-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SO+lsZJsXBeKKiua4toIqYPBwC4Du2pD7Y29236c6zIbUyUNDfRARFS4e+msc5+/ NCtCpQTvtQzepkUqAXQr5Q== 0000105634-02-000007.txt : 20020725 0000105634-02-000007.hdr.sgml : 20020725 20020725080046 ACCESSION NUMBER: 0000105634-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020725 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCOR GROUP INC CENTRAL INDEX KEY: 0000105634 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] IRS NUMBER: 112125338 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08267 FILM NUMBER: 02710295 BUSINESS ADDRESS: STREET 1: 101 MERRITT SEVEN CORPORATE PK STREET 2: 7TH FLOOR CITY: NORWALK STATE: CT ZIP: 06851 BUSINESS PHONE: 2038497800 MAIL ADDRESS: STREET 1: 101 MERRITT SEVEN CORPORATE PARK STREET 2: 7TH FLOOR CITY: NORWALK STATE: CT ZIP: 06851 FORMER COMPANY: FORMER CONFORMED NAME: WELSBACH CORP DATE OF NAME CHANGE: 19761119 FORMER COMPANY: FORMER CONFORMED NAME: JAMAICA WATER PROPERTIES INC DATE OF NAME CHANGE: 19860518 FORMER COMPANY: FORMER CONFORMED NAME: JWP INC/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 a60210q.txt SECOND QUARTER FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 - -------------------------------------------------------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------- 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. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2125338 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 Merritt Seven Corporate Park Norwalk, Connecticut 06851-1060 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (203) 849-7800 - ------------------------------- (Registrant's telephone number) 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 __ Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on July 22, 2002: 14,907,973 shares. EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of June 30, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Operations - three months ended June 30, 2002 and 2001 3 Condensed Consolidated Statements of Operations - six months ended June 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2002 and 2001 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - six months ended June 30, 2002 and 2001 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 16 PART II - Other Information Item 1 Legal Proceedings 25 Item 4 Submission of Matters to a Vote of Security Holders 25 Item 6 Exhibits and Reports on Form 8-K 25 14 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- June 30, December 31, 2002 2001 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 89,716 $ 189,766 Accounts receivable, net 880,071 777,102 Costs and estimated earnings in excess of billings on uncompleted contracts 227,712 221,272 Inventories 8,887 7,158 Prepaid expenses and other 25,758 22,026 ---------- ---------- Total current assets 1,232,144 1,217,324 Investments, notes and other long-term receivables 11,483 16,817 Property, plant and equipment, net 55,276 42,548 Goodwill, net 184,345 56,011 Other assets 17,971 16,964 ---------- ---------- Total assets $1,501,219 $1,349,664 ========== ========== See Notes to Condensed Consolidated Financial Statements. Page 1 EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) - -------------------------------------------------------------------------------- June 30, December 31, 2002 2001 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 21,592 $ 947 Accounts payable 359,208 313,227 Billings in excess of costs and estimated earnings on uncompleted contracts 364,549 319,165 Accrued payroll and benefits 126,439 121,196 Other accrued expenses and liabilities 97,563 99,726 ---------- ---------- Total current liabilities 969,351 854,261 Long-term debt and capital lease obligations 767 848 Other long-term obligations 80,191 72,622 ---------- ---------- Total liabilities 1,050,309 927,731 ---------- ---------- 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, 14,904,896 and 14,815,007 shares issued and outstanding, respectively 159 159 Capital surplus 311,837 307,636 Accumulated other comprehensive loss (2,727) (5,424) Retained earnings 158,477 136,398 Treasury stock, at cost, 1,131,985 shares (16,836) (16,836) ---------- ---------- Total stockholders' equity 450,910 421,933 ---------- ---------- Total liabilities and stockholders' equity $1,501,219 $1,349,664 ========== ========== See Notes to Condensed Consolidated Financial Statements. Page 2 EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) - -------------------------------------------------------------------------------- Three months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Revenues $986,399 $869,506 Cost of sales 866,183 776,762 -------- -------- Gross profit 120,216 92,744 Amortization of goodwill -- 1,353 Selling, general and administrative expenses 93,292 70,230 -------- -------- Operating income 26,924 21,161 Interest expense, net 445 243 -------- -------- Income before income taxes 26,479 20,918 Income tax provision 11,651 9,296 -------- -------- Net income $ 14,828 $ 11,622 ======== ======== Basic earnings per share $ 1.00 $ 1.00 ======== ======== Diluted earnings per share $ 0.96 $ 0.81 ======== ======== See Notes to Condensed Consolidated Financial Statements. Page 3 EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) - -------------------------------------------------------------------------------- Six months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Revenues $1,796,698 $1,707,061 Cost of sales 1,587,096 1,533,798 ---------- ---------- Gross profit 209,602 173,263 Amortization of goodwill -- 2,674 Selling, general and administrative expenses 170,147 138,582 ---------- ---------- Operating income 39,455 32,007 Interest expense, net 28 985 ---------- ---------- Income before income taxes 39,427 31,022 Income tax provision 17,348 13,743 ---------- ---------- Net income $ 22,079 $ 17,279 ========== ========== Basic earnings per share $ 1.49 $ 1.56 ========== ========== Diluted earnings per share $ 1.43 $ 1.25 ========== ========== See Notes to Condensed Consolidated Financial Statements. Page 4 EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) - -------------------------------------------------------------------------------- Six months ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 22,079 $ 17,279 Depreciation and amortization 7,305 6,080 Amortization of goodwill -- 2,674 Other non-cash expenses 2,471 16,828 Changes in operating assets and liabilities, excluding the effect of business acquired 36,231 (6,975) ------- -------- Net cash provided by operating activities 68,086 35,886 -------- -------- Cash flows from investing activities: Payments for acquisitions of businesses, net of cash acquired, and related earn-out agreements (164,649) (2,983) Proceeds from sale of assets 360 1,131 Purchase of property, plant and equipment (9,039) (7,548) Net proceeds from other investments 5,480 253 -------- -------- Net cash used in investing activities (167,848) (9,147) -------- -------- Cash flows from financing activities: Net repayments of long-term debt and capital lease obligations (1,588) (292) Net proceeds from exercise of stock options 1,300 1,590 -------- -------- Net cash (used in) provided by financing activities (288) 1,298 -------- -------- (Decrease) increase in cash and cash equivalents (100,050) 28,037 Cash and cash equivalents at beginning of year 189,766 137,685 -------- -------- Cash and cash equivalents at end of period $ 89,716 $165,722 ======== ======== Supplemental cash flow information: Cash paid for: Interest $ 488 $ 3,307 Income taxes $ 22,130 $ 2,045 Non-cash financing activities: Debt assumed in acquisition $ 21,262 -- 5 3/4% Convertible Subordinated Notes due 2005, converted into common stock -- $115,000 See Notes to Condensed Consolidated Financial Statements. Page 5 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 loss (1) earnings stock income - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 2001 $233,503 $117 $167,742 $(3,906) $ 86,386 $(16,836) Net income 17,279 -- -- -- 17,279 -- $17,279 Foreign currency translation adjustments (1,670) -- -- (1,670) -- -- (1,670) ------- Comprehensive income -- -- -- -- -- -- $15,609 ======= Provision in lieu of income taxes 11,569 -- 11,569 -- -- -- Common stock issued under stock option plans 1,590 -- 1,590 -- -- -- Conversion of 5 3/4% convertible subordinated notes (2) 113,876 42 113,834 -- -- -- Value of Restricted Stock Units (3) 2,050 -- 2,050 -- -- -- -------- ---- -------- ------- -------- -------- Balance, June 30, 2001 $378,197 $159 $296,785 $(5,576) $103,665 $(16,836) ======== ==== ======== ======= ======== ======== Balance, January 1, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836) Net income 22,079 -- -- -- 22,079 -- $22,079 Foreign currency translation adjustments 2,697 -- -- 2,697 -- -- 2,697 ------- Comprehensive income -- -- -- -- -- -- $24,776 ======= Common stock issued under stock option plans 1,300 -- 1,300 -- -- -- Value of Restricted Stock Units (3) 2,901 -- 2,901 -- -- -- -------- ---- -------- ------- -------- -------- Balance, June 30, 2002 $450,910 $159 $311,837 $(2,727) $158,477 $(16,836) ======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments. (2) Represents conversion of $115.0 million 5 3/4% convertible subordinated notes into common stock, net of related interest and deferred financing costs. (3) Shares of common stock will be issued in respect of restricted stock units. This amount represents the value of restricted stock units at the date of grant and the current year compensation expense due to an increase in market value of the underlying common stock. See Notes to Condensed Consolidated Financial Statements. Page 6 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 generally accepted accounting principles 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 six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B Acquisition of Businesses On March 1, 2002, EMCOR acquired nineteen subsidiaries of Comfort Systems USA, Inc. ("Comfort"). Accordingly, the Consolidated Results of Operations for EMCOR for the three and six months ended June 30, 2002 include the results of operations for the acquired Comfort companies since March 1, 2002. The purchase price paid for a 100% voting interest of the acquired Comfort Companies was $186.25 million and was comprised of $164.15 million in cash and $22.1 million by assumption of Comfort's notes payable to former owners of certain of the acquired companies. The acquisition was funded with $114.15 million of cash and $50.0 million of borrowings under EMCOR's working capital credit line. The acquired companies, which are based predominantly in the Midwest United States and New Jersey, are active in the installation and maintenance of mechanical systems and the design and installation of process and fire protection systems. Services are provided to a wide variety of industries, including the food processing, pharmaceutical and manufacturing/distribution sectors. EMCOR believes the addition of these companies, which are in geographic markets where EMCOR did not have significant presence, will further EMCOR's goal of market and geographic diversification. Additionally, the acquisition creates more opportunities for EMCOR companies to collaborate on national facilities services contracts. These factors contributed to preliminary goodwill of $123.8 million, which represents the excess of purchase price paid to the estimated fair value of the net assets at date of acquisition. The Comfort acquisition is being accounted for in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 is discussed further in Note C, "Significant Accounting Policies." The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. EMCOR is currently evaluating the fair value of these assets and liabilities and is in the process of obtaining a third-party valuation of the acquired Comfort Companies tangible and intangible assets; therefore, the allocation of the purchase price is subject to adjustment. Page 7 NOTE B Acquisition of Businesses - (Continued) The following table summarizes the revised preliminary purchase price allocation related to the Comfort acquisition (in thousands): At June 30, 2002 ---------------- Current assets $150,080 Property, plant and equipment 11,384 Goodwill and other intangible assets 123,814 Other assets 1,184 -------- Total assets acquired 286,462 -------- Current liabilities 103,926 Long-term obligations 288 -------- Total liabilities assumed 104,214 -------- Net assets acquired 182,248 Notes payable assumed 22,115 -------- Cash purchase price, net of cash acquired $160,133 ======== The goodwill of $123.8 million was allocated primarily to the United States mechanical construction and facilities services operating segment. It is expected that most of the goodwill associated with the acquisition will be deductible for tax purposes. Pending the third-party valuation being performed, certain identifiable intangible assets may be determined to exist and therefore a reallocation of goodwill may occur. In accordance with SFAS 141 and SFAS 142, goodwill will not be amortized while identifiable intangible assets will be subject to amortization over their useful lives. As of June 30, 2002, $0.3 million of the Notes payable assumed have been paid by EMCOR. NOTE C Significant Accounting Policies EMCOR has adopted the following accounting standards issued by the Financial Accounting Standards Board ("FASB"): SFAS 141 and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. After the initial impairment review required by SFAS 142, EMCOR has determined that the adoption of SFAS 142 did not result in the impairment of the carrying value of its existing goodwill. Page 8 NOTE C Significant Accounting Policies - (Continued) The following table provides a reconciliation of the prior year's reported net income to adjusted net income had SFAS 142 been applied as of the beginning of fiscal 2001.
For the three months ended June 30, 2001 ------------------------------------------------------------------ Basic Diluted -------------------------------- ------------------------------- Income available Income available to common Earnings to common Earnings stockholders per share stockholders per share ---------------- --------- ---------------- --------- Reported net income attributed to EMCOR common stock $11,622,000 $1.00 $12,365,000 $0.81 Add back amortization of goodwill, net of income tax 757,680 0.07 757,680 0.05 ----------- ----- ----------- ----- Adjusted net income attributed to EMCOR common stock $12,379,680 $1.07 $13,122,680 $0.86 =========== ===== =========== =====
For the six months ended June 30, 2001 ------------------------------------------------------------------ Basic Diluted -------------------------------- ------------------------------- Income available Income available to common Earnings to common Earnings stockholders per share stockholders per share ------------------ --------- ------------------ --------- Reported net income attributed to EMCOR common stock $17,279,000 $1.56 $19,014,395 $1.25 Add back amortization of goodwill, net of income tax 1,497,440 0.14 1,497,440 0.10 ----------- ----- ----------- ----- Adjusted net income attributed to EMCOR common stock $18,776,440 $1.70 $20,511,835 $1.35 =========== ===== =========== =====
The changes in the carrying amount of Goodwill during the three and six months ended June 30, 2002 were as follows (in thousands): For the three For the six months ended months ended June 30, 2002 June 30, 2002 ------------- ------------- Balance at beginning of period $169,603 $ 56,011 Acquisition of Comfort businesses 10,224 123,814 Earn-out payments on prior acquisitions 4,518 4,518 -------- -------- Balance at end of period $184,345 $184,343 ======== ======== As of June 30, 2002, the purchase accounting related to the acquisition of the companies acquired from Comfort was preliminary. As such, the allocation of goodwill to operating segments has not been finalized. Preliminarily, however, the goodwill of $123.8 million has been allocated primarily to the United States mechanical construction and facilities services segment. The additional goodwill in this quarter reflects cash consideration paid to Comfort, in accordance with Page 9 NOTE C Significant Accounting Policies - (Continued) the purchase agreement (based upon the final determination of net asset values), and amounts paid to advisors for professional fees incurred in connection with the acquisition. The FASB has issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 144 provides accounting guidance for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the disposal of a segment of a business. The adoption of SFAS 144, which was effective January 1, 2002, did not have a material impact on EMCOR's results of operations, financial position or cash flows. NOTE D Pro Forma Results of Operations The following tables present pro forma results of operations including the companies acquired from Comfort. The results of operations presented assume the acquisition had occurred at the beginning of fiscal 2001. The unaudited pro forma results of operations are not necessarily indicative of the results of operations had the acquisition actually occurred at the beginning of fiscal 2001, nor is it necessarily indicative of future operating results (in thousands, except per share data):
Actual Pro Forma Results of Operations Pro Forma Results of Operations For the three months ended For the six months ended -------------------------- ------------------------------- June 30, June 30, June 30, June 30, 2002 2001 2002 2001 -------- ---------- ---------- ---------- Revenues $986,399 $1,032,147 $1,890,782 $2,033,243 Operating income $ 26,924 $ 27,012 $ 38,691 $ 45,443 Interest expense, net $ 445 $ 629 $ 126 $ 1,755 Income before income taxes $ 26,479 $ 26,383 $ 38,564 $ 43,689 Net income $ 14,828 $ 14,682 $ 21,596 $ 24,372 Basic earnings per share $ 1.00 $ 1.26 $ 1.45 $ 2.20 Diluted earnings per share $ 0.96 $ 0.96 $ 1.40 $ 1.61
The pro forma results of operations, for segment information, is included in Note G Segment Information. Page 10 NOTE E Earnings Per Share The following tables summarize EMCOR's calculation of Basic and Diluted Earnings per Share ("EPS") for the three month periods ended June 30, 2002 and 2001: Three months ended June 30, 2002 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------------------------------- Basic EPS Income available to common stockholders $14,828,000 14,863,074 $1.00 ===== Effect of Dilutive Securities Options to purchase shares of common stock -- 628,228 ----------- ---------- Diluted EPS $14,828,000 15,491,302 $0.96 =========== ========== ===== Six months ended June 30, 2002 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------------------------------- Basic EPS Income available to common stockholders $22,079,000 14,846,079 $1.49 ===== Effect of Dilutive Securities Options to purchase shares of common stock -- 605,216 ----------- ---------- Diluted EPS $22,079,000 15,451,295 $1.43 =========== ========== ===== Three months ended June 30, 2001 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------------------------------- Basic EPS Income available to common stockholders $11,622,000 11,647,990 $1.00 ===== Effect of Dilutive Securities: Convertible Subordinated Notes, including assumed interest savings, net of tax 743,520 3,168,835 Options to purchase shares of common stock -- 497,523 ----------- ---------- Diluted EPS $12,365,520 15,314,348 $0.81 =========== ========== ===== Page 11 NOTE E Earnings Per Share (Continued) Six months ended June 30, 2001 --------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------------------------------- Basic EPS Income available to common stockholders $17,279,000 11,074,392 $1.56 ===== Effect of Dilutive Securities Convertible Subordinated Notes, including assumed interest savings, net of tax 1,735,395 3,649,763 Options to purchase shares of common stock -- 444,519 ----------- ---------- Diluted EPS $19,014,395 15,168,674 $1.25 =========== ========== ===== There were no anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three and six month periods ended June 30, 2002 and 2001. NOTE F Long-Term Debt Long-term debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands): June 30, December 31, 2002 2001 -------- ------------ Notes assumed in Comfort acquisition $21,262 $ -- Note Payable -- 573 Capitalized lease obligations 239 249 Other 858 973 ------- ---- 22,359 1,795 Less: current maturities 21,592 947 ------- ----- $ 767 $ 848 ======= ====== The notes assumed in connection with the acquisition of the Comfort companies represent payments due to certain former owners of the acquired companies. The notes assumed accrue interest at a 10% annual interest rate and are payable in full in April 2003. The $573,000 Note Payable was paid in January 2002. Page 12 NOTE G Segment Information EMCOR has the following reportable segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segment "United States other services" primarily represents those operations which principally provide consulting and maintenance services, and "Other international construction and facilities services" represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily South Africa, the Middle East and Europe performing electrical construction, mechanical construction and facilities services. The pro forma information includes the results of operations for the companies acquired from Comfort companies as if they were acquired by EMCOR effective January 1, 2001. The following presents information about industry segments and geographic areas (in thousands):
For the three months ended June 30, ----------------------------------- As Reported Actual Pro Forma ----------------------- -------- ---------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues from unrelated entities: United States electrical construction and facilities services $289,275 $358,307 $289,275 $ 361,447 United States mechanical construction and facilities services 442,200 288,726 442,200 448,227 United States other services 48,486 58,802 48,486 58,802 -------- -------- -------- --------- Total United States operations 779,961 705,835 779,961 868,476 Canada construction and facilities services 84,132 39,897 84,132 39,897 United Kingdom construction and facilities services 122,306 118,645 122,306 118,645 Other international construction and facilities services -- 5,129 -- 5,129 -------- -------- -------- ---------- Total worldwide operations $986,399 $869,506 $986,399 $1,032,147 ======== ======== ======== ==========
Total revenues: United States electrical construction and facilities services $291,448 $378,236 $291,448 $ 381,376 United States mechanical construction and facilities services 445,521 304,785 445,521 464,286 United States other services 48,850 62,072 48,850 62,072 Less intersegment revenues (5,858) (39,258) (5,858) (39,258) -------- -------- -------- ---------- Total United States operations 779,961 705,835 779,961 868,476 Canada construction and facilities services 84,132 39,897 84,132 39,897 United Kingdom construction and facilities services 122,306 118,645 122,306 118,645 Other international construction and facilities services -- 5,129 -- 5,129 -------- -------- -------- ---------- Total worldwide operations $986,399 $869,506 $986,399 $1,032,147 ======== ======== ======== ==========
Page 13 NOTE G Segment Information - (Continued)
For the six months ended June 30, --------------------------------- As Reported Pro Forma --------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues from unrelated entities: United States electrical construction and facilities services $ 577,013 $ 690,304 $ 578,674 $ 696,482 United States mechanical construction and facilities services 750,421 584,247 842,844 904,251 United States other services 99,239 104,447 99,239 104,447 ---------- ---------- ---------- ---------- Total United States operations 1,426,673 1,378,998 1,520,757 1,705,180 Canada construction and facilities services 138,651 77,782 138,651 77,782 United Kingdom construction and facilities services 231,374 244,257 231,374 244,257 Other international construction and facilities services -- 6,024 -- 6,024 ---------- ---------- ---------- ---------- Total worldwide operations $1,796,698 $1,707,061 $1,890,782 $2,033,243 ========== ========== ========== ==========
Total revenues: United States electrical construction and facilities services $ 581,747 $ 717,124 $ 583,408 $ 723,302 United States mechanical construction and facilities services 756,577 606,946 849,000 926,950 United States other services 100,053 108,505 100,053 108,505 Less intersegment revenues (11,704) (53,577) (11,704) (53,577) ---------- ---------- ---------- ---------- Total United States operations 1,426,673 1,378,998 1,520,757 1,705,180 Canada construction and facilities services 138,651 77,782 138,651 77,782 United Kingdom construction and facilities services 231,374 244,257 231,374 244,257 Other international construction and facilities services -- 6,024 -- 6,024 ---------- ---------- ---------- ---------- Total worldwide operations $1,796,698 $1,707,061 $1,890,782 $2,033,243 ========== ========== ========== ==========
For the three months ended June 30, ----------------------------------- As Reported Actual Pro Forma ----------------------- -------- ------------ 2002 2001 2002 2001 ---- ---- ---- ---- Operating income (loss): United States electrical construction and facilities services $14,514 $16,505 $14,514 $17,080 United States mechanical construction and facilities services 19,711 11,393 19,711 16,669 United States other services (247) (1,364) (247) (1,364) ------- ------- ------- ------- Total United States operations 33,978 26,534 33,978 32,385 Canada construction and facilities services 693 344 693 344 United Kingdom construction and facilities services 665 2,406 665 2,406 Other international construction and facilities services 230 (897) 230 (897) Corporate administration (8,642) (7,226) (8,642) (7,226) ------- ------- ------- ------- 26,924 21,161 26,924 27,012 Total worldwide operations Other corporate items: Interest expense (823) (1,754) (823) (2,140) Interest income 378 1,511 378 1,511 ------- ------- ------- ------- Income before income taxes $26,479 $20,918 $26,479 $26,383 ======= ======= ======= =======
Page 14 NOTE G Segment Information - (Continued)
For the six months ended June 30, --------------------------------- As Reported Pro Forma ---------------------- --------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Operating income (loss): United States electrical construction and facilities services $30,971 $31,009 $31,228 $32,095 United States mechanical construction and facilities services 26,495 16,460 26,198 28,981 United States other services (1,216) (3,290) (1,216) (3,290) ------- ------- ------- ------- Total United States operations 56,250 44,179 56,210 57,786 Canada construction and facilities services 235 971 235 971 United Kingdom construction and facilities services (347) 2,342 (347) 2,342 Other international construction and facilities services (57) (1,437) (57) (1,437) Corporate administration (16,626) (14,048) (16,626) (14,048) ------- ------- ------- ------- Total worldwide operations 39,455 32,007 39,415 45,614 Other corporate items: Interest expense (1,340) (3,973) (1,178) (4,742) Interest income 1,312 2,988 1,312 2,988 ------- ------- ------- ------- Income before income taxes $39,427 $31,022 $39,549 $43,860 ======= ======= ======= =======
As Reported ------------------------- June 30, Dec. 31, 2002 2001 -------- -------- Total assets: United States electrical construction and facilities services $ 346,888 $ 417,678 United States mechanical construction and facilities services 751,459 457,596 United States other services 61,444 60,965 ---------- ---------- Total United States operations 1,159,791 936,239 Canada construction and facilities services 72,834 62,234 United Kingdom construction and facilities services 162,601 152,981 Other international construction and facilities services 5,575 11,497 Corporate administration 100,418 186,713 ---------- ---------- Total worldwide operations $1,501,219 $1,349,664 ========== ==========
Page 15 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Unaudited) Highlights EMCOR Group, Inc.'s ("EMCOR") revenues for the three months ended June 30, 2002 and 2001 were $986.4 million and $869.5 million, respectively. Net income for the three months ended June 30, 2002 was $14.8 million compared to net income of $11.6 million for the three months ended June 30, 2001. Diluted Earnings Per Share ("Diluted EPS") were $0.96 per share for the three months ended June 30, 2002 compared to Diluted EPS of $0.81 per share in the year earlier period. Revenues for the six months ended June 30, 2002 and 2001 were $1,796.7 million and $1,707.1 million, respectively. Net income for the six months ended June 30, 2002 and 2001 was $22.1 million and $17.3 million, respectively. Diluted EPS were $1.43 per share for the six months ended June 30, 2002 compared to $1.25 per share for the same period in the prior year. The results of operations for the three and six months ended June 30, 2002 include results for the companies acquired from Comfort Systems USA, Inc. ("Comfort") from the acquisition date of March 1, 2002. Operating Segments EMCOR has the following reportable segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segment "United States other services" primarily represents those operations which principally provide consulting and maintenance services, and "Other international construction and facilities services" represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily South Africa, the Middle East and Europe performing electrical construction, mechanical construction and facilities services. Results of Operations Revenues The following table presents EMCOR's operating segment revenues and their respective percentage of total revenues (in thousands, except for percentages):
For the three months ended June 30, ----------------------------------- % of % of 2002 Total 2001 Total ---- ----- ---- ----- Revenues: United States electrical construction and facilities services $289,275 29% $358,307 41% United States mechanical construction and facilities services 442,200 45% 288,726 33% United States other services 48,486 5% 58,802 7% -------- -------- Total United States operations 779,961 79% 705,835 81% Canada construction and facilities services 84,132 9% 39,897 5% United Kingdom construction and facilities services 122,306 12% 118,645 14% Other international construction and facilities services -- -- 5,129 -- -------- -------- Total worldwide operations $986,399 100% $869,506 100% ======== ========
Page 16
For the six months ended June 30, --------------------------------- % of % of 2002 Total 2001 Total ---- ----- ---- ----- Revenues: United States electrical construction and facilities services $ 577,013 32% $ 690,304 40% United States mechanical construction and facilities services 750,421 42% 584,247 34% United States other services 99,239 6% 104,447 6% --------- ---------- Total United States operations 1,426,673 79% 1,378,998 81% Canada construction and facilities services 138,651 8% 77,782 5% United Kingdom construction and facilities services 231,374 13% 244,257 14% Other international construction and facilities services -- -- 6,024 -- --------- ---------- Total worldwide operations $1,796,698 100% $1,707,061 100% ========== ==========
EMCOR's revenues increased $116.9 million for the three months ended June 30, 2002 compared to the second quarter of 2001, primarily due to revenues of $147.6 million derived from the Comfort companies acquired. Revenues increased $89.6 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, primarily due to revenues of $196.4 million derived from the Comfort companies acquired. Revenues for the EMCOR subsidiaries (excluding the Comfort companies acquired) in both the three and six month periods decreased principally due to a decline in "fast-track" contracts, an increase in longer-duration projects which results in revenue recognition over a longer time period and a planned reduction of most work in the North and South Carolina markets. Revenues of United States electrical construction and facilities services business units for the three months ended June 30, 2002 were $289.3 million compared to $358.3 million for the three months ended June 30, 2001. Revenues for the six months ended June 30, 2002 were $577.0 million compared to $690.3 million in the same period a year earlier. The revenues decrease of $69.0 million and $113.3 million, respectively, for the three month and six month periods ended June 30, 2002 compared to the same periods in 2001 was primarily due to a reduction in "fast-track" telecom projects in the current year compared to the prior year. Power plant and transportation infrastructure work, however, remained steady compared to the prior year. Revenues of United States mechanical construction and facilities services business units for the three months ended June 30, 2002 were $442.2 million compared to $288.7 million for the three months ended June 30, 2001. Revenues for the six months ended June 30, 2002 were $750.4 million compared to $584.3 million in the same period in the prior year. The revenues increase of $153.5 million and $166.1 million for the three and six month periods, respectively, were primarily derived from revenues from the acquired Comfort companies of $145.6 million and $193.6 million, respectively, and increased revenues from the northern California and Michigan markets. These increases were offset by the planned reduction of most work in the North and South Carolina markets and a decrease in the number of "fast-track" contracts. United States other services revenues of $48.5 million for the three months ended June 30, 2002, which include those operations which principally provide consulting and maintenance services, decreased by $10.3 million from $58.8 million for the same three months in 2001. Revenues for the six months ended June 30, 2002 were $99.2 million compared to $104.4 million in the same period in the prior year, a $5.2 million decrease. The decrease in revenues for both the three and six month periods was primarily attributable to a decrease in telecommunications industry related work associated with the general slow-down in that industry, partially offset by an increase in facilities services maintenance contracts. Revenues of Canada construction and facilities services for the three months ended June 30, 2002 were $84.1 million compared to $39.9 million for the three months ended June 30, 2001. Revenues for the six months ended June 30, 2002 were $138.7 million compared to $77.8 million in the same period in the prior year. The increase in revenues for the both three and six month periods was primarily attributable to the start-up of work on certain long-term jobs, partially offset by a reduced number of "fast-track" type jobs in the same period in the prior year. Page 17 Revenues of United Kingdom construction and facilities services business units for the three months ended June 30, 2002 were $122.3 million compared to $118.6 million for the three months ended June 30, 2001. Revenues for the six months ended June 30, 2002 were $231.4 million compared to $244.3 million in the same period in the prior year. The increase in the three month period was principally attributable to growth in the facilities services market offsetting a decrease in the construction market. The decrease in revenues in the six month period was principally attributable to fewer bid opportunities within the construction market, offset partially by growth in the facilities services market. Other international construction and facilities services revenues primarily consists of EMCOR's operations in the Middle East, South Africa and Europe. Revenues from those markets for the three and six months ended June 30, 2002 decreased by $5.1 million and $6.0 million, respectively, compared to the same periods in the prior year. All of the 2002 projects in these markets are being performed by joint ventures, while in 2001 certain projects in Europe performed entirely by EMCOR and therefore recorded as revenues. The results of these joint venture operations are accounted for under the equity method of accounting because EMCOR has less than majority ownership in these joint ventures, and, accordingly, revenues attributable to such joint ventures are not reflected as revenues in the consolidated financial statements. EMCOR continues to pursue new business selectively in these markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East. Cost of sales and Gross profit The following table presents EMCOR's cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages): For the three months ended June 30, ----------------------------------- 2002 2001 ---- ---- Cost of sales $866,183 $776,762 Gross profit $120,216 $ 92,744 Gross profit, as a percentage of revenues 12.2% 10.7% For the six months ended June 30, --------------------------------- 2002 2001 ---- ---- Cost of sales $1,587,096 $1,533,798 Gross profit $ 209,602 $ 173,263 Gross profit, as a percentage of revenues 11.7% 10.1% Gross profit (revenues less cost of sales) increased $27.5 million for the three months ended June 30, 2002 to $120.2 million compared to $92.7 million for the three months ended June 30, 2001. As a percentage of revenues, gross profit increased to 12.2% from 10.7% for the three months ended June 30, 2002 and 2001, respectively. Gross profits for the six months ended June 30, 2002 of $209.6 million were $36.3 million higher than the $173.3 million in the same period last year. As a percentage of revenues, gross profit increased to 11.7% from 10.1% for the six months ended June 30, 2002 and 2001, respectively. The dollar increase in gross profit in both the three and six month periods, as well as the increase in gross profit as a percentage of revenues in those periods, was primarily due to gross profit of $24.2 million and $31.3 million earned by the acquired Comfort companies in the three and six month periods, respectively. The increase in gross profits of $3.3 million and $5.0 million attributable to EMCOR's other subsidiaries in both the three and six month periods, respectively, was due to the type and location of construction and facilities services contracts performed. During those periods, EMCOR companies performed well in the New York and northern California markets and on several transportation infrastructure and power plant projects. Page 18 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 June 30, ----------------------------------- 2002 2001 ---- ---- Selling, general and administrative expenses $93,292 $70,230 Selling, general and administrative expenses, as a percentage of revenues 9.5% 8.1% For the six months ended June 30, --------------------------------- 2002 2001 ---- ---- Selling, general and administrative expenses $170,147 $138,582 Selling, general and administrative expenses, as a percentage of revenues 9.5% 8.1% Selling, general and administrative expenses for the three months ended June 30, 2002 increased $23.1 million to $93.3 million from $70.2 million in the same period last year. Selling, general and administrative expenses as a percentage of revenues were 9.5% for the three months ended June 30, 2002 compared to 8.1% for the three months ended June 30, 2001. Selling, general and administrative expenses for the six months ended June 30, 2002 were $170.1 million, an increase of $31.5 million compared to $138.6 million for the six months ended June 30, 2001. Selling, general and administrative expenses as a percentage of revenues were 9.5% for the six months ended June 30, 2002, compared to 8.1% for the six months ended June 30, 2001. For the three and six month periods ended June 30, 2002 the increase in selling, general and administrative expense, and the increase as a percentage of revenues compared to the prior year, was attributable to $17.7 million and $23.6 million of expenses, respectively, of the acquired Comfort companies. An increase in selling, general and administrative expense of $5.4 million and $7.9 million compared to the prior year for the three and six month periods, respectively, related primarily to higher historical variable selling, general and administrative expenses associated with certain markets in which EMCOR is currently generating more of its gross profits than it had in 2001. The increases were partially offset by expense reductions in order to adjust to current market conditions. Beginning in 2002, the amortization of goodwill is no longer required per Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Amortization expense for the three and six months ended June 30, 2001 was $1.4 million and $2.7 million, respectively. Page 19 Operating income The following table presents EMCOR's operating income, and operating income as a percentage of segment revenues (in thousands, except for percentages):
For the three months ended June 30, ----------------------------------- % of % of Segment Segment 2002 Revenues 2001 Revenues ---- -------- ---- -------- Operating income (loss): United States electrical construction and facilities services $14,514 5.0% $16,505 4.6% United States mechanical construction and facilities services 19,711 4.5% 11,393 3.9% United States other services (247) (1,364) ------- ------- Total United States operations 33,978 4.4% 26,534 3.8% Canada construction and facilities services 693 0.8% 344 0.9% United Kingdom construction and facilities services 665 0.5% 2,406 2.0% Other international construction and facilities services 230 (897) Corporate administration (8,642) (7,226) -------- ------- Total worldwide operations 26,924 2.7% 21,161 2.4% Other corporate items: Interest expense (823) (1,754) Interest income 378 1,511 ------- ------- Income before income taxes $26,479 $20,918 ======= =======
For the six months ended June 30, --------------------------------- % of % of Segment Segment 2002 Revenues 2001 Revenues ---- -------- ---- -------- Operating income (loss) United States electrical construction and facilities services $30,971 5.4% $31,009 4.5% United States mechanical construction and facilities services 26,495 3.5% 16,460 2.8% United States other services (1,216) (3,290) ------- ------- Total United States operations 56,250 3.9% 44,179 3.2% Canada construction and facilities services 235 0.2% 971 1.2% United Kingdom construction and facilities services (347) 2,342 1.0% Other international construction and facilities services (57) (1,437) Corporate administration (16,626) (14,048) ------- ------- Total worldwide operations 39,455 2.2% 32,007 1.9% Other corporate items: Interest expense (1,340) (3,973) Interest income 1,312 2,988 ------- ------- Income before income taxes $39,427 $31,022 ======= =======
EMCOR had operating income of $26.9 million and $21.2 million for the three months ended June 30, 2002 and 2001, respectively. Operating income was $39.5 million and $32.0 million for the six months ended June 30, 2002 and 2001, respectively. The increase of $5.7 million and $7.5 million in operating income for the three and six month periods ended June 30, 2002 as compared to the same periods in 2001 was due primarily to operating income of the acquired Comfort companies. United States electrical construction and facilities services operating income (before deduction of general corporate and other expenses discussed below) for the three months ended June 30, 2002 was $14.5 million or 5.0% of revenues compared to $16.5 million or 4.6% of revenues for the three months ended June 30, 2001. Operating income for the three months ended June 30, 2002 compared to the same period in 2001 was favorably impacted by increased activity from power plant and transportation infrastructure construction projects on the west and east coasts and increased operating income from various activities in the Salt Lake City and Ohio markets offset by a reduction in the "fast-track" work. Page 20 Operating income for the six months ended June 30, 2002 was $31.0 million, or 5.4% of revenues, compared to $31.0 million, or 4.5% of revenues, for the six months ended June 30, 2001. The increase in operating income as a percentage of revenues for the six month period was due to good performance on power plant and transportation infrastructure construction projects, in addition to other construction and facilities services activities performed in the New York City, Salt Lake City and Ohio markets. United States mechanical construction and facilities services operating income for the three months ended June 30, 2002 was $19.7 million, or 4.5% of revenues, compared to $11.4 million, or 3.9% of revenues, for the three months ended June 30, 2001. Operating income for the six months ended June 30, 2002 was $26.5 million or 3.5% of revenues compared to $16.5 million or 2.8% of revenues for the six months ended June 30, 2001. The $8.3 million and $10.0 million increases in operating income for the three and six months periods, respectively, were primarily attributable to (i) results of operations for the acquired Comfort companies, (ii) power plant construction activity on the west and east coasts, and (iii) improved results for EMCOR's Poole & Kent subsidiary operations which had losses in the prior year. The prior year Poole & Kent losses had been primarily attributable to its operations in the North and South Carolina markets, which operations have since been significantly reduced. United States other services operating losses were $0.3 million and $1.4 million for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, operating losses were $1.2 million and $3.3 million, respectively. The decrease in operating losses for both the three and six month periods was primarily attributable to an increase in gross profit and a decrease in selling, general and administrative expenses as these operations have become more established and thus require less overhead spending. Canada construction and facilities services operating income was $0.7 million compared to $0.3 million operating income for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, operating income was $0.2 million compared to operating income of $1.0 million for the same period in the prior year. The $0.4 million increase in operating income for the three months ended June 30, 2002 was due to an increase in activities compared to the prior year on long-term contracts. The decrease in operating income for the six months ended June 30, 2002 compared to the prior year was primarily due to a reduction in the number of fast-track type jobs and a slower rate of work on the long-term contracts that result in profit recognition over a longer time period. United Kingdom construction and facilities services operating income for the three months ended June 30, 2002 was $0.7 million compared to operating income of $2.4 million in the same period of the prior year. For the six months ended June 30, 2002, operating loss was $0.4 million compared to operating income of $2.3 million for the same period in the prior year. The decrease in operating income for both the three months and six months ended June 30, 2002 compared to the same periods in 2001 was attributable to the type of jobs and locations of jobs in the current period. The facilities services business continues to realize increased revenues and operating income while the construction market has slowed since last year. Other international construction and facilities services operating income was $0.2 million for the three months ended June 30, 2002 compared to an operating loss of $0.9 million for three months ended June 30, 2001. The operating loss of $0.06 million for the six months ended June 30, 2002 decreased compared to an operating loss of $1.4 million for the same period in the prior year. EMCOR continues to pursue new business selectively in the Middle East, South African and European markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East. Page 21 General corporate expenses for the three months ended June 30, 2002 were $8.6 million compared to $7.2 million for the three months ended June 30, 2001. For the six months ended June 30, 2002, general corporate expenses were $16.6 million compared to $14.0 million for the same period in the prior year. The increase in general corporate expenses for both the three and six month periods was primarily due to the expansion of operations support activities such as information technology infrastructure, human resources and communications in order to meet the level of service expected by our clients, in addition to an increase in variable compensation expense for the value of Restricted Stock Units. Interest expense for the three months ended June 30, 2002 and 2001 was $0.8 million and $1.8 million, respectively. Interest expense for the six months ended June 30, 2002 and 2001 was $1.3 million and $4.0 million, respectively. Interest income decreased $1.1 million and $1.7 million for the three and six months ended June 30, 2002, respectively, compared to the same periods in 2001 due to reduced cash on hand because of $167.6 million of cash used for acquisitions and earn-out payments in the current year. The decreased interest expense in the 2002 three and six month periods, when compared to the same three and six month periods in 2001, was primarily due to the conversion of $115.0 million of EMCOR's 5.75% Convertible Subordinated Notes, net of related deferred financing costs, into approximately 4.2 million shares of EMCOR common stock in May and June of 2001. The income tax provision increased to $11.7 million for the three months ended June 30, 2002 versus $9.3 million for the same period in 2001. For the six months ended June 30, 2002, the income tax provision was $17.3 million versus $13.7 million for the six months ended June 30, 2001. The increase in this provision was primarily due to increased income before taxes. The effective income tax rate was 44% in all periods presented. EMCOR's contract backlog was $2.8 billion at June 30, 2002 and $2.4 billion at December 31, 2001. The increase in backlog was primarily due to the acquired Comfort companies' backlog of $0.3 billion. EMCOR's contract backlog at June 30, 2002 was $2.8 billion compared to $2.0 billion at June 30, 2001. The increase was primarily attributable to the acquired Comfort companies' backlog of $0.3 billion plus a net increase of $0.5 million for projects awarded in the United States, the United Kingdom and Canada. 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 six months ended June 30, ----------------------------- 2002 2001 ---- ---- Net cash provided by operating activities $ 68,086 $35,886 Net cash used in investing activities $(167,848) $(9,147) Net cash (used in) provided by financing activities $ (288) $ 1,298 EMCOR's consolidated cash balance decreased by approximately $100.1 million from $189.8 million at December 31, 2001 to $89.7 million at June 30, 2002 primarily due to use of cash for the acquisition of the Comfort companies, partially offset by net cash provided by operating activities. Net cash provided by operating activities of $68.1 million for the six months ended June 30, 2002 represented a $32.2 million increase from the net cash provided by operating activities of $35.9 million in the same period last year. The increase in net cash provided by operating activities was primarily attributable to increased net income and decreased accounts receivable and an increase in accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts. Page 22 Net cash used in investing activities of $167.8 million for the six months ended June 30, 2002 increased by $158.7 million compared to $9.1 million of net cash used in investing activities in the same period last year. The increase was due primarily to payments for the acquired Comfort companies of $160.1 million and earn-out payments for prior acquisitions of $4.5 million which were offset partially by a decrease in EMCOR's investments, notes and other long-term receivables. Net cash used in financing activities of $0.3 million represented a $1.6 million decrease from the net cash provided by financing activities of $1.3 million for the six months ended June 30, 2001. The increase in net cash provided by financing activities was attributable to proceeds from the exercise of stock options offset by a reduction in net repayments of long-term debt and capital lease payments. As of June 30, 2002, EMCOR's total borrowing capacity under its revolving credit facility was $150.0 million. EMCOR had approximately $28.3 million of letters of credit outstanding under the revolving credit facility as of that date. There were no revolving loans outstanding as of June 30, 2002 and December 31, 2001 under the revolving credit facility. 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 cooling. These guarantees are not expected to have a material adverse effect on EMCOR's financial position or results of operations. Under one guarantee, each of the venturers is jointly and severally liable for the venture's $25.0 million borrowing due December 2031. The other guarantee is related to the venture's $50.0 million revolving credit facility expiring September 2002 under which EMCOR's subsidiary may be responsible for 40% of the indebtedness. EMCOR believes that current cash balances and borrowing capacity available under its line of credit, 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. The primary source of liquidity for EMCOR has been, and is expected to continue to be, cash generated by operating activities. EMCOR also maintains a credit facility that may be utilized, among other things, to meet short-term liquidity needs in the event that net cash generated by operating activities is insufficient or to enable EMCOR to participate in joint ventures or to make acquisitions that may require access to cash on short notice. Long-term liquidity requirements can be expected to be met through cash generated from operating activities, the credit facility, and the sale of various secured or unsecured debt or equity interests in the public and private markets. Based on its current credit rating and financial condition, EMCOR can reasonably expect to be able to issue medium-to long-term debt instruments or equity. EMCOR's primary revenue risk factor continues to be the level of demand for non-residential construction services, which is in turn influenced by macroeconomic trends including interest rates and government 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 sector. New Accounting Pronouncements EMCOR has adopted the following accounting standards issued by the Financial Accounting Standards Board ("FASB"): Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangibles assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. After the initial impairment review required by SFAS 142, EMCOR has determined that the adoption of SFAS 142 did not result in the impairment of the carrying value of its existing goodwill. Page 23 The FASB has issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 144 provides accounting guidance for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the disposal of a segment of a business. The adoption of SFAS 144, which was effective January 1, 2002, did not have a material impact on EMCOR's results of operations, financial position or cash flows. Critical Accounting Policies EMCOR's significant accounting policies are described in Note B to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2001. EMCOR believes its most critical accounting policy is revenue recognition from long-term 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 and, accordingly, the method used for revenue recognition within EMCOR's industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for each contract at completion. Certain of EMCOR's electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Provisions for 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 within the consolidated balance sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected on the consolidated balance sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers based on various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Costs and estimated earnings in excess of billings on uncompleted contracts also includes amounts EMCOR seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price, or other customer-related causes of unanticipated additional contract costs. Such amounts are recorded at estimated net realizable value. Due to uncertainties inherent within estimates employed to apply percentage-of-completion accounting, it is possible that estimates will be revised as project work progresses. Application of percentage-of-completion accounting requires that the impact of those revised estimates be reported in the consolidated financial statements prospectively. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995, particularly statements regarding market opportunities, market share growth, competitive growth, gross profit, and selling, general and administrative expenses. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in any such forward-looking statements. Such risk and uncertainties include, but are not limited to adverse changes in general economic conditions, including changes in the specific markets for EMCOR's services, adverse business conditions, decreased or lack of growth in the mechanical and electrical construction and facilities services industries, increased competition, pricing pressures, risks associated with foreign operations and other factors. Page 24 PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS On July 31, 1998, a former employee of a subsidiary of EMCOR filed a class-action complaint on behalf of the participants in two employee benefit plans sponsored by EMCOR against EMCOR and other defendants for breach of fiduciary duty under the Employee Retirement Income Security Act. All of the claims relate to alleged acts or omissions which occurred during the period May 1991 to December 1994. The principal allegations of the complaint are that the defendants breached their fiduciary duties by causing the plans to purchase and hold stock of EMCOR when it was then known as JWP, Inc. and when the defendants knew or should have known it was imprudent to do so. On May 3, 2002 the court before which the class action was pending issued an order and final judgment (i) approving a settlement of the action that had been reached by the parties and (ii) dismissing the action. The amount to be paid by EMCOR in connection with the settlement is not material. There have been no new developments during the quarter ended June 30, 2002 regarding other legal proceedings reported in EMCOR's Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 19, 2002 EMCOR held its annual meeting of stockholders. (a) Each of the six individuals nominated for election as a director of EMCOR for the ensuing year was elected. The six directors constituted all of the members of the Board of Directors of EMCOR. Name Votes For Votes Withheld ---- --------- -------------- Stephen W. Bershad 13,186,698 137,469 David A. B. Brown 13,187,998 136,169 Albert Fried, Jr. 13,124,193 199,974 Richard F. Hamm, Jr. 13,186,543 137,624 Frank T. MacInnis 13,188,093 136,114 Kevin C. Toner 13,187,498 136,669 There were no broker non-votes. (b) The stockholders voted upon a proposal to ratify the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP, certified public accountants, as EMCOR's independent public accountants for 2002. 13,263,212 shares voted in favor of ratification, 58,445 shares voted against ratification, and 2,510 shares abstained from voting thereon. There were no broker non-votes. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Incorporated by Reference to, Exhibit No Description or Page Number ---------- ----------- ----------------------------- 11 Computation of Basic Note C of the Notes EPS and Diluted EPS to the Condensed Consolidated for the three and six Financial Statements months ended June 30, 2002 and 2001 (b) The following reports on Form 8-K were filed during the quarter ended June 30, 2002: (1) Current Report on Form 8-K/A - Amendment to Current Report on Form 8-K dated March 13, 2002 which disclosed the acquisition of certain companies of Comfort Systems USA, Inc., dated May 15, 2002; and (2) Current Report on Form 8-K - Changes in Registrant's Certifying Accountant, dated May 13, 2002. Page 25 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. EMCOR GROUP, INC. ------------------------------------------- (Registrant) Date: July 25, 2002 By: /s/FRANK T. MACINNIS ------------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Date: July 25, 2002 By: /s/LEICLE E. CHESSER ------------------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer Date: July 25, 2002 By: /s/ MARK A. POMPA ------------------------------------------- Mark A. Pompa Vice President and Controller Page 26 -----END PRIVACY-ENHANCED MESSAGE-----