10-Q 1 b90210q.txt 3RD QUARTER FILING 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 September 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 October 21, 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 September 30, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Operations - three months ended September 30, 2002 and 2001 3 Condensed Consolidated Statements of Operations - nine months ended September 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2002 and 2001 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - nine months ended September 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 Item 4 Controls and Procedures 25 PART II - Other Information Item 1 Legal Proceedings 26 Item 4 Submission of Matters to a Vote of Security Holders 26 Item 6 Exhibits and Reports on Form 8-K 26 16 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) -------------------------------------------------------------------------------- September 30, December 31, 2002 2001 (Unaudited) -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 88,853 $ 189,766 Accounts receivable, net 926,291 777,102 Costs and estimated earnings in excess of billings on uncompleted contracts 237,296 221,272 Inventories 10,536 7,158 Prepaid expenses and other 25,693 22,026 ---------- ---------- Total current assets 1,288,669 1,217,324 Investments, notes and other long-term receivables 26,604 16,817 Property, plant and equipment, net 55,966 42,548 Goodwill, net 186,862 56,011 Other assets 23,064 16,964 ---------- ---------- Total assets $1,581,165 $1,349,664 ========== ========== 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, 2002 2001 (Unaudited) -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 22,193 $ 947 Accounts payable 361,916 313,227 Billings in excess of costs and estimated earnings on uncompleted contracts 404,882 319,165 Accrued payroll and benefits 138,107 121,196 Other accrued expenses and liabilities 101,420 99,726 ---------- ---------- Total current liabilities 1,028,518 854,261 Long-term debt and capital lease obligations 815 848 Other long-term obligations 82,371 72,622 ---------- ---------- Total liabilities 1,111,704 927,731 ---------- ---------- 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, 14,905,896 and 14,815,007 shares issued and outstanding, respectively 159 159 Capital surplus 311,122 307,636 Accumulated other comprehensive loss (2,940) (5,424) Retained earnings 177,956 136,398 Treasury stock, at cost 1,131,985 shares (16,836) (16,836) ---------- ---------- Total stockholders' equity 469,461 421,933 ---------- ---------- Total liabilities and stockholders' equity $1,581,165 $1,349,664 ========== ========== 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, 2002 2001 -------------------------------------------------------------------------------- Revenues $1,052,285 $848,629 Cost of sales 923,052 747,762 ---------- -------- Gross profit 129,233 100,867 Amortization of goodwill -- 1,275 Selling, general and administrative expenses 93,375 73,357 ----------- -------- Operating income 35,858 26,235 Interest (expense) income, net (1,073) 1,070 ----------- -------- Income before income taxes 34,785 27,305 Income tax provision 15,306 12,014 ---------- -------- Net income $ 19,479 $ 15,291 ========== ======== Basic earnings per share $ 1.31 $ 1.03 ========== ======== Diluted earnings per share $ 1.26 $ 1.00 ========== ======== 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, 2002 2001 ------------------------------------------------------------- ------------------ Revenues $2,848,983 $2,555,690 Cost of sales 2,510,148 2,281,560 ---------- ---------- Gross profit 338,835 274,130 Amortization of goodwill -- 3,949 Selling, general and administrative expenses 263,522 211,939 ---------- ---------- Operating income 75,313 58,242 Interest (expense) income, net (1,101) 85 ---------- ---------- Income before income taxes 74,212 58,327 Income tax provision 32,654 25,757 ---------- ---------- Net income $ 41,558 $ 32,570 ========== ========== Basic earnings per share $ 2.80 $ 2.64 ========== ========== Diluted earnings per share $ 2.69 $ 2.25 ========== ========== 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, 2002 2001 -------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 41,558 $ 32,570 Depreciation and amortization 11,477 9,272 Amortization of goodwill -- 3,949 Other non-cash expenses 2,421 27,401 Changes in operating assets and liabilities, excluding the effect of business acquired 34,657 (19,507) --------- --------- Net cash provided by operating activities 90,113 53,685 --------- --------- Cash flows from investing activities: Payments for acquisitions of businesses, net of cash acquired, and related earn-out agreements (169,787) (6,636) Proceeds from sale of assets 987 1,066 Purchase of property, plant and equipment (12,935) (12,646) Net (increase) decrease in investments (9,641) 94 --------- -------- Net cash used in investing activities (191,376) (18,122) --------- -------- Cash flows from financing activities:....... Net repayments of long-term debt and capital lease obligations (1,047) (462) Net proceeds from exercise of stock options 1,397 1,946 --------- -------- Net cash provided by financing activities 350 1,484 --------- -------- (Decrease) increase in cash and cash equivalents (100,913) 37,047 Cash and cash equivalents at beginning of year 189,766 137,685 --------- -------- Cash and cash equivalents at end of period $ 88,853 $174,732 ========= ======== Supplemental cash flow information: Cash paid for: Interest $ 5,413 $ 3,567 Income taxes $ 41,059 $ 4,513 Non-cash financing activities: Debt assumed in acquisition $ 22,115 -- 5 3/4% Convertible Subordinated Notes due 2005, converted into common stock -- $115,000 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 loss (1) earnings stock income ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 2001 $233,503 $117 $167,742 $(3,906) $ 86,386 $(16,836) Net income 32,570 -- -- -- 32,570 -- $32,570 Foreign currency translation adjustments (1,197) -- -- (1,197) -- -- (1,197) ------- Comprehensive income -- -- -- -- -- -- $31,373 ======= Provision in lieu of income taxes 21,449 -- 21,449 -- -- -- Common stock issued under stock option plans 1,946 -- 1,946 -- -- -- Conversion of 5 3/4% convertible subordinated notes (2) 113,874 42 113,832 -- -- -- Value of Restricted Stock Units (3) 2,050 -- 2,050 -- -- -- -------- ---- -------- ------- -------- -------- Balance, September 30, 2001 $404,195 $159 $307,019 $(5,103) $118,956 $(16,836) ======== ==== ======== ======= ======== ======== Balance, January 1, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836) Net income 41,558 -- -- -- 41,558 -- $41,558 Foreign currency translation adjustments 2,484 -- -- 2,484 -- -- 2,484 ------- Comprehensive income -- -- -- -- -- -- $44,042 ======= Common stock issued under stock option plans 1,397 -- 1,397 -- -- -- Value of Restricted Stock Units (3) 2,089 -- 2,089 -- -- -- -------- ---- -------- ------- -------- -------- Balance, September 30, 2002 $469,461 $159 $311,122 $(2,940) $177,956 $(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. 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, 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 nine months ended September 30, 2002 include the results of operations for the acquired 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. Pursuant to the terms of the acquisition agreement an additional $7.1 million of purchase price was paid by EMCOR to Comfort subsequent to the acquisition date due to a working capital adjustment related to excess cash and/or net assets in the opening balance sheet. The acquisition was paid with $114.15 million of EMCOR's funds and $50.0 million from borrowings under EMCOR's revolving credit facility. 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 $122.2 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 finalizing the fair value of these assets and liabilities. Therefore, the allocation of the purchase price is subject to adjustment. NOTE B Acquisition of Businesses - (Continued) The following table summarizes the preliminary purchase price allocation related to the aforementioned acquisition (in thousands): At Sept. 30, 2002 ----------------- Current assets, including cash acquired $161,197 Property, plant and equipment 11,384 Goodwill 122,187 Other assets 3,184 -------- Total assets acquired 297,952 -------- Current liabilities 104,299 Long-term obligations 288 -------- Total liabilities assumed 104,587 -------- Net assets acquired 193,365 Notes payable assumed 22,115 -------- Cash purchase price $171,250 ======== The goodwill of $122.2 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. In accordance with SFAS 141 and SFAS 142, goodwill will not be amortized, while certain other intangible assets that have been identified will be subject to amortization over their useful lives. As of September 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 on an annual basis and between annual tests 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. 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 September 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 $15,291,000 $1.03 $15,291,000 $1.00 Add back amortization of goodwill, net of income tax 714,000 0.05 714,000 0.05 ----------- ----- ----------- ----- Adjusted net income attributed to EMCOR common stock $16,005,000 $1.08 $16,005,000 $1.05 =========== ===== =========== =====
For the nine months ended September 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 $32,570,000 $2.64 $34,305,395 $2.25 Add back amortization of goodwill, net of income tax 2,211,440 0.18 2,211,440 0.15 ----------- ----- ----------- ----- Adjusted net income attributed to EMCOR common stock $34,781,440 $2.82 $36,516,835 $2.40 =========== ===== =========== =====
The changes in the carrying amount of Goodwill during the nine months ended September 30, 2002 were as follows (in thousands): For the nine months ended Sept. 30, 2002 --------------------- Balance at beginning of period $ 56,011 Acquisition of businesses 123,278 Earn-out payments on acquisitions 7,573 -------- Balance at end of period $186,862 ======== As of September 30, 2002, the purchase accounting related to the acquisition of the companies acquired was preliminary. As such, the allocation of goodwill to operating segments has not been finalized. Preliminarily, however, the goodwill of $122.2 million has been allocated primarily to the United States mechanical construction and facilities services segment. NOTE C Significant Accounting Policies - (Continued) 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 as if 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 nine months ended ---------------------------------- --------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2002 2001 2002 2001 --------- --------- --------- --------- Revenues $1,052,285 $1,021,597 $2,943,067 $3,054,840 Operating income $ 35,858 $ 35,167 $ 75,273 $ 80,603 Interest (expense) income, net $ (1,073) $ 688 $ (939) $ ( 1,066) Income before income taxes $ 34,785 $ 35,855 $ 74,334 $ 79,537 Net income $ 19,479 $ 20,079 $ 41,627 $ 44,541 Basic earnings per share $ 1.31 $ 1.36 $ 2.80 $ 3.61 Diluted earnings per share $ 1.26 $ 1.31 $ 2.69 $ 2.92
The pro forma results of operations, for segment information, is included in Note G Segment Information. NOTE E 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, 2002 and 2001: Three months ended September 30, 2002 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------- Basic EPS Income available to common stockholders $19,479,000 14,905,849 $1.31 ===== Effect of Dilutive Securities Options to purchase shares of common stock -- 560,118 ----------- ---------- Diluted EPS $19,479,000 15,465,967 $1.26 =========== ========== ===== Nine months ended September 30, 2002 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------- Basic EPS Income available to common stockholders $41,558,000 14,866,212 $2.80 ===== Effect of Dilutive Securities Options to purchase shares of common stock -- 590,183 ----------- ---------- Diluted EPS $41,558,000 15,456,395 $2.69 =========== ========== ===== Three months ended September 30, 2001 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------- Basic EPS Income available to common stockholders $15,291,000 14,801,296 $1.03 ===== Effect of Dilutive Securities: Options to purchase shares of common stock -- 495,295 ----------- ---------- Diluted EPS $15,291,000 15,296,591 $1.00 =========== ========== ===== NOTE E Earnings Per Share (Continued) Nine months ended September 30, 2001 ---------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ---------------------------------------- Basic EPS Income available to common stockholders $32,570,000 12,323,302 $2.64 ===== Effect of Dilutive Securities Convertible Subordinated Notes, including assumed interest savings, net of tax 1,735,395 2,430,258 Options to purchase shares of common stock -- 461,444 ----------- ---------- Diluted EPS $34,305,395 15,215,004 $2.25 =========== ========== ===== There were no 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, 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): September 30, December 31, 2002 2001 ------------- ------------ Notes assumed in acquisition of Comfort companies $21,815 $ -- Note Payable -- 573 Capitalized lease obligations 352 249 Other 841 973 ------- ------ 23,008 1,795 Less: current maturities 22,193 947 ------- ------ $ 815 $ 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 outstanding at December 31, 2001 was paid in January 2002. 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 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 September 30, As Reported Pro Forma ----------------------------------------- 2002 2001 2001 ---- ---- ---- Revenues from unrelated entities: United States electrical construction and facilities services $ 291,999 $300,873 $ 304,369 United States mechanical construction and facilities services 458,408 322,167 491,639 United States other services 66,455 57,048 57,048 ---------- -------- ---------- Total United States operations 816,862 680,088 853,056 Canada construction and facilities services 91,329 53,415 53,415 United Kingdom construction and facilities services 144,094 110,332 110,332 Other international construction and facilities services -- 4,794 4,794 ---------- -------- ---------- Total worldwide operations $1,052,285 $848,629 $1,021,597 ========== ======== ========== Total revenues: United States electrical construction and facilities services $ 307,497 $307,006 $ 310,502 United States mechanical construction and facilities services 459,222 328,734 498,206 United States other services 66,857 58,211 58,211 Less intersegment revenues (16,714) (13,863) (13,863) ---------- -------- ---------- Total United States operations 816,862 680,088 853,056 Canada construction and facilities services 91,329 53,415 53,415 United Kingdom construction and facilities services 144,094 110,332 110,332 Other international construction and facilities services -- 4,794 4,794 ---------- -------- ---------- Total worldwide operations $1,052,285 $848,629 $1,021,597 ========== ======== ==========
NOTE G Segment Information - (Continued)
For the nine months ended September 30, As Reported Pro Forma ----------------------------------------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services $ 864,879 $ 991,651 $ 866,540 $1,001,325 United States mechanical construction and facilities services 1,213,356 906,006 1,305,779 1,395,482 United States other services 165,300 161,429 165,300 161,429 ---------- ---------- ---------- ---------- Total United States operations 2,243,535 2,059,086 2,337,619 2,558,236 Canada construction and facilities services 229,980 131,197 229,980 131,197 United Kingdom construction and facilities services 375,468 354,113 375,468 354,113 Other international construction and facilities services -- 11,294 -- 11,294 ---------- ---------- ---------- ---------- Total worldwide operations $2,848,983 $2,555,690 $2,943,067 $3,054,840 ========== ========== ========== ========== Total revenues: United States electrical construction and facilities services $ 889,244 $1,024,130 $ 890,905 $1,033,804 United States mechanical construction and facilities services 1,215,799 935,680 1,308,222 1,425,156 United States other services 166,910 166,716 166,910 166,716 Less intersegment revenues (28,418) (67,440) (28,418) (67,440) ---------- ---------- ---------- ---------- Total United States operations 2,243,535 2,059,086 2,337,619 2,558,236 Canada construction and facilities services 229,980 131,197 229,980 131,197 United Kingdom construction and facilities services 375,468 354,113 375,468 354,113 Other international construction and facilities services -- 11,294 -- 11,294 ---------- ---------- ---------- ---------- Total worldwide operations $2,848,983 $2,555,690 $2,943,067 $3,054,840 ========== ========== ========== ==========
For the three months ended September 30, As Reported Pro Forma ---------------------------------------- 2002 2001 2001 ---- ---- ---- Operating income (loss): United States electrical construction and facilities services $21,855 $17,179 $17,757 United States mechanical construction and facilities services 16,151 15,049 23,403 United States other services 2,497 (396) (396) ------- ------- ------- Total United States operations 40,503 31,832 40,764 Canada construction and facilities services 1,276 366 366 United Kingdom construction and facilities services 435 733 733 Other international construction and facilities services 142 82 82 Corporate administration (6,498) (6,778) (6,778) ------- ------- ------- Total worldwide operations 35,858 26,235 35,167 Other corporate items: Interest expense (1,411) (408) (790) Interest income 338 1,478 1,478 ------- ------- ------- Income before income taxes $34,785 $27,305 $35,855 ======= ======= =======
NOTE G Segment Information - (Continued)
For the nine months ended September 30, As Reported Pro Forma ----------------------------------------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Operating income (loss): United States electrical construction and facilities services $52,814 $48,051 $53,071 $49,715 United States mechanical construction and facilities services 42,650 31,689 42,353 52,386 United States other services 1,290 (3,689) 1,290 (3,689) ------- ------- ------- ------- Total United States operations 96,754 76,051 96,714 98,412 Canada construction and facilities services 1,510 1,337 1,510 1,337 United Kingdom construction and facilities services 88 3,189 88 3,189 Other international construction and facilities services 85 (1,469) 85 (1,469) Corporate administration (23,124) (20,866) (23,124) (20,866) ------- ------- ------- ------- Total worldwide operations 75,313 58,242 75,273 80,603 Other corporate items: Interest expense (2,751) (4,381) (2,589) (5,532) Interest income 1,650 4,466 1,650 4,466 ------- ------- ------- ------- Income before income taxes $74,212 $58,327 $74,334 $79,537 ======= ======= ======= =======
As Reported ---------------------------- Sept. 30, Dec. 31, 2002 2001 ------------- ----------- Total assets: United States electrical construction and facilities services $ 330,295 $ 417,678 United States mechanical construction and facilities services 817,651 457,596 United States other services 73,283 60,965 ---------- ---------- Total United States operations 1,221,229 936,239 Canada construction and facilities services 72,534 62,234 United Kingdom construction and facilities services 187,549 152,981 Other international construction and facilities services 3,917 11,497 Corporate administration 95,936 186,713 ---------- ---------- Total worldwide operations $1,581,165 $1,349,664 ========== ==========
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 September 30, 2002 and 2001 were $1,052.3 million and $848.6 million, respectively. Net income for the three months ended September 30, 2002 was $19.5 million compared to net income of $15.3 million for the three months ended September 30, 2001. Diluted Earnings Per Share ("Diluted EPS") were $1.26 per share for the three months ended September 30, 2002 compared to Diluted EPS of $1.00 per share in the year earlier period. Revenues for the nine months ended September 30, 2002 and 2001 were $2,849.0 million and $2,555.7 million, respectively. Net income for the nine months ended September 30, 2002 and 2001 was $41.6 million and $32.6 million, respectively. Diluted EPS were $2.69 per share for the nine months ended September 30, 2002 compared to $2.25 per share for the same period in the prior year. The results of operations for the three and nine months ended September 30, 2002 include results for cettain 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 September 30, ---------------------------------------- % of % of 2002 Total 2001 Total ---- ----- ---- ---- Revenues: United States electrical construction and facilities services $ 291,999 28% $300,873 35% United States mechanical construction and facilities services 458,408 44% 322,167 38% United States other services 66,455 6% 57,048 7% ---------- -------- Total United States operations ........................... 816,862 78% 680,088 80% Canada construction and facilities services .............. 91,329 9% 53,415 6% United Kingdom construction and facilities services ...... 144,094 14% 110,332 13% Other international construction and facilities services.. -- -- 4,794 1% ---------- -------- Total worldwide operations ............................... $1,052,285 100% $848,629 100% ========== ========
For the nine months ended September 30, --------------------------------------- % of % of 2002 Total 2001 Total ---- ----- ---- ----- Revenues: United States electrical construction and facilities services $ 864,879 30% $ 991,651 39% United States mechanical construction and facilities services 1,213,356 43% 906,006 35% United States other services ............................. 165,300 6% 161,429 6% ---------- ---------- Total United States operations ........................... 2,243,535 79% 2,059,086 81% Canada construction and facilities services .............. 229,980 8% 131,197 5% United Kingdom construction and facilities services ...... 375,468 13% 354,113 14% Other international construction and facilities services.. -- -- 11,294 -- ---------- ---------- Total worldwide operations ............................... $2,848,983 100% $2,555,690 100% ========== ==========
EMCOR's revenues increased $203.7 million for the three months ended September 30, 2002 compared to the third quarter of 2001, primarily due to revenues of $153.8 million derived from the acquired Comfort companies and to increased revenues in Canada and the United Kingdom of $37.9 million and $33.8 million, respectively. Revenues increased by $293.3 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001, primarily due to revenues of $350.2 million derived from the acquired Comfort companies and to increased revenues in Canada and the United Kingdom of $98.8 million and $21.4 million, respectively. Revenues for the EMCOR United States operations (excluding the acquired Comfort companies) in both the three and nine 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 the elimination of new work in the North and South Carolina markets. Revenues for the Canada and United Kingdom segments increased primarily due to long-duration contracts that began to generate revenues in 2002 and increased facilities services revenues, respectively. Revenues of United States electrical construction and facilities services business units for the three months ended September 30, 2002 were $292.0 million compared to $300.9 million for the three months ended September 30, 2001. Revenues for the nine months ended September 30, 2002 were $864.9 million compared to $991.7 million in the same period a year earlier. The decrease in revenues of $8.9 million and $126.8 million for the three and nine month periods ended September 30, 2002, respectively, when compared to the same period in 2001, was primarily due to a reduction in "fast-track" telecom projects in the current year compared to the prior year. Transportation infrastructure and power plant 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 September 30, 2002 were $458.4 million compared to $322.2 million for the three months ended September 30, 2001. Revenues for the nine months ended September 30, 2002 were $1,213.4 million compared to $906.0 million in the same period in the prior year. The increase in revenues of $136.2 million for the three month period was attributable to revenues from the acquired Comfort companies of $150.8 million and increased revenues from other operations in the northern California, Denver and Las Vegas markets. This increases in the three month period was partially offset by decreases in revenues from operations in certain markets due to completion of certain large contracts in the prior quarter that have not been replaced with projects in the current quarter. The revenues increase of $307.4 million for the nine month period was primarily derived from revenues from the acquired Comfort companies of $344.3 million and growth in revenues in the northern California market. These increases in the nine month period were partially offset by decreased revenues in operations in some other markets due to fewer fast-track contracts available. Additionally, these increases were offset in both the three and nine month periods by the elimination of new work in the North and South Carolina markets. United States other services revenues of $66.5 million for the three months ended September 30, 2002, which include those operations which principally provide consulting and maintenance services, increased by $9.4 million from $57.0 million in the same three months in 2001. Revenues for the nine months ended September 30, 2002 were $165.3 million compared to $161.4 million in the same period in the prior year. These increases in revenues for the three and nine month periods were primarily due to an increase in facilities services contracts performed, partially offset by a decline in telecommunications industry related work due to the slow-down in that industry. Revenues of Canada construction and facilities services for the three months ended September 30, 2002 were $91.3 million compared to $53.4 million for the three months ended September 30, 2001. Revenues for the nine months ended September 30, 2002 were $230.0 million compared to $131.2 million in the same period in the prior year. The increases in revenues for the both three and nine month periods were primarily attributable to the performance of work on certain long-term contracts, partially offset by a reduced number of "fast-track" type contracts in the same period in the prior year. Revenues from United Kingdom construction and facilities services business units for the three months ended September 30, 2002 were $144.1 million compared to $110.3 million for the three months ended September 30, 2001. Revenues for the nine months ended September 30, 2002 were $375.5 million compared to $354.1 million in the same period in the prior year. The increases in the three and nine month periods were principally attributable to growth in the facilities services market offsetting a decrease in the overall construction market principally resulting in fewer attractive bid opportunities, and thereby causing EMCOR to be more selective in submitting project bids. Construction revenues do not include revenues from certain multi-year rail projects that have been awarded but which will not produce revenues until future periods. Other international construction and facilities services revenues primarily consists of EMCOR's operations in the Middle East, South Africa and Europe. Revenues from those operations for the three and nine months ended September 30, 2002 decreased by $4.8 million and $11.3 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. 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. In 2001, certain European projects were performed entirely by EMCOR and therefore revenues were recorded. EMCOR continues to pursue new business selectively in those markets; however, the availability of opportunities has been significantly reduced as a result of local market conditions, 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 September 30, ---------------------------------------- 2002 2001 ---- ---- Cost of sales ................................ $923,052 $747,762 Gross profit.................................. $129,233 $100,867 Gross profit, as a percentage of revenues..... 12.3% 11.9% For the nine months ended September 30, --------------------------------------- 2002 2001 ---- ---- Cost of sales ................................ $2,510,148 $2,281,560 Gross profit.................................. $ 338,835 $ 274,130 Gross profit, as a percentage of revenues..... 11.9% 10.7% Gross profit (revenues less cost of sales) increased $28.4 million for the three months ended September 30, 2002 to $129.2 million compared to $100.9 million for the three months ended September 30, 2001. As a percentage of revenues, gross profit increased to 12.3% from 11.9% for the three months ended September 30, 2002 and 2001, respectively. Gross profit for the nine months ended September 30, 2002 of $338.8 million was $64.7 million higher than the $274.1 million in the same period last year. As a percentage of revenues, gross profit increased to 11.9% from 10.7% for the nine months ended September 30, 2002 and 2001, respectively. The dollar increase in gross profit in both the three and nine 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 $25.5 million and $56.8 million earned by the acquired Comfort companies in the three and nine month periods, respectively. The increase in gross profit of $2.9 million and $7.9 million attributable to EMCOR's other subsidiaries in both the three and nine month periods, respectively, was due to the type and location of construction and facilities services contracts performed, efficient deployment of local labor, effective procurement of materials and focus on risk management programs. 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, -------------------- 2002 2001 ---- ---- Selling, general and administrative expenses....... $93,375 $73,357 Selling, general and administrative expenses, as a percentage of revenues....................... 8.9% 8.6% For the nine months ended September 30, -------------------- 2002 2001 ---- ---- Selling, general and administrative expenses....... $263,522 $211,939 Selling, general and administrative expenses, as a percentage of revenues....................... 9.2% 8.3% Selling, general and administrative expenses for the three months ended September 30, 2002 increased $20.0 million to $93.4 million from $73.4 million in the same period last year. Selling, general and administrative expenses as a percentage of revenues were 8.9% for the three months ended September 30, 2002 compared to 8.6% for the three months ended September 30, 2001. Selling, general and administrative expenses for the nine months ended September 30, 2002 were $263.5 million, an increase of $51.6 million compared to $211.9 million for the nine months ended September 30, 2001. Selling, general and administrative expenses as a percentage of revenues were 9.2% for the nine months ended September 30, 2002, compared to 8.3% for the nine months ended September 30, 2001. For the three and nine month periods ended September 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 $17.9 million and $41.2 million of expenses, respectively, of the acquired Comfort companies. Exclusive of the acquired Comfort companies, an increase in selling, general and administrative expense of $2.1 million and $10.4 million for the three and nine month periods ended September 30, 2002, respectively, when compared to the same periods in 2001, was primarily attributable to higher 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". Goodwill amortization expense for the three and nine months ended September 30, 2001 was $1.3 million and $3.9 million, respectively. 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 September 30, ---------------------------------------- % of % of Segment Segment 2002 Revenues 2001 Revenues ---- -------- ---- -------- Operating income (loss): United States electrical construction and facilities services $21,855 7.5% $17,179 5.7% United States mechanical construction and facilities services 16,151 3.5% 15,049 4.7% United States other services 2,497 3.8% (396) -- ------- ------- Total United States operations 40,503 5.0% 31,832 4.7% Canada construction and facilities services 1,276 1.4% 366 0.7% United Kingdom construction and facilities services 435 0.3% 733 0.7% Other international construction and facilities services 142 -- 82 1.7% Corporate administration (6,498) -- (6,778) -- ------- ------- Total worldwide operations 35,858 3.4% 26,235 3.1% Other corporate items: Interest expense (1,411) (408) Interest income 338 1,478 ------- ------- Income before income taxes $34,785 $27,305 ======= =======
For the nine months ended September 30, --------------------------------------- % of % of Segment Segment 2002 Revenues 2001 Revenues ---- -------- ---- -------- Operating income (loss): United States electrical construction and facilities services $52,814 6.1% $48,051 4.8% United States mechanical construction and facilities services 42,650 3.5% 31,689 3.5% United States other services 1,290 0.8% (3,689) -- ------- ------- Total United States operations 96,754 4.3% 76,051 3.7% Canada construction and facilities services 1,510 0.7% 1,337 1.0% United Kingdom construction and facilities services 88 -- 3,189 0.9% Other international construction and facilities services 85 -- (1,469) -- Corporate administration (23,124) -- (20,866) -- ------- ------- Total worldwide operations 75,313 2.6% 58,242 2.3% Other corporate items: Interest expense (2,751) (4,381) Interest income 1,650 4,466 ------- ------- Income before income taxes $74,212 $58,327 ======= =======
EMCOR had operating income of $35.9 million and $26.2 million for the three months ended September 30, 2002 and 2001, respectively. Operating income was $75.3 million and $58.2 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $9.6 million and $17.1 million in operating income for the three and nine month periods ended September 30, 2002 as compared to the same periods in 2001 was due primarily to incremental operating income of the acquired Comfort companies, increased operating income attributable to electrical operations in New York City, operating income from the United States other services segment and increased operating income associated with increased revenues in the Canada construction and facilities services segment. United States electrical construction and facilities services operating income (before deduction of general corporate and other expenses discussed below) for the three months ended September 30, 2002 was $21.9 million or 7.5% of revenues compared to $17.2 million or 5.7% of revenues for the three months ended September 30, 2001. Operating income for the three months ended September 30, 2002 compared to the same period in 2001 was favorably impacted by increased activity from transportation infrastructure and power plant construction projects on the west and east coasts and increased operating income from various commercial and industrial activities in the San Diego, Las Vegas, Washington, D.C. and Denver markets offset, in part, by a reduction in "fast-track" work across the other markets in this segment. Operating income for the nine months ended September 30, 2002 was $52.8 million, or 6.1% of revenues, compared to $48.1 million, or 4.8% of revenues, for the nine months ended September 30, 2001. The increase in operating income and operating income as a percentage of revenues for the nine month period was due to the same reasons cited for the increase in the three month period in addition to the successful completion and settlement of several contracts. United States mechanical construction and facilities services operating income for the three months ended September 30, 2002 was $16.2 million, or 3.5% of revenues, compared to $15.0 million, or 4.7% of revenues, for the three months ended September 30, 2001. Operating income for the nine months ended September 30, 2002 was $42.7 million or 3.5% of revenues compared to $31.7 million or 3.5% of revenues for the nine months ended September 30, 2001. The $1.1 million and $11.0 million increases in operating income for the three and nine months periods, respectively, were primarily attributable to (i) results of operations of the acquired Comfort companies, (ii) operating income associated with power plant construction activity on the west and east coasts, and (iii) improved results of 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 ceased bidding new work. The increases were partially offset by less operating income attributable to fewer fast-track contracts in the current year than the prior year. United States other services operating income was $2.5 million compared to operating losses of $0.4 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, operating income was $1.3 million and operating losses were $3.7 million, respectively. The increase in operating profit for both the three and nine month periods was primarily attributable to an increase in gross profit associated with new facilities services contracts and a decrease in selling, general and administrative expenses as these operations became more established and thus required less overhead spending related to the development of new business. Canada construction and facilities services operating income was $1.3 million and $0.4 million for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002, operating income was $1.5 million compared to operating income of $1.3 million for the same period in the prior year. The $0.9 million increase in operating income for the three months ended September 30, 2002 was due to an increase in construction activities for work on long-term contracts. The increase in operating income for the nine months ended September 30, 2002 when compared to the prior year was primarily due to increased work on long-term contracts that result in profit recognition over a longer time period, partially offset by a reduction in the number of fast-track type contracts. United Kingdom construction and facilities services operating income for the three months ended September 30, 2002 was $0.4 million compared to operating income of $0.7 million in the same period of the prior year. For the nine months ended September 30, 2002, operating income was $0.09 million compared to operating income of $3.2 million for the same period in the prior year. The decrease in operating income for both the three months and nine months ended September 30, 2002 compared to the same periods in 2001 was attributable to the type and location of jobs in the periods ended September 30, 2002. The facilities services business continues to realize increased revenues and operating income while the construction activities have slowed since last year. Other international construction and facilities services operating income was $0.14 million for the three months ended September 30, 2002 compared to an operating income of $0.08 million for three months ended September 30, 2001. Operating income for the nine months ended September 30, 2002 increased by $1.6 million compared to 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. General corporate expenses for the three months ended September 30, 2002 were $6.5 million compared to $6.8 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, general corporate expenses were $23.1 million compared to $20.9 million for the same period in the prior year. The increase in general corporate expenses for the nine month period 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, plus certain costs associated with the integration of the acquired Comfort companies during the first six months of 2002. Interest expense for the three months ended September 30, 2002 and 2001 was $1.4 million and $0.4 million, respectively. Interest expense for the nine months ended September 30, 2002 and 2001 was $2.8 million and $4.4 million, respectively. Interest income decreased $1.1 million and $2.8 million for the three and nine months ended September 30, 2002, respectively, compared to the same periods in 2001, due to reduced cash on hand because of $169.8 million of cash used to fund acquisitions and earn-out payments in the current year. The decreased interest expense in the 2002 nine month period, when compared to the same nine month period 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 $15.3 million for the three months ended September 30, 2002 versus $12.0 million for the same period in 2001. For the nine months ended September 30, 2002, the income tax provision was $32.7 million versus $25.8 million for the nine months ended September 30, 2001. The increase in this provision was primarily due to increased income before taxes. EMCOR's contract backlog was $2.8 billion at September 30, 2002 and $2.4 billion at December 31, 2001. The increase in backlog was primarily due to the acquired Comfort companies. EMCOR's contract backlog at September 30, 2002 was $2.8 billion compared to $2.1 billion at September 30, 2001. The increase was primarily attributable to the acquired Comfort companies' backlog of $0.3 billion plus a net increase of $0.3 billion 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 nine months ended September 30, ------------------- 2002 2001 ---- ---- Net cash provided by operating activities $ 90,113 $ 53,685 Net cash used in investing activities $(191,376) $(18,122) Net cash provided by financing activities $ 350 $ 1,484 EMCOR's consolidated cash balance decreased by approximately $100.9 million from $189.8 million at December 31, 2001 to $88.9 million at September 30, 2002 primarily due to the 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 $90.1 million for the nine months ended September 30, 2002 represented a $36.4 million increase from the net cash provided by operating activities of $53.7 million in the same period last year. The increase in net cash provided by operating activities was primarily attributable to increased net income and a net decrease in the working capital accounts. Net cash used in investing activities of $191.4 million for the nine months ended September 30, 2002 increased by $173.3 million compared to $18.1 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 $9.7 million, in addition to an increase in EMCOR's investments, notes and other long-term receivables primarily related to a $14.0 million equity contribution by EMCOR to the venture with Baltimore Gas and Electric that is discussed below. The increase in net cash provided by financing activities was attributable to proceeds from the exercise of stock options offset by a reduction due to net repayments of long-term debt and capital lease payments. On September 26, 2002, EMCOR entered into a new $275 million five year revolving credit agreement. The new agreement replaces EMCOR's $150.0 million 3 year credit facility that would have expired June 2003. EMCOR had approximately $30.7 million of letters of credit outstanding under the revolving credit facility as of September 30, 2002. There were no revolving loans outstanding as of September 30, 2002 and December 31, 2001 under its 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. Each of the venturers is jointly and severally liable for the venture's $25.0 million borrowing due December 2031. During September 2002 each partner contributed equity to the venture, of which EMCOR's contribution was $14.0 million. EMCOR believes that current cash balances and the 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 revolving credit facility, referred to above, 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 revolving credit facility, and the sale of various secured or unsecured debt and/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 and long-term debt instruments and/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 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 contracts 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. ITEM 4 CONTROLS AND PROCEDURES Based on an evaluation of the disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, the Chairman of the Board and Chief Executive Officer, Frank T. MacInnis, and the Executive Vice President and Chief Financial Officer, Leicle E. Chesser, have concluded that the disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934 are effective. There were no significant changes in the internal controls or in other factors that could significantly affect those controls subsequent to the date of our most recent evaluation thereof. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS In August 2002, the Company's subsidiary Heritage Air Systems, Inc. ("Heritage") was added as one of twenty-one defendants named in a civil action pending in the United States District Court for the Eastern District of New York by a competitor under the Sherman Act, 15 U.S.C. ss.ss. 1 and 2, the Clayton Act 15 U.S.C. ss.ss. 15 and 26, The Labor Management Relations Act, 29 U.S.C. ss. 187 (a), and New York state law. Plaintiff, Cool Wind Ventilation Corp., alleges a conspiracy in restraint of trade and a monopoly in the sheet metal duct industry in New York City and Long Island. Specifically, the plaintiff alleges that the defendants Sheet Metal Workers International Association Local No. 28 ("Local 28"), certain other trade unions, contractors, including Heritage, building owners and building managers violated federal antitrust and federal labor laws by entering into agreements whereby Local 28 would engage in, and to threaten to engage in, localized and widespread picketing and work stoppages at job sites where plaintiff or other non-Local 28 contractors were working in order to compel mechanical contractors to stop or change the way they did business with plaintiff and other non-Local 28 contractors. As a result of the alleged conspiracy, plaintiff alleges that it and others were prevented from competing in the most lucrative area of the sheet metal ductwork industry. Plaintiff claims judgment for treble the damages it believes it sustained and which it estimates to be no less than $50 million. Heritage has yet to answer the complaint, but, when it does, it will deny the allegations of wrongdoing. There have been no other new developments during the quarter ended September 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 None. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Incorporated by Reference to, Exhibit No Description or Page Number ---------- ----------- ----------------------------- 4.5 U.S. $275,000,000 Credit Agreement Incorporated herein by reference by and among EMCOR Group, Inc. to Exhibit 4 of EMCOR's current and Certain of its Subsidiaries and report on Form 8-K, dated as of Harris Trust and Savings Bank October 4, 2002 individually and as Agent and the Lenders which are or become parties thereto dated as of September 26, 2002 11 Computation of Basic Note C of the Notes EPS and Diluted EPS to the Condensed Consolidated for the three and nine months Financial Statements ended September 30, 2002 and 2001
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
Incorporated by Reference to, Exhibit No Description or Page Number ---------- ----------- ----------------------------- 99.1 Certification Pursuant to Section 906 Page 30 of the Sarbanes - Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer 99.2 Certification Pursuant to Section 906 Page 31 of the Sarbanes - Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - (Continued) (b) The following reports on Form 8-K were filed during the quarter ended September 30, 2002, or prior to filing of this report: (1) Current Report on Form 8-K, dated as of October 4, 2002 - Credit Agreement by and among EMCOR Group, Inc. and Certain of its Subsidiaries and Harris Trust and Savings Bank, dated September 26, 2002; and (2) Current Report on Form 8-K, dated as of August 8, 2002 - Regulation of Financial Disclosure, dated August 8, 2002. 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: October 23, 2002 By: /s/FRANK T. MACINNIS ------------------------------------ Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Date: October 23, 2002 By: /s/LEICLE E. CHESSER ------------------------------------ Leicle E. Chesser Executive Vice President and Chief Financial Officer Date: October 23, 2002 By: /s/ MARK A. POMPA ------------------------------------ Mark A. Pompa Vice President and Controller 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 23, 2002 /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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 23, 2002 /s/ LEICLE E. CHESSER ---------------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank T. MacInnis, Chairman of the Board of Directors and 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 23, 2002 /s/ FRANK T. MACINNIS ----------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leicle E. Chesser, Executive Vice President and 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 23, 2002 /s/ LEICLE E. CHESSER --------------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer