,729
Accumulated other comprehensive income 1,992 1,257
Retained earnings 242,549 219,921
Treasury stock, at cost 1,087,891 and 1,123,651
shares, respectively (16,733) (16,713)
---------- ----------
Total stockholders' equity 545,500 521,356
---------- ----------
Total liabilities and stockholders' equity $1,894,477 $1,795,247
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
- --------------------------------------------------------------------------------
Three months ended September 30, 2004 2003
- --------------------------------------------------------------------------------
Revenues $1,215,911 $1,157,588
Cost of sales 1,100,931 1,039,382
---------- ----------
Gross profit 114,980 118,206
Selling, general and administrative expenses 97,616 104,671
Restructuring expenses 617 --
Gain on sale of assets 2,839 --
---------- ----------
Operating income 19,586 13,535
Interest expense, net (2,132) (1,987)
Gain on sale of equity investment 1,844 --
---------- ----------
Income before income taxes 19,298 11,548
Income tax provision 3,832 5,080
---------- ----------
Net income $ 15,466 $ 6,468
========== ==========
Basic earning per share $ 1.02 $ 0.43
========== ==========
Diluted earnings per share $ 0.99 $ 0.42
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
- --------------------------------------------------------------------------------
Nine months ended September 30, 2004 2003
- --------------------------------------------------------------------------------
Revenues $3,518,210 $3,362,996
Cost of sales 3,200,555 3,004,746
---------- ----------
Gross profit 317,655 358,250
Selling, general and administrative expenses 295,758 320,484
Restructuring expenses 5,936 --
Gain on sale of assets 2,839 --
---------- ----------
Operating income 18,800 37,766
Interest expense, net (5,550) (5,631)
Gain on sale of equity investment 1,844 --
---------- ----------
Income before income taxes 15,094 32,135
Income tax (benefit) provision (7,534) 14,138
---------- ----------
Net income $ 22,628 $ 17,997
========== ==========
Basic earning per share $ 1.49 $ 1.20
========== ==========
Diluted earnings per share $ 1.46 $ 1.16
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
- --------------------------------------------------------------------------------
Nine months ended September 30, 2004 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 22,628 $ 17,997
Depreciation and amortization 15,635 15,986
Amortization of identifiable intangibles 2,583 2,284
Deferred income taxes 13,573 --
Gain on sale of assets and equity investment (4,683) --
Other non-cash expenses 2,508 5,279
Changes in operating assets and liabilities, excluding
the effect of businesses acquired (15,591) (94,732)
----------- -----------
Net cash provided by (used in) operating activities 36,653 (53,186)
----------- -----------
Cash flows from investing activities:
Payments for acquisitions of businesses, net of
cash acquired, and related earn-out agreements (1,506) (3,127)
Proceeds from sale of assets and equity investment 10,061 --
Proceeds from sale of property, plant and equipment 2,671 521
Purchase of property, plant and equipment (9,774) (13,388)
Net disbursements related to other investments (4,176) (4,366)
----------- -----------
Net cash used in investing activities (2,724) (20,360)
----------- -----------
Cash flows from financing activities:
Proceeds from working capital credit lines 1,036,250 1,199,483
Repayments of working capital credit lines (1,048,350) (1,116,504)
Net repayments for long-term debt (96) (22,204)
Net borrowings for capital lease obligations 17 189
Net proceeds from exercise of stock options 1,015 1,641
----------- -----------
Net cash (used in) provided by financing activities (11,164) 62,605
----------- -----------
Increase (decrease) in cash and cash equivalents 22,765 (10,941)
Cash and cash equivalents at beginning of year 78,260 93,103
----------- -----------
Cash and cash equivalents at end of period $ 101,025 $ 82,162
=========== ===========
Supplemental cash flow information:
Cash paid for:
Interest $ 6,015 $ 5,321
Income taxes $ 4,491 $ 13,048
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands)(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Capital comprehensive Retained Treasury Comprehensive
Total stock surplus income(loss)(1) earnings stock income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 $489,870 $161 $312,393 $(5,148) $199,300 $(16,836)
Net income 17,997 -- -- -- 17,997 -- $17,997
Foreign currency translation
adjustments 5,061 -- -- 5,061 -- -- 5,061
-------
Comprehensive income -- -- -- -- -- -- $23,058
=======
Common stock issued under
stock option plans 1,641 -- 1,602 -- -- 39
Value of Restricted Stock
Units (2) 1,434 -- 1,434 -- -- --
-------- ---- -------- ------- -------- --------
Balance, September 30, 2003 $516,003 $161 $315,429 $ (87) $217,297 $(16,797)
======== ==== ======== ======= ======== ========
Balance, January 1, 2004 $521,356 $162 $316,729 $ 1,257 $219,921 $(16,713)
Net income 22,628 -- -- -- 22,628 -- $22,628
Foreign currency translation
adjustments 735 -- -- 735 -- -- 735
-------
Comprehensive income -- -- -- -- -- -- $23,363
=======
Issuance of treasury stock
for restricted stock units (3) -- -- (836) -- -- 836
Treasury stock, at cost (4) (856) -- -- -- -- (856)
Common stock issued under
stock option plans 969 -- 969 -- -- --
Value of Restricted Stock
Units (2) 668 -- 668 -- -- --
-------- ---- -------- ------- -------- --------
Balance, September 30, 2004 $545,500 $162 $317,530 $ 1,992 $242,549 $(16,733)
======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments and minimum
pension liability adjustments.
(2) Shares of common stock will be issued in respect of restricted stock units
granted pursuant to EMCOR's Executive Stock Bonus Plan. This amount
represents the value of restricted stock units at the date of grant.
(3) Represents common stock transferred at cost from treasury stock upon the
vesting of restricted stock units.
(4) Represents value of shares of common stock withheld by EMCOR for income tax
withholding requirements upon the vesting of restricted stock units.
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
by EMCOR Group, Inc. and Subsidiaries ("EMCOR"), without audit, pursuant to the
interim period reporting requirements of Form 10-Q. Consequently, certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. Readers of this report should
refer to the consolidated financial statements and the notes thereto included in
EMCOR's latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
In the opinion of EMCOR, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of a normal
recurring nature) necessary to present fairly the financial position of EMCOR
and the results of its operations. The results of operations for the three and
nine month periods ended September 30, 2004 are not necessarily indicative of
the results to be expected for the year ending December 31, 2004.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
NOTE B Earnings Per Share
Calculation of Basic and Diluted Earnings per share
The following tables summarize EMCOR's calculation of Basic and Diluted Earnings
per Share ("EPS") for the three and nine month periods ended September 30, 2004
and 2003:
Three months ended
September 30, 2004
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS
Income available to common stockholders $15,466,000 15,202,938 $1.02
=====
Effect of Dilutive Securities:
Options -- 359,666
----------- ----------
Diluted EPS $15,466,000 15,562,604 $0.99
=========== ========== =====
Nine months ended
September 30, 2004
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS
Income available to common stockholders $22,628,000 15,178,938 $1.49
=====
Effect of Dilutive Securities:
Options -- 372,698
----------- ----------
Diluted EPS $22,628,000 15,551,636 $1.46
=========== ========== =====
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE B Earnings Per Share - (continued)
Three months ended
September 30, 2003
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS
Income available to common stockholders $6,468,000 15,003,737 $0.43
=====
Effect of Dilutive Securities:
Options -- 457,369
---------- ----------
Diluted EPS $6,468,000 15,461,106 $0.42
========== ========== =====
Nine months ended
September 30, 2003
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS
Income available to common stockholders $17,997,000 14,974,590 $1.20
=====
Effect of Dilutive Securities:
Options -- 497,121
----------- ----------
Diluted EPS $17,997,000 15,471,711 $1.16
=========== ========== =====
There were 850,078 anti-dilutive stock options that were required to be excluded
from the calculation of diluted EPS for both the three and nine month periods
ended September 30, 2004, respectively. There were 425,499 and 227,730
anti-dilutive stock options that were required to be excluded from the
calculation of diluted EPS for the three and nine month periods ended September
30, 2003, respectively.
NOTE C Valuation of Stock Option Grants
EMCOR has stock-based compensation plans and programs. 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
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2004 and 2003 in respect of stock options granted
during those periods inasmuch as EMCOR grants stock options at fair market
value. Had compensation cost for these options been determined consistent with
SFAS 123, "Accounting for Stock-Based Compensation", EMCOR's net income, basic
earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS")
would have been reduced from the "as reported amounts" below to the "pro forma
amounts" (in thousands, except per share amounts):
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE C Valuation of Stock Option Grants - (continued)
For the three months For the nine months
ended September 30, ended September 30,
------------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------------
Net income:
As reported $15,466 $6,468 $22,628 $17,997
Less: Total stock-based compensation expense determined
under fair value based method, net of related tax effects 48 -- 1,058 1,028
------- ------ ------- -------
Pro forma $15,418 $6,468 $21,570 $16,969
======= ====== ======= =======
Basic EPS:
As reported $ 1.02 $ 0.43 $ 1.49 $ 1.20
Pro forma $ 1.01 $ 0.43 $ 1.42 $ 1.13
Diluted EPS:
As reported $ 0.99 $ 0.42 $ 1.46 $ 1.16
Pro forma $ 0.99 $ 0.42 $ 1.39 $ 1.10
Common Stock
As of September 30, 2004 and December 31, 2003, 15,158,157 and 15,032,193 shares
of EMCOR common stock were outstanding, respectively.
NOTE D Segment Information
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 process
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
and energy management programs) and, although this segment occasionally performs
construction projects, this segment's services are not generally related to
customers' construction programs. The Canada, United Kingdom and Other
international segments perform electrical construction, mechanical construction
and facilities services. "Other international construction and facilities
services" represents 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 a South African joint venture was sold
in July 2004. The following tables present information about industry segments
and geographic areas (in thousands):
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE D Segment Information -(continued)
For the three months ended Sept. 30,
----------------------------------------
2004 2003
----------------------------------------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 330,522 $ 354,341
United States mechanical construction and facilities services 463,921 422,015
United States facilities services 181,361 162,474
---------- ----------
Total United States operations 975,804 938,830
Canada construction and facilities services 66,320 83,222
United Kingdom construction and facilities services 173,787 135,536
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $1,215,911 $1,157,588
========== ==========
For the three months ended Sept. 30,
----------------------------------------
2004 2003
----------------------------------------
Total revenues:
United States electrical construction and facilities services $ 332,551 $ 358,721
United States mechanical construction and facilities services 467,468 426,111
United States facilities services 181,575 162,760
Less intersegment revenues (5,790) (8,762)
---------- ----------
Total United States operations 975,804 938,830
Canada construction and facilities services 66,320 83,222
United Kingdom construction and facilities services 173,787 135,536
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $1,215,911 $1,157,588
========== ==========
For the nine months ended Sept. 30,
----------------------------------------
2004 2003
----------------------------------------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 908,670 $ 930,250
United States mechanical construction and facilities services 1,355,660 1,264,606
United States facilities services 538,883 495,663
---------- ----------
Total United States operations 2,803,213 2,690,519
Canada construction and facilities services 207,444 267,548
United Kingdom construction and facilities services 507,553 404,929
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $3,518,210 $3,362,996
========== ==========
For the nine months ended Sept. 30,
----------------------------------------
2004 2003
----------------------------------------
Total revenues:
United States electrical construction and facilities services $ 916,800 $ 950,796
United States mechanical construction and facilities services 1,375,878 1,271,308
United States facilities services 539,491 497,026
Less intersegment revenues (28,956) (28,611)
---------- ----------
Total United States operations 2,803,213 2,690,519
Canada construction and facilities services 207,444 267,548
United Kingdom construction and facilities services 507,553 404,929
Other international construction and facilities services -- --
---------- ----------
Total worldwide operations $3,518,210 $3,362,996
========== ==========
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE D Segment Information - (continued)
For the three months ended Sept. 30,
----------------------------------------
2004 2003
----------------------------------------
Operating income (loss):
United States electrical construction and facilities services $ 24,316 $ 14,899
United States mechanical construction and facilities services (1,483) 3,688
United States facilities services 4,831 5,589
-------- --------
Total United States operations 27,664 24,176
Canada construction and facilities services (1,695) 1,350
United Kingdom construction and facilities services 1,220 (3,174)
Other international construction and facilities services (63) 131
Corporate administration (9,762) (8,948)
Restructuring expenses (617) --
Gain on sale of assets 2,839 --
-------- --------
Total worldwide operations 19,586 13,535
Other corporate items:
Interest expense (2,609) (2,131)
Interest income 477 144
Gain on sale of equity investment 1,844 --
-------- --------
Income before income taxes $ 19,298 $ 11,548
======== ========
For the nine months ended Sept. 30,
--------------------------------------
2004 2003
--------------------------------------
Operating income (loss):
United States electrical construction and facilities services $ 50,421 $ 44,017
United States mechanical construction and facilities services (6,331) 14,267
United States facilities services 7,196 12,328
-------- --------
Total United States operations 51,286 70,612
Canada construction and facilities services (2,328) 3,116
United Kingdom construction and facilities services (1,370) (10,514)
Other international construction and facilities services 151 19
Corporate administration (25,842) (25,467)
Restructuring expenses (5,936) --
Gain on sale of assets 2,839 --
-------- --------
Total worldwide operations 18,800 37,766
Other corporate items:
Interest expense (6,453) (6,159)
Interest income 903 528
Gain on sale of equity investment 1,844 --
-------- --------
Income before income taxes $ 15,094 $ 32,135
======== ========
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE D Segment Information - (continued)
September 30, December 31,
2004 2003
--------------------------------------
Total assets:
United States electrical construction and facilities services $ 406,573 $ 362,306
United States mechanical construction and facilities services 774,372 771,730
United States facilities services 293,792 280,512
---------- ----------
Total United States operations 1,474,737 1,414,548
Canada construction and facilities services 110,911 98,191
United Kingdom construction and facilities services 219,990 198,397
Other international construction and facilities services 1,405 4,461
Corporate administration 87,434 79,650
---------- ----------
Total worldwide operations $1,894,477 $1,795,247
========== ==========
NOTE E Retirement Plans
Components of Net Periodic Pension Benefit Cost
The components of net periodic pension benefit cost for three and nine month
periods ended September 30, 2004 and 2003 were as follows (in thousands):
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 1,031 $ 1,192 $ 3,353 $ 3,576
Interest cost 2,214 2,016 6,638 6,047
Expected return on plan assets (2,225) (1,653) (6,681) (4,959)
Amortization of prior service cost (2) (2) (6) (6)
Amortization of net loss 348 562 1,044 1,687
------- ------- ------- -------
Net periodic pension benefit cost $ 1,366 $ 2,115 $ 4,348 $ 6,345
======= ======= ======= =======
Employer Contributions
During 2004, EMCOR's United Kingdom subsidiary contributed $5.1 million to its
defined benefit pension plan and anticipates contributing an additional $2.4
million in the remainder of 2004.
NOTE F Income Taxes
For the three months ended September 30, 2004, the income tax provision was $3.8
million compared to $5.1 million for the three months ended September 30, 2003.
The income tax provision for the current three month period was comprised of (a)
$8.1 million of income tax provision on pre-tax earnings of $19.3 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficient future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by a $12.5 million income tax benefit for income tax
reserves no longer required based on a current analysis of probable exposures.
For the nine months ended September 30, 2004, the income tax benefit was $7.5
million, compared to an income tax provision of $14.1 million for the nine
months ended September 30, 2003. In addition to the current quarter valuation
allowance and the reversal of income tax reserves,
EMCOR Group, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE F Income Taxes - (continued)
the income tax benefit in the 2004 nine month period included a first quarter
reversal of $9.6 million of income tax reserves no longer required, plus a $6.3
million income tax provision on $15.1 million of income before income taxes. The
provision on income before income taxes for the three and nine months ended
September 30, 2004 was recorded at an effective income tax rate of approximately
42% for each period; and the income before income taxes for the three and nine
months ended September 30, 2003 was recorded at an effective income tax rate of
approximately 44%. The decrease in the effective income tax rate for the current
year periods compared to the prior year periods was primarily due to increased
income anticipated in certain lower tax rate jurisdictions.
NOTE G Legal Proceedings
See Part II - Other Information, Item 1 - Legal Proceedings.
NOTE H Gain on Sale of Assets and Equity Investment
The gain on sale of assets of $2.8 million for the three and nine months ended
September 30, 2004 was related to the September 1, 2004 sale of the assets of
EMCOR's United Kingdom Delcommerce equipment rental services division.
Concurrent with the sale, EMCOR entered into a long-term agreement to utilize
the equipment rental services of the purchaser. The $1.8 million gain on sale of
an equity investment for the three and nine months ended September 30, 2004 was
attributable to the 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 the three
or nine month periods ended September 30, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The results of operations for each of the three and nine month periods ended
September 30, 2004, compared to results for the same periods in 2003, have been
impacted by certain strategic changes initiated by management late in 2003 and
throughout 2004. Actions taken include a shift in focus toward private sector
commercial work, which shift may result in a temporary reduction in revenues
until such construction spending increases significantly; replacement of the
senior management of the United Kingdom operations; and reductions in selling,
general and administrative expenses in all segments. EMCOR continues to follow
its long-term strategy of increasing revenues from multi-year facilities
services contracts and continues to expect demand for non-residential commercial
construction to gradually improve.
Gross profit for the three and nine months ended September 30, 2004 was lower
than in the prior year periods despite greater revenues. The lower gross profit
was primarily due to: (a) poor contract performance on certain construction
work, (b) continued decreased availability of higher margin discretionary small
project spending and repair and maintenance work and (c) increased competition
for, and a related decrease in gross profit margin on, commercial, industrial
and public sector work in the United States. Positively impacting gross profits
were reduced operating losses from the United Kingdom construction and
facilities services segment and increased gross profit from United States
transportation infrastructure, financial services and hospitality projects.
Selling, general and administrative expenses decreased for the three and nine
months ended September 30, 2004 compared to the same period in the prior year
primarily due to reduced salary costs and other variable costs associated with
reductions in personnel in all segments.
Specific actions with respect to management's strategy that have occurred during
the three months ended September 30, 2004 include the sale of the assets of the
United Kingdom Delcommerce equipment rental services division for a gain of $2.8
million and the sale of EMCOR's interest in a South African joint venture for a
gain of $1.8 million. For the three and nine months ended September 30, 2004,
restructuring expenses, primarily related to reductions in selling, general and
administrative expenses, were $0.6 million and $5.9 million, respectively.
Management believes it has positioned EMCOR to benefit from its strategy;
however, there is no guarantee that its strategy will result in significantly
improved results if economic conditions affecting EMCOR and the construction
industry generally do not improve.
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 process
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
and energy management programs) and, although this segment occasionally performs
construction projects, this segment's services are not generally related to
customers' construction programs. The Canada, United Kingdom and Other
international segments perform electrical construction, mechanical construction
and facilities services. "Other international construction and facilities
services" represents 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 a South African joint venture was sold
in July 2004.
Results of Operations
The results presented reflect certain reclassifications of prior period amounts
to conform to current year presentation.
Revenues
The following table presents EMCOR's operating segment revenues from unrelated
entities and their respective percentage of total revenues (in thousands, except
for percentages):
For the three months ended September 30,
--------------------------------------------------------------
% of % of
2004 Total 2003 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 330,522 27% $ 354,341 31%
United States mechanical construction and facilities services 463,921 38% 422,015 36%
United States facilities services 181,361 15% 162,474 14%
---------- ----------
Total United States operations 975,804 80% 938,830 81%
Canada construction and facilities services 66,320 6% 83,222 7%
United Kingdom construction and facilities services 173,787 14% 135,536 12%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $1,215,911 100% $1,157,588 100%
========== ==========
For the nine months ended September 30,
--------------------------------------------------------------
% of % of
2004 Total 2003 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 908,670 26% $ 930,250 28%
United States mechanical construction and facilities services 1,355,660 39% 1,264,606 38%
United States facilities services 538,883 15% 495,663 15%
---------- ----------
Total United States operations 2,803,213 80% 2,690,519 80%
Canada construction and facilities services 207,444 6% 267,548 8%
United Kingdom construction and facilities services 507,553 14% 404,929 12%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $3,518,210 100% $3,362,996 100%
========== ==========
As described below in more detail, revenues for the three months ended September
30, 2004 increased 5.0% to $1.22 billion compared to $1.16 billion for the three
months ended September 30, 2003. Revenues for the nine months ended September
30, 2004 increased 4.6% to $3.52 billion compared to $3.36 billion for the nine
months ended September 30, 2003. This revenue growth was principally due to
increased work on United States transportation infrastructure, financial
services, healthcare and hospitality construction projects and an increase in
the number of site-based facilities services contracts. The increases in
revenues in the three and nine month periods in 2004 compared to the same
periods in 2003 were partially offset by lower revenues from power generation
projects, office and manufacturing construction projects, discretionary small
projects and repair and maintenance work in the United States and lower revenues
from certain power generation and healthcare projects in Canada.
Revenues of the United States electrical construction and facilities services
segment for the three months ended September 30, 2004 decreased $23.8 million
compared to the three months ended September 30, 2003. This segment's revenues
for the nine months ended September 30, 2004 decreased $21.6 million compared to
the nine months ended September 30, 2003. The decrease in revenues was primarily
due to fewer power generation and manufacturing construction projects, partially
offset by an increase in transportation infrastructure, financial services and
hospitality work.
Revenues of the United States mechanical construction and facilities services
segment for the three months ended September 30, 2004 increased $41.9 million
compared to the three months ended September 30, 2003. This segment's revenues
for the nine months ended September 30, 2004 increased $91.1 million compared to
the nine months ended September 30, 2003. The increases in revenues were
primarily attributable to increased work on healthcare, hospitality and
financial services construction projects, partially offset by decreased power
generation work, office work, discretionary small projects and repair and
maintenance work.
United States facilities services segment revenues, which include those
operations that principally provide consulting and maintenance services,
increased $18.9 million for the three months ended September 30, 2004 compared
to the three months ended September 30, 2003. This segment's revenues for the
nine months ended September 30, 2004 increased $43.2 million compared to the
nine months ended September 30, 2003. The increase in revenues for the three
month period was primarily attributable to increased revenues from more
site-based facilities services contracts. The increase in revenues for the nine
month period was primarily attributable to increased revenues from additional
site-based facilities services contracts, partially offset by decreased revenues
as a result of less discretionary small projects and repair and maintenance
mobile services work during the first three months of the year.
Revenues of Canada construction and facilities services decreased by $16.9
million for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003. This segment's revenues for the nine months
ended September 30, 2004 decreased $60.1 million compared to the nine months
ended September 30, 2003. These decreases were primarily due to the completion
of certain long-term power generation projects active in the prior year.
However, these decreases were partially offset by $3.5 million and $14.6 million
in the three and nine month periods, respectively, of increased revenues related
to changes in the rates of exchange for Canadian dollars to United States
dollars due to the strengthening of the Canadian dollar.
United Kingdom construction and facilities services revenues increased $38.3
million for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003. This segment's revenues for the nine months
ended September 30, 2004 increased $102.6 million compared to the nine months
ended September 30, 2003. These increases in revenues were principally due to
increases in transportation infrastructure work and to increases of $19.9
million and $58.6 million for the three and nine month periods, respectively,
related to changes in the rate of exchange for British pounds to United States
dollars due to strengthening of the British pound.
Other international construction and facilities services activities consist of
operations primarily in the Middle East and South Africa (until the sale of
EMCOR's interest in a South African joint venture in July 2004). During 2004,
all of the current projects in these markets were being performed by joint
ventures, and accordingly, the results of these joint venture operations are
accounted for under the equity method of accounting because EMCOR has less than
majority ownership. Therefore, revenues attributable to such joint ventures are
not reflected as revenues in the consolidated financial statements. EMCOR
continues to pursue new business selectively in the Middle East and in
Continental Europe; however, the availability of opportunities there has been
significantly reduced as a result of local economic factors.
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 (in thousands, except for percentages):
For the three months ended
September 30,
----------------------------------
2004 2003
---- ----
Cost of sales.............................. $1,100,931 $1,039,382
Gross profit............................... 114,980 118,206
Gross profit, as a percentage of revenues.. 9.5% 10.2%
For the nine months ended
September 30,
----------------------------------
2004 2003
---- ----
Cost of sales.............................. $3,200,555 $3,004,746
Gross profit............................... 317,655 358,250
Gross profit, as a percentage of revenues.. 9.0% 10.7%
Gross profit (revenues less cost of sales) decreased $3.2 million and $40.6
million for the three and nine months ended September 30, 2004 compared to the
three and nine months ended September 30, 2003, respectively. Gross profit as a
percentage of revenues was 9.5% for the three months ended September 30, 2004
compared to 10.2% for the three months ended September 30, 2003. Gross profit as
a percentage of revenues was 9.0% for the nine months ended September 30, 2004
compared to 10.7% for the nine months ended September 30, 2003. Gross profit for
the 2004 three and nine month periods was lower than in the prior year periods,
despite greater revenues than in the prior year periods, primarily due to: (a)
poor contract performance on certain construction work related to greater than
originally estimated labor requirements to perform the work and continued
reduced labor productivity due to the uncertain construction job market, (b)
continued decreased availability of higher margin discretionary small project
spending and repair and maintenance work and (c) increased competition for, and
a related decrease in gross profit margin on commercial, industrial and public
sector work in the United States. Additionally, in the nine months ended
September 30, 2004 compared to the same prior year period, gross profit was
adversely impacted by unprofitable performance on certain power generation
projects due to labor requirements in excess of original estimates and other
factors. Positively impacting gross margin during the three and nine month
periods ended September 30, 2004 were reduced operating losses from the United
Kingdom construction and facilities services segment when compared to the
corresponding three and nine month periods ended September 30, 2003 and
increased gross profit from transportation infrastructure, financial services
and hospitality projects. Total gross profit increased $1.9 million and $5.3
million for the three and nine months ended September 30, 2004, respectively,
due to changes in the rate of exchange for foreign currencies to United States
dollars compared to the same periods in the prior year.
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 (in thousands, except for percentages):
For the three months ended
September 30,
----------------------------
2004 2003
---- ----
Selling, general and administrative expenses........ $97,616 $104,671
Selling, general and administrative expenses,
as a percentage of revenues....................... 8.0% 9.0%
For the nine months ended
September 30,
----------------------------
2004 2003
---- ----
Selling, general and administrative expenses........ $295,758 $320,484
Selling, general and administrative expenses,
as a percentage of revenues....................... 8.4% 9.5%
Selling, general and administrative expenses for the three and nine months ended
September 30, 2004 decreased $7.1 million and $24.7 million compared to the
three and nine months ended September 30, 2003, respectively. Selling, general
and administrative expenses as a percentage of revenues were 8.0% for the three
months ended September 30, 2004, compared to 9.0% for the three months ended
September 30, 2003, and 8.4% for the nine months ended September 30, 2004,
compared to 9.5% for the nine months ended September 30, 2003. The decreases in
selling, general and administrative expenses both in dollars and as a percentage
of revenues compared to the same periods in the prior year was primarily
attributable to reduced salary costs and other variable costs associated with
reductions in personnel. Selling, general and administrative expenses increased
$1.7 million and $5.4 million for the three and nine month periods ended
September 30, 2004, respectively, due to changes in the rate of exchange for
foreign currencies to United States dollars compared to the same periods in the
prior year.
Restructuring expenses
Restructuring expenses, primarily relating to employee severance obligations,
were $0.6 million and $5.9 million for the three and nine months ended September
30, 2004. Approximately $5.3 million of the restructuring obligations were paid
prior to September 30, 2004. EMCOR anticipates paying approximately $0.1 million
of these remaining obligations in fiscal 2004 and $0.5 million, thereafter.
There were no restructuring expenses for the three and nine months ended
September 30, 2003.
Gain on sale of assets and equity investment
The gain on sale of assets of $2.8 million for the three and nine months ended
September 30, 2004 was related to the September 1, 2004 sale of the assets of
EMCOR's United Kingdom Delcommerce equipment rental services division.
Concurrent with the sale, EMCOR entered into a long-term agreement to utilize
the equipment rental services of the purchaser. The $1.8 million gain on sale of
an equity investment for the three and nine months ended September 30, 2004 was
attributable to the 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 the three
or nine month periods ended September 30, 2003.
Operating income
The following table presents EMCOR's operating income (loss), and operating
income (loss) as a percentage of segment revenues from unrelated entities (in
thousands, except for percentages):
For the three months ended September 30,
---------------------------------------------------------
% of % of
Segment Segment
2004 Revenues 2003 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $24,316 7.4% $14,899 4.2%
United States mechanical construction and facilities services (1,483) (0.3)% 3,688 0.9%
United States facilities services 4,831 2.7% 5,589 3.4%
------- -------
Total United States operations 27,664 2.8% 24,176 2.6%
Canada construction and facilities services (1,695) (2.6)% 1,350 1.6%
United Kingdom construction and facilities services 1,220 0.7% (3,174) (2.3)%
Other international construction and facilities services (63) 131
Corporate administration (9,762) (8,948)
Restructuring expenses (617) --
Gain on sale of assets 2,839 --
------- -------
Total worldwide operations 19,586 1.6% 13,535 1.2%
Other corporate items:
Interest expense (2,609) (2,131)
Interest income 477 144
Gain on sale of equity investment 1,844 --
------- ------
Income before income taxes $19,298 $11,548
======= =======
For the nine months ended September 30,
---------------------------------------------------------
% of % of
Segment Segment
2004 Revenues 2003 Revenues
---- -------- ---- --------
Operating income (loss) :
United States electrical construction and facilities services $50,421 5.5% $44,017 4.7%
United States mechanical construction and facilities services (6,331) (0.5)% 14,267 1.1%
United States facilities services 7,196 1.3% 12,328 2.5%
------- -------
Total United States operations 51,286 1.8% 70,612 2.6%
Canada construction and facilities services (2,328) (1.1)% 3,116 1.2%
United Kingdom construction and facilities services (1,370) (0.3)% (10,514) (2.6)%
Other international construction and facilities services 151 19
Corporate administration (25,842) (25,467)
Restructuring expenses (5,936) --
Gain on sale of assets 2,839 --
------- -------
Total worldwide operations 18,800 0.5% 37,766 1.1%
Other corporate items:
Interest expense (6,453) (6,159)
Interest income 903 528
Gain on sale of equity investment 1,844 --
------- -------
Income before income taxes $15,094 $32,135
======= =======
As described below in more detail, operating income increased by $6.1 million
for the three months ended September 30, 2004 compared to the three month period
ended September 30, 2003. Operating income decreased by $19.0 million for the
nine months ended September 30, 2004 compared to the nine month period ended
September 30, 2003.
United States electrical construction and facilities services operating income
for the three months ended September 30, 2004 increased $9.4 million compared to
the three months ended September 30, 2003. This segment's operating income for
the nine months ended September 30, 2004 increased $6.4 million compared to the
nine months ended September 30, 2003. Generally, the segment's increased
operating income in the current year three and nine month periods was
attributable to increased gross profit on transportation infrastructure,
financial services, and hospitality construction projects. Selling, general and
administrative expenses decreased in both the three and nine month periods
primarily due to decreased salary costs and other variable costs associated with
reductions in personnel.
United States mechanical construction and facilities services operating loss for
the three months ended September 30, 2004 was $1.5 million compared to operating
income of $3.7 million for the three months ended September 30, 2003. For the
nine months ended September 30, 2004, this segment had an operating loss of $6.3
million compared to $14.3 million of operating income for the nine months ended
September 30, 2003. The segment's reduced operating income for both the three
and nine month periods was primarily attributable to: (a) decreases in the
recovery of estimated costs upon completion of certain projects, principally in
the Western United States, (b) poor 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 reduced salary
costs and other variable costs associated with reductions in personnel and to
reduced incentive compensation due to less favorable financial performance.
United States facilities services operating income for the three months ended
September 30, 2004 decreased $0.8 million compared to the three months ended
September 30, 2003. Operating income for the nine months ended September 30,
2004 decreased $5.1 million compared to the nine months ended September 30,
2003. For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, there was 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. For the nine months ended September 30, 2004, compared to the same
period in 2003, the decrease in operating income was due to the following: (a) a
reduction in discretionary small projects and repair and maintenance work, (b)
approximately $2.3 million of losses during the first three months of 2004 on
certain construction projects, outside of the normal facilities services
operations of this segment, that were contracted for by subsidiaries in this
segment prior to their acquisition by EMCOR and (c) increased expenses incurred
for site-based facilities services business development. The decrease in
operating income in the current year periods was only partially offset by a
reduction in selling, general and administrative expenses related to decreased
salary costs and other variable costs associated with reductions in personnel.
Canada construction and facilities services operating loss for the three months
ended September 30, 2004 was $1.7 million compared to operating income of $1.4
million for the three months ended September 30, 2003. Operating loss for the
nine months ended September 30, 2004 was $2.3 million compared to operating
income of $3.1 million for the nine months ended September 30, 2003. The reduced
operating income for both the three and nine month periods compared to the prior
year comparable periods was primarily due to (a) the completion of certain
long-term power generation projects active in the prior year and (b) poor
contract performance on certain other construction work related to greater labor
requirements than originally estimated to perform the work. Exchange rates did
not have a significant impact on reported operating losses for either the three
or nine month periods ended September 30, 2004 compared to the same periods in
the prior year.
United Kingdom construction and facilities services operating income for the
three months ended September 30, 2004 was $1.2 million compared to operating
losses of $3.2 million for the three months ended September 30, 2003. Operating
losses for the nine months ended September 30, 2004 and 2003 were $1.4 million
and $10.5 million, respectively. These decreases in operating losses were
attributable to reductions in selling, general and administrative expenses
related to a reorganization of the United Kingdom operations in late 2003 and an
improvement in the 2004 gross profit as the contracts causing large losses in
2003 were substantially completed by December 31, 2003. The 2003 losses had been
the result of several unfavorable project close-outs and poor labor performance.
Exchange rates did not have a significant impact on reported operating losses
for either the three or nine month periods ended September 30, 2004 compared to
the same periods in the prior year.
Other international construction and facilities services realized operating
losses of $0.06 million for the three months ended September 30, 2004 and
operating income of $0.2 million for the nine months ended September 30, 2004,
compared to operating income of $0.1 million and $0.02 million for the three and
nine months ended September 30, 2003, respectively. EMCOR continues to pursue
new business selectively in the Middle East as well as in Continental Europe;
however, the availability of opportunities has been significantly reduced as a
result of local economic factors.
Corporate administration expense increased $0.8 million for the three months
ended September 30, 2004, compared to the three months ended September 30, 2003.
Corporate administration expense increased $0.4 million for the nine months
ended September 30, 2004, compared to the nine months ended September 30, 2003.
The increase in expense for the three and nine month periods was primarily due
to increased marketing expenditures partially offset by selected other cost
reductions.
Restructuring expenses, primarily relating to employee severance obligations,
were $0.6 million and $5.9 for the three and nine months ended September 30,
2004. There were no restructuring expenses for the three and nine months ended
September 30, 2003.
The gain on sale of assets of $2.8 million for the three and nine months ended
September 30, 2004 was related to the September 1, 2004 sale of the assets of
EMCOR's United Kingdom Delcommerce equipment rental services division.
Concurrent with the sale, EMCOR entered into a long-term agreement to utilize
the equipment rental services of the purchaser. The $1.8 million gain on sale of
an equity investment for the three and nine months ended September 30, 2004 was
attributable to the 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 was no sale of assets or equity investments in either the three
or nine month periods ended September 30, 2003.
Interest expense for the three months ended September 30, 2004 and 2003 was $2.6
million and $2.1 million, respectively, and interest expense was $6.5 million
and $6.2 million for the nine months ended September 30, 2004 and 2003,
respectively. Interest income for the three months ended September 30, 2004 and
2003 was $0.5 million and $0.1 million, respectively, and interest income was
$0.9 million and $0.5 million for the nine month periods ended September 30,
2004 and 2003, respectively. Changes in the interest rate on borrowings and on
cash invested did not have a significant impact on interest expense or income
during the three or nine months ended September 30, 2004 compared to the 2003
periods.
For the three months ended September 30, 2004, the income tax provision was $3.8
million compared to $5.1 million for the three months ended September 30, 2003.
The income tax provision for the current three month period was comprised of (a)
$8.1 million of income tax provision on pre-tax earnings of $19.3 million, (b)
$8.2 million of income tax provision related to a valuation allowance recorded
to reduce net deferred tax assets related to net operating losses and other
temporary differences of the United Kingdom construction and facilities services
segment inasmuch as there is uncertainty of sufficient future income to realize
the benefit of such deferred tax assets and (c) the partial offset of such
income tax provisions by a $12.5 million income tax benefit for income tax
reserves no longer required based on a current analysis of probable exposures.
For the nine months ended September 30, 2004, the income tax benefit was $7.5
million, compared to an income tax provision of $14.1 million for the nine
months ended September 30, 2003. In addition to the current quarter valuation
allowance and the reversal of income tax reserves, the income tax benefit in the
2004 nine month period included a first quarter reversal of $9.6 million of
income tax reserves no longer required, plus a $6.3 million income tax provision
on $15.1 million of income before income taxes. The provision on income before
income taxes for the three and nine months ended September 30, 2004 was recorded
at an effective income tax rate of approximately 42% for each period; and the
income before income taxes for the three and nine months ended September 30,
2003 was recorded at an effective income tax rate of approximately 44%. The
decrease in the effective income tax rate for the current year periods compared
to the prior year periods was primarily due to increased income anticipated in
certain lower tax rate jurisdictions.
EMCOR's contract backlog at September 30, 2004 was $2.96 billion compared to
$3.11 billion of contract backlog at September 30, 2003. The $0.15 billion
decrease was primarily due to a $0.2 billion total decrease in the United States
electrical construction and facilities services, the United States mechanical
construction and facilities services and the Canada construction and facilities
services segments' backlog, partially offset by increases in backlog in the
United States facilities services and United Kingdom construction and facilities
services segments.
EMCOR's contract backlog was $2.96 billion at September 30, 2004 and $3.03
billion at December 31, 2003. The $0.07 billion decrease was primarily due to a
$0.16 billion total decrease in the United States mechanical construction and
facilities services, the Canada construction and facilities services and the
United Kingdom construction and facilities services segments' backlog, partially
offset by increases in backlog in the United States electrical construction and
facilities services and the United States facilities services segments.
Liquidity and Capital Resources
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities (in thousands):
For the nine months ended
September 30,
-------------------------
2004 2003
---- ----
Net cash provided by (used in) operating activities...... $ 36,653 $(53,186)
Net cash used in investing activities.................... $ (2,724) $(20,360)
Net cash (used in) provided by financing activities...... $(11,164) $ 62,605
EMCOR's consolidated cash balance increased by approximately $22.8 million from
$78.3 million at December 31, 2003 to $101.0 million at September 30, 2004. For
the nine months ended September 30, 2004, the $36.7 million of cash provided by
operating activities was primarily attributable to net income of $22.7 million
and net non-cash expenses of $29.6 million (primarily depreciation and
amortization expense and an increase in net deferred income taxes less gains on
the sales of assets and equity investment), partially offset by net payments of
accounts payable and other accrued expenses of $15.6 million. For the nine
months ended September 30, 2003, $53.2 million of cash was used in operating
activities primarily due to the shift toward increased public sector work in
2003, which work typically involves larger projects and significant working
capital requirements until initial billing milestones can be reached. Net cash
used in investing activities of $2.7 million for the nine months ended September
30, 2004 decreased $17.6 million compared to $20.4 million in the same period in
the prior year primarily due to proceeds from the sale of assets and equity
investment of $10.1 million in 2004, increased proceeds from the sale of
property, plant and equipment of $2.2 million, decreased purchases of property,
plant and equipment of $3.6 million and decreased earn-out payments of $1.6
million as nearly all earn-out periods provided for in acquisition agreements
have expired. Net cash used in financing activities of $11.2 million for the
nine months ended September 30, 2004 was primarily attributable to net
repayments under the working capital credit line, compared to net borrowings
under the working capital credit line in 2003.
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 0.4 0.2 0.2 -- --
Operating leases 149.7 36.4 52.2 27.2 33.9
Minimum funding requirement for pension plan 7.5 7.5 -- -- --
Open purchase obligations (1) 659.3 482.1 168.0 9.2 --
Other long-term obligations (2) 106.4 -- 106.4 -- --
------ ------ ------ ----- -----
Total Contractual Obligations $923.8 $526.3 $327.0 $36.6 $33.9
====== ====== ====== ===== =====
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) $127.3 $ -- $127.3 $ -- $ --
Letters of credit 50.0 -- 50.0 -- --
Guarantees 25.0 -- -- -- 25.0
------ ----- ------ ----- -----
Total Commercial Obligations $202.3 $ -- $177.3 $ -- $25.0
====== ===== ====== ===== =====
(1) Represent open purchase orders for material and subcontracting costs
related to the Company'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) Represent primarily insurance related liabilities, classified as other
long-term liabilities in EMCOR's consolidated balance sheets. It is not
practical to estimate cash payments for insurance related liabilities
beyond three years.
(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.
EMCOR's revolving credit agreement (the "Revolving Credit Facility") provides
for a credit facility of $350.0 million. As of September 30, 2004 and December
31, 2003, EMCOR had approximately $50.0 million and $42.9 million of letters of
credit outstanding, respectively, under the Revolving Credit Facility. The
amounts borrowed under the Revolving Credit Facility as of September 30, 2004
and December 31, 2003 were $127.3 million and $139.4 million, respectively.
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 commercial 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.
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 EMCOR employees, bonds are sometimes provided to secure obligations
for wages and benefits payable to or for such employees. As of September 30,
2004, sureties had issued bonds for the account of EMCOR in the aggregate amount
of approximately $1.7 billion. The bonds are issued by EMCOR's sureties in
return for a premium, which varies depending on the size and type of bond. 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 typically been, and is generally
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. Short-term liquidity is also impacted by the type and
length of construction contracts in place. During economic downturns in
non-residential commercial construction, such as during the period 2001 through
September 30, 2004, there are typically fewer discretionary small projects from
the private sector, and companies such as EMCOR more aggressively bid large
long-term infrastructure and public sector contracts. Performance of long-term
public sector contracts (as opposed to private sector short-term contracts)
typically requires greater 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
$206.9 million and $95.8 million as of September 30, 2004 and December 31, 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 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, corporate
profits and governmental economic policy. In order to provide protection against
demand cycles in private sector construction services, EMCOR has increased its
participation, and its backlog of contracts, in the public sector and in the
facilities services market when compared to historical levels. 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, or defend the failure to pay to it, amounts ranging from a few thousand
dollars to over $70.0 million. If EMCOR is not successful in one or more such
proceedings, the results could have a material adverse effect on its financial
position, results of operations and/or cash flows.
Certain Insurance Matters
As of September 30, 2004 and December 31, 2003, EMCOR was utilizing
approximately $39.4 million and $37.7 million, respectively, of letters of
credit obtained under its revolving credit facility as collateral for its
insurance obligations.
Application of Critical Accounting Policies
The condensed 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 its annual report on
Form 10-K for the year ended December 31, 2003. There was no initial adoption of
any accounting policies during the three and nine months ended September 30,
2004. EMCOR believes that some of the more critical judgment areas in the
application of accounting policies that affect its financial condition and
results of operations are 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.
Revenue Recognition for 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 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 in dispute 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 (claims and
unapproved change orders). Such amounts are recorded at estimated net realizable
value and take into account factors that may affect the ability to bill and
collect amounts billed. 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 service 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: (1)
fixed price 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 on a customer's site full time) and (2)
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 evenly 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, which assessment factors include the creditworthiness of the
customer, EMCOR's prior collection history with the customer and related aging
of the past due balances. The provisions for bad debts during the nine months
ended September 30, 2004 and 2003 were $1.5 and $4.3 million, respectively. At
September 30, 2004 and December 31, 2003, accounts receivable of $1,114.5
million and $1,009.2 million, respectively, included allowances for bad debts of
$34.0 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 deterioration of its financial condition or credit ratings or
its bankruptcy. The allowance requirements are based on the best facts available
and are re-evaluated 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 estimates of claims incurred but not reported. The estimates of 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 recorded liabilities for these obligations are
adequate. However, such obligations are difficult to assess and estimate due to
numerous factors, including severity of injury, determination of liability in
proportion to other parties, timely reporting of occurrences and effectiveness
of safety and risk management programs. Therefore, if 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 has net deferred tax assets primarily resulting from deductible temporary
differences, 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 September 30, 2004 and December
31, 2003, the total valuation allowance on net deferred tax assets was
approximately $10.2 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 September 30, 2004, EMCOR had goodwill and net identifiable intangible
assets (primarily the market value of its acquired backlog, customer
relationships and trademarks and tradenames) of $280.8 million and $19.6
million, respectively, in connection with the acquisition of certain 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 identifiable intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") requires a review
for impairment of the market value ascribed to identifiable intangible assets
with indefinite lives. Trademarks and tradenames have indefinite lives and are
not amortized. Changes in strategy and/or market conditions may result in
adjustments to recorded intangible asset balances. As of September 30, 2004, no
indicators of impairment of EMCOR's goodwill or identifiable intangible assets
existed in accordance with the provisions of SFAS 142 or SFAS 144. EMCOR will
perform its annual review for impairment during the fourth quarter.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995. All
forward-looking statements included in this Quarterly Report are based upon
information available to EMCOR, and management's perception thereof, as of the
date of this Quarterly 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 EMCOR's 2003 Form 10-K, its Forms
10-Q for the three months ended March 31, 2004 and June 30, 2004 and in other
reports filed by it 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR has not used derivative financial instruments for any purpose during the
three and nine months ended September 30, 2004 and 2003, including trading or
speculation 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 its 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 September 30,
2004, there was $127.3 million of borrowings outstanding under the facility, and
these borrowings bear interest at (1) a rate which is the prime commercial
lending rate announced by Harris Nesbitt from time to time (4.75% at September
30, 2004) plus 0% to 1.0% based on certain financial tests or (2) United States
dollar LIBOR (at September 30, 2004 the rate was 1.84%) plus 1.5% to 2.5% based
on certain financial tests. The interest rates in effect at September 30, 2004
were 5.25% and 3.84% 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 based on the type of letter of credit issued and certain financial tests.
Based on the $127.3 million of borrowings, if overall interest rates were to
increase by 1.0%, the net of tax interest expense would increase approximately
$0.8 million in the next twelve months. Conversely, if overall interest rates
were to decrease by 1.0%, interest expense would decrease by approximately $0.8
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 its potential related impact on
accounts receivable or costs and estimated earnings in excess of billings on
uncompleted contracts. The amounts recorded may be at risk if customers' ability
to pay these obligations is negatively impacted by economic conditions. EMCOR
continually monitors the creditworthiness 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 the end of the period. The resulting
translation adjustments are recorded as accumulated other comprehensive income
(loss), a component of stockholders' equity, in the condensed consolidated
balance sheets. EMCOR believes the exposure to the effects that fluctuating
foreign currencies may have on the consolidated results of operations is limited
because the foreign operations primarily invoice customers and collect
obligations in their respective local currencies. Additionally, expenses
associated with these transactions are generally contracted and paid for in
their same local currencies.
In addition, EMCOR is exposed to market risk of fluctuations in certain
commodity prices of materials such as copper and steel utilized in both its
construction and facilities services operations. EMCOR believes it can be
successful in recovery of most commodity price escalations.
ITEM 4. CONTROLS AND PROCEDURES
EMCOR's management evaluated, with the participation of its Chief Executive
Officer and Chief Financial Officer, the effectiveness of EMCOR's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that EMCOR's disclosure controls and procedures were
effective as of the end of the period covered by this report. There has been no
change in EMCOR's internal control over financial reporting that occurred during
the quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, EMCOR's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the legal matters previously reported in its Forms 10-K for the
year ended December 31, 2003 and in its Form 10-Q for the quarter ended March
31, 2004, EMCOR is involved in other proceedings in which claims for damages
have been asserted against it. EMCOR believes that it has a number of valid
defenses to such proceedings, intends to vigorously defend such proceedings, 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 $70.0
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 has been
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 has been 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 September 30, 2004 and December 31, 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 scheduled to commence November
2004. The JV claims total damages, based upon alternative measures of damages,
of between $80 and $90 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 6. EXHIBITS
(a) Exhibits
Incorporated by Reference to,
Exhibit No. Description or Page Number
- ----------- ---------------------------------------------- -------------------------------------
3(a-1) Restated Certificate of Incorporation of Exhibit 3(a-1) to EMCOR's Form 10-K
EMCOR filed December 15, 1994 as originally filed March 17, 1995
3(a-2) Amendment dated November 28, 1995 to the Exhibit 3(a-2) to EMCOR's
Restated Certificate of Incorporation of Annual Report on Form 10-K for
EMCOR the year ended December 31, 1995
3(a-3) Amendment dated February 12, 1998 to the Exhibit 3(a-3) to EMCOR's
Restated Certificate of Incorporation Annual Report on Form 10-K for
the year ended December 31, 1997
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
4.1(a) U.S. $275,000,000 Credit Agreement by and Exhibit 4.1(a) to EMCOR's Report
among EMCOR Group, Inc. and certain of its On Form 8-K dated October 4, 2002
Subsidiaries and Harris Trust and Savings
Bank individually and as Agent and the
Lenders which are or become parties thereto
dated as of September 26, 2002 (the "Credit
Agreement")
4.1(b) Amendment and Waiver letter dated Exhibit 4.1(b) to EMCOR's Annual
December 10, 2002 to the Credit Agreement Report on Form 10-K for the year
ended December 31, 2002
4.1(c) First Amendment to Credit Agreement dated Exhibit 4.1(c) to EMCOR's Quarterly
as of June 2003 Report on Form 10-Q for the quarter
ended June 30, 2003 (the "June 2003
Form 10-Q")
4.1(d) Second Amendment to Credit Agreement Exhibit 4.1(d) to June 2003 Form
dated as of June 2003 10-Q
4.1(e) Commitment Amount Increase Request Exhibit 4.1(e) to June 2003 Form
dated June 26, 2003 among Harris, National 10-Q
City Bank and EMCOR
4.1(f) Commitment Amount Increase Request Exhibit 4.1(f) to June 2003 Form
Dated June 26, 2003 among Harris, Webster 10-Q
Bank and EMCOR
4.1(g) Commitment Amount Increase Request Exhibit 4.1(g) to June 2003 Form
dated June 26, 2003 among Harris, Union 10-Q
Bank of California, N.A. and EMCOR
4.1(h) Commitment Amount Increase Request Exhibit 4.1(h) to June 2003 Form
dated June 26, 2003 among Harris, Sovereign 10-Q
Bank and EMCOR
4.1(i) Commitment Amount Increase Request Exhibit 4.1(i) to June 2003 Form
dated July 9, 2003 among Harris, Bank 10-Q
Hapoalim B.M. and EMCOR
ITEM 6. EXHIBITS - (continued)
Incorporated by Reference to,
Exhibit No. Description or Page Number
- ----------- ---------------------------------------------- -------------------------------------
4.1(j) Commitment Amount Increase Request Exhibit 4.1(j) to June 2003 Form
dated July 9, 2003 among Harris, The 10-Q
Governor and Company of Bank of Scotland
and EMCOR
4.1(k) Commitment Amount Increase Request Exhibit 4.1(k) to June 2003 Form
dated July 9, 2003 among Harris, U.S. Bank, 10-Q
National Association and EMCOR
11 Computation of Basic Note B of the Notes
EPS and Diluted EPS to the Condensed Consolidated
for the three and nine months Financial Statements
ended September 30, 2004 and 2003
31.1 Additional Exhibit - Page
Certification Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
31.2 Additional Exhibit - Page
Certification Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
32.1 Additional Exhibit - Page
Certification Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
32.2 Additional Exhibit - Page
Certification Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
SIGNATURES
Pursuant to the requirements 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.
Date: October 28, 2004
EMCOR GROUP, INC.
-----------------------------------
(Registrant)
By: /s/FRANK T. MACINNIS
-----------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
/s/LEICLE E. CHESSER
-----------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/MARK A. POMPA
-----------------------------------
Mark A. Pompa
Senior Vice President,
Chief Accounting Officer
and Treasurer
(Principal Accounting Officer)
CERTIFICATION
I, Frank T. MacInnis, Chairman of the Board and Chief Executive Officer of EMCOR
Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 28, 2004
/s/FRANK T. MACINNIS
-------------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
CERTIFICATION
I, Leicle E. Chesser, Executive Vice President and Chief Financial Officer of
EMCOR Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 28, 2004
/s/LEICLE E. CHESSER
-------------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Frank T. MacInnis, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: October 28, 2004 /s/ FRANK T. MACINNIS
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Frank T. MacInnis
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EMCOR Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Leicle E. Chesser, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: October 28, 2004 /s/ LEICLE E. CHESSER
-----------------------------------
Leicle E. Chesser
Chief Financial Officer