10-Q 1 a90310q.txt EMCOR GROUP, INC. 3RD QUARTER SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q 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 EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ -------------------------------------------------------------------------------- Commission file number 0-2315 EMCOR Group, Inc. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2125338 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 301 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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No __ Applicable Only To Corporate Issuers ------------------------------------ Number of shares of Common Stock outstanding as of the close of business on October 20, 2003: 15,014,199 shares. EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of September 30, 2003 and December 31, 2002 1 Condensed Consolidated Statements of Operations - three months ended September 30, 2003 and 2002 3 Condensed Consolidated Statements of Operations - nine months ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2003 and 2002 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - nine months ended September 30, 2003 and 2002 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3 Quantitative and Qualitative Disclosures about Market Risk 29 Item 4 Controls and Procedures 30 PART II - Other Information Item 1 Legal Proceedings 30 Item 6 Exhibits and Reports on Form 8-K 31 38 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 (Unaudited) -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 82,162 $ 93,103 Accounts receivable, net 1,012,911 964,968 Costs and estimated earnings in excess of billings on uncompleted contracts 272,969 235,809 Inventories 11,876 12,271 Prepaid expenses and other 35,423 28,784 ---------- ---------- Total current assets 1,415,341 1,334,935 Investments, notes and other long-term receivables 29,008 24,642 Property, plant and equipment, net 68,363 70,750 Goodwill 293,538 290,412 Identifiable intangible assets, net 11,561 13,845 Other assets 20,824 23,907 ---------- ---------- Total assets $1,838,635 $1,758,491 ========== ========== 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, 2003 2002 (Unaudited) -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under working capital credit line $ 194,979 $ 112,000 Current maturities of long-term debt and capital lease obligations 544 22,276 Accounts payable 389,270 409,562 Billings in excess of costs and estimated earnings on uncompleted contracts 372,714 363,092 Accrued payroll and benefits 138,266 159,416 Other accrued expenses and liabilities 131,870 113,529 ---------- ---------- Total current liabilities 1,227,643 1,179,875 Long-term debt and capital lease obligations 622 905 Other long-term obligations 94,367 87,841 ---------- ---------- Total liabilities 1,322,632 1,268,621 ---------- ---------- Stockholders' equity: Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 16,143,516 and 16,050,862 shares issued, respectively 161 161 Capital surplus 315,429 312,393 Accumulated other comprehensive loss (87) (5,148) Retained earnings 217,297 199,300 Treasury stock, at cost 1,129,317 and 1,131,985 shares, respectively (16,797) (16,836) ---------- ---------- Total stockholders' equity 516,003 489,870 ---------- ---------- Total liabilities and stockholders' equity $1,838,635 $1,758,491 ========== ========== 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, 2003 2002 -------------------------------------------------------------------------------- Revenues $1,157,588 $1,052,285 Cost of sales 1,039,382 923,052 ---------- ---------- Gross profit 118,206 129,233 Selling, general and administrative expenses 104,671 93,375 ---------- ---------- Operating income 13,535 35,858 Interest expense, net 1,987 1,073 ---------- ---------- Income before income taxes 11,548 34,785 Income tax provision 5,080 15,306 ---------- ---------- Net income $ 6,468 $ 19,479 ========== ========== Basic earnings per share $ 0.43 $ 1.31 ========== ========== Diluted earnings per share $ 0.42 $ 1.26 ========== ========== 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, 2003 2002 -------------------------------------------------------------------------------- Revenues $3,362,996 $2,848,983 Cost of sales 3,004,746 2,510,148 ---------- ---------- Gross profit 358,250 338,835 Selling, general and administrative expenses 320,484 263,522 ---------- ---------- Operating income 37,766 75,313 Interest expense, net 5,631 1,101 ---------- ---------- Income before income taxes 32,135 74,212 Income tax provision 14,138 32,654 ---------- ---------- Net income $ 17,997 $ 41,558 ========== ========== Basic earnings per share $ 1.20 $ 2.80 ========== ========== Diluted earnings per share $ 1.16 $ 2.69 ========== ========== 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, 2003 2002 -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 17,997 $ 41,558 Depreciation and amortization 15,986 11,477 Amortization of identifiable intangible assets 2,284 -- Other non-cash expenses 5,279 2,421 Changes in operating assets and liabilities, excluding the effect of business acquired (94,732) 34,657 --------- --------- Net cash (used in) provided by operating activities (53,186) 90,113 --------- --------- Cash flows from investing activities: Payments for acquisitions of businesses, net of cash acquired, and related earn-out agreements (3,127) (169,787) Proceeds from sale of assets 521 987 Purchase of property, plant and equipment (13,388) (12,935) Net disbursements related to other investments (4,366) (9,641) ----------- --------- Net cash used in investing activities (20,360) (191,376) ----------- --------- Cash flows from financing activities: Proceeds from working capital credit lines 1,199,483 50,000 Repayments of working capital credit lines (1,116,504) (50,000) Net repayments for long-term debt (22,204) (1,150) Net borrowings for capital lease obligations 189 103 Net proceeds from exercise of stock options 1,641 1,397 ----------- --------- Net cash provided by financing activities 62,605 350 ----------- --------- Decrease in cash and cash equivalents (10,941) (100,913) Cash and cash equivalents at beginning of year 93,103 189,766 ----------- --------- Cash and cash equivalents at end of period $ 82,162 $ 88,853 =========== ========= Supplemental cash flow information: Cash paid for: Interest $ 5,321 $ 5,413 Income taxes $ 13,048 $ 41,059 Non-cash financing activities: Debt assumed in acquisition $ -- $ 22,115 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, 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 0 1,397 -- -- -- Value of Restricted Stock Units (2) 2,089 -- 2,089 -- -- -- -------- ---- -------- ------- -------- -------- Balance, September 30, 2002 $469,461 $159 $311,122 $(2,940) $177,956 $(16,836) ======== ==== ======== ======= ======== ======== Balance, January 1, 2003 $489,870 $161 $312,393 $(5,148) $199,300 $(16,836) Net income 17,997 -- -- -- 17,997 -- $17,997 Foreign currency translation adjustments 5,061 -- -- 5,061 -- -- 5,061 ------- Comprehensive income -- -- -- -- -- -- $23,058 ======= Common stock issued under stock option plans 1,641 0 1,602 -- -- 39 Value of Restricted Stock Units (3) 1,434 -- 1,434 -- -- -- -------- ---- -------- ------- -------- -------- Balance, September 30, 2003 $516,003 $161 $315,429 $ (87) $217,297 $(16,797) ======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments and minimum pension liability adjustments. (2) Shares of common stock will be issued in respect of restricted stock units granted pursuant to EMCOR's Executive Stock Bonus Plan. This amount represents the value of restricted stock units at the date of grant plus the related compensation expense recorded in 2002 due to an increase in market value of the underlying common stock. As of October 2002, the terms of the Executive Stock Bonus Plan were changed resulting in prospective fixed plan accounting for both existing and new grants. (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. 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 conformity 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, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. ("CSU") a group of companies (the "Acquired Comfort Companies"). On December 19, 2002, EMCOR acquired all the capital stock of Consolidated Engineering Services, Inc. ("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two additional companies during 2002. These acquisitions were accounted for by the purchase method, and the purchase prices have been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at their respective dates of acquisition. The CES purchase price allocation is preliminary and subject to finalization, which could lead to the recognition of additional intangible assets subject to amortization. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board (the "FASB") issued Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the "Interpretation"). FIN 45 clarifies the requirements of FASB Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 may require that, upon issuance of a guarantee, the guarantor recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods that end after December 15, 2002. The Interpretation's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The guarantor's previous accounting for guarantees that were issued before the date of FIN 45's initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. EMCOR has determined that the adoption of FIN 45 only impacted disclosures and the accounting for guarantees was not impacted as of September 30, 2003. In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002 and was adopted by EMCOR for all periods presented herein. EMCOR did not change to the fair value based method of accounting for stock-based employee compensation; therefore, adoption of SFAS 148 has impacted disclosures, not the financial results, of EMCOR. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. EMCOR is currently evaluating the effect the adoption of the provisions of FIN 46 will have on EMCOR's consolidated financial condition or results of operations. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, (b) in connection with other FASB projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. EMCOR has determined that the provisions of SFAS 149 will have no effect on EMCOR's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. EMCOR does not have any financial instruments that meet the provisions of SFAS 150; therefore, EMCOR has determined that the provisions of SFAS 150 will have no effect on EMCOR's consolidated financial position, results of operations or cash flows. NOTE C Earnings Per Share Calculation of Basic and Diluted Earnings per share The following tables summarize EMCOR's calculation of Basic and Diluted Earnings per Share ("EPS") for the three and nine month periods ended September 30, 2003 and 2002: Three months ended September 30, 2003 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------------- Basic EPS Income available to common stockholders $6,468,000 15,003,737 $0.43 ===== Effect of Dilutive Securities: Options -- 457,369 ---------- ---------- Diluted EPS $6,468,000 15,461,106 $0.42 ========== ========== ===== Nine months ended September 30, 2003 ------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------------- Basic EPS Income available to common stockholders $17,997,000 14,974,590 $1.20 ===== Effect of Dilutive Securities: Options -- 497,121 ----------- ---------- Diluted EPS $17,997,000 15,471,711 $1.16 =========== ========== ===== NOTE C Earnings Per Share - (Continued) 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 -- 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 -- 590,183 ----------- ---------- Diluted EPS $41,558,000 15,456,395 $2.69 =========== ========== ===== There were options to purchase 425,499 shares and 227,730 shares of common stock outstanding during the three and nine month periods ended September 30, 2003, respectively, which options were anti-dilutive and required to be excluded from the calculation of diluted EPS. 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. NOTE D Valuation of Stock Option Grants At September 30, 2003, EMCOR had several stock-based compensation plans and programs. EMCOR applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized in the accompanying Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2003 and 2002 in respect of stock options granted during those periods inasmuch as EMCOR grants stock options at fair market value. Had compensation cost for these options been determined consistent with SFAS 123 and SFAS 148, EMCOR's net income, basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") would have been reduced from the "as reported amounts" below to the "pro forma amounts" below for the three and nine months ended September 30, 2003 and 2002 (in thousands, except per share amounts):
For the three months For the nine months ended Sept. 30, ended Sept. 30, -------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income: As reported..................................................... $6,468 $19,479 $17,997 $41,558 Less: Total stock-based compensation expense determined under a fair value based method, net of related tax effects.. 80 280 713 2,548 ------ ------- ------- ------- Pro Forma....................................................... $6,388 $19,199 $17,284 $39,010 ====== ======= ======= ======= Basic EPS: As reported..................................................... $ 0.43 $ 1.31 $ 1.20 $ 2.80 Pro Forma....................................................... $ 0.43 $ 1.29 $ 1.15 $ 2.62 Diluted EPS: As reported..................................................... $ 0.42 $ 1.26 $ 1.16 $ 2.69 Pro Forma....................................................... $ 0.41 $ 1.24 $ 1.12 $ 2.52
Common Stock As of September 30, 2003 and December 31, 2002, 15,014,199 and 14,918,877 shares of EMCOR common stock were outstanding, respectively. NOTE E Long-Term Debt Long-term debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands): Sept. 30, Dec. 31, 2003 2002 --------- -------- Notes Payable at 10.0%, due 2003 $ -- $21,815 Capitalized lease obligations 540 351 Other 626 1,015 ------ ------- 1,166 23,181 Less: current maturities 544 22,276 ------ ------- $ 622 $ 905 ====== ======= The Notes Payable of $21.8 million at December 31, 2002 were notes made by CSU to former owners of certain Acquired Comfort Companies, which notes were assumed by EMCOR in connection with the acquisition of the Acquired Comfort Companies. The Notes Payable accrued interest at 10.0% per annum and were paid in full in April 2003. NOTE F Segment Information EMCOR has the following reportable segments which provide services associated with the design, integration, installation, startup, operation and maintenance of various systems: United States electrical construction and facilities services (systems for generation and distribution of electrical power; lighting systems; low voltage systems such as fire alarm, security, communications and process control systems; and voice and data systems), United States mechanical construction and facilities services (systems for heating, ventilation, air conditioning, refrigeration and clean room ventilation systems; and plumbing, process and high-purity piping systems), United States facilities services, Canada construction and facilities services, United Kingdom construction and facilities services, and Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which primarily provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile operation and maintenance services, site-based operation and maintenance services, call center services, facility planning and consulting and energy management programs) which services are not related to customers' construction programs. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. "Other international construction and facilities services" represents EMCOR's operations outside of the United States, Canada, and the United Kingdom (primarily in South Africa and the Middle East during the periods presented). The following tables present information about industry segments and geographic areas. The tables also present pro forma revenues and operating income as if the 2002 acquisitions had occurred at the beginning of fiscal 2002. Certain reclassifications of prior year amounts have been made to conform to current year segment presentation. The unaudited pro forma revenues and operating income are not necessarily indicative of future operating results (in thousands):
For the three months ended September 30, As Reported Pro Forma ----------------------- ---------- 2003 2002 2002 ---------- ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services $ 354,341 $ 291,999 $ 292,189 United States mechanical construction and facilities services 422,015 454,123 462,464 United States facilities services 162,474 70,740 169,570 ---------- ---------- ---------- Total United States operations 938,830 816,862 924,223 Canada construction and facilities services 83,222 91,329 91,329 United Kingdom construction and facilities services 135,536 144,094 144,094 Other international construction and facilities services -- -- -- ---------- ---------- ---------- Total worldwide operations $1,157,588 $1,052,285 $1,159,646 ========== ========== ========== Total revenues: United States electrical construction and facilities services $ 358,721 $ 307,497 $ 307,687 United States mechanical construction and facilities services 426,111 454,915 463,256 United States facilities services 162,760 71,164 169,994 Less intersegment revenues (8,762) (16,714) (16,714) ---------- ---------- ---------- Total United States operations 938,830 816,862 924,223 Canada construction and facilities services 83,222 91,329 91,329 United Kingdom construction and facilities services 135,536 144,094 144,094 Other international construction and facilities services -- -- -- ---------- ---------- ---------- Total worldwide operations $1,157,588 $1,052,285 $1,159,646 ========== ========== ==========
NOTE F Segment Information - (Continued)
For the nine months ended September 30, As Reported Pro Forma ----------------------- ---------- 2003 2002 2002 ---------- ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services $ 930,250 $ 864,879 $ 867,111 United States mechanical construction and facilities services 1,264,606 1,203,663 1,330,321 United States facilities services 495,663 174,993 457,520 ---------- ---------- ---------- Total United States operations 2,690,519 2,243,535 2,654,952 Canada construction and facilities services 267,548 229,980 229,980 United Kingdom construction and facilities services 404,929 375,468 375,468 Other international construction and facilities services -- -- -- ---------- ---------- ---------- Total worldwide operations $3,362,996 $2,848,983 $3,260,400 ========== ========== ========== Total revenues: United States electrical construction and facilities services $ 950,796 $ 889,244 $ 891,476 United States mechanical construction and facilities services 1,271,308 1,206,070 1,332,728 United States facilities services 497,026 176,639 459,166 Less intersegment revenues (28,611) (28,418) (28,418) ---------- ---------- ---------- Total United States operations 2,690,519 2,243,535 2,654,952 Canada construction and facilities services 267,548 229,980 229,980 United Kingdom construction and facilities services 404,929 375,468 375,468 Other international construction and facilities services -- -- -- ---------- ---------- ---------- Total worldwide operations $3,362,996 $2,848,983 $3,260,400 ========== ========== ==========
For the three months ended September 30, As Reported Pro Forma ----------------------- ---------- 2003 2002 2002 ---------- ---------- ---------- Operating income (loss): United States electrical construction and facilities services $ 14,899 $ 21,855 $ 21,878 United States mechanical construction and facilities services 3,688 15,751 16,344 United States facilities services 5,589 2,897 9,428 ---------- ---------- ---------- Total United States operations 24,176 40,503 47,650 Canada construction and facilities services 1,350 1,276 1,276 United Kingdom construction and facilities services (3,174) 435 435 Other international construction and facilities services 131 142 142 Corporate administration (8,948) (6,498) (6,498) ---------- ---------- ---------- Total worldwide operations 13,535 35,858 43,005 Other corporate items: Interest expense (2,131) (1,411) (3,108) Interest income 144 338 339 ---------- ---------- ---------- Income before income taxes $ 11,548 $ 34,785 $ 40,236 ========== ========== ==========
For the nine months ended September 30, As Reported Pro Forma ----------------------- ---------- 2003 2002 2002 ---------- ---------- ---------- Operating income (loss): United States electrical construction and facilities services $ 44,017 $ 52,814 $ 53,139 United States mechanical construction and facilities services 14,267 41,563 43,697 United States facilities services 12,328 2,377 19,559 ---------- ---------- ---------- Total United States operations 70,612 96,754 116,395 Canada construction and facilities services 3,116 1,510 1,510 United Kingdom construction and facilities services (10,514) 88 88 Other international construction and facilities services 19 85 85 Corporate administration (25,467) (23,124) (23,124) ---------- ---------- ---------- Total worldwide operations 37,766 75,313 94,954 Other corporate items: Interest expense (6,159) (2,751) (7,681) Interest income 528 1,650 1,656 ---------- ---------- ---------- Income before income taxes $ 32,135 $ 74,212 $ 88,929 ========== ========== ==========
Sept. 30, Dec. 31, 2003 2002 ---------- ---------- Total assets: United States electrical construction and facilities services $ 376,473 $ 308,752 United States mechanical construction and facilities services 807,712 810,498 United States facilities services 276,653 292,218 ---------- ---------- Total United States operations 1,460,838 1,411,468 Canada construction and facilities services 100,553 77,727 United Kingdom construction and facilities services 178,573 191,563 Other international construction and facilities services 4,301 5,071 Corporate administration 94,370 72,662 ---------- ---------- Total worldwide operations $1,838,635 $1,758,491 ========== ==========
NOTE G Pro Forma Results of Operations The following tables present pro forma results of operations including all companies acquired during 2002. The results of operations presented assume the acquisitions had occurred at the beginning of fiscal 2002. The pro forma results of operations are not necessarily indicative of the results of operations had the acquisitions actually occurred at the beginning of fiscal 2002, nor is it necessarily indicative of future operating results (in thousands, except per share data): NOTE G Pro Forma Results of Operations - (Continued)
Adjustments to Arrive at Pro Forma Results of Operations ------------------------------------------------------------------------------------ For the three months ended September 30, 2002 ------------------------------------------------------------------- EMCOR Other as Reported CES (1) Acquisitions(1) Pro Forma ------------------------------------------------------------------- Revenues $1,052,285 $105,540 $1,821 $1,159,646 Operating income $ 35,858 $ 7,125 $ 22 $ 43,005 Interest income (expense), net $ (1,073) $ (1,697) $ 1 $ (2,769) Income before income taxes $ 34,785 $ 5,428 $ 23 $ 40,236 Net income $ 19,479 $ 3,040 $ 14 $ 22,533 Basic earnings per share $ 1.31 $ 0.20 $ 0.00 $ 1.51 Diluted earnings per share $ 1.26 $ 0.20 $ 0.00 $ 1.46
For the nine months ended September 30, 2002 ------------------------------------------------------------------------------------ Acquired EMCOR Comfort Other as Reported Companies(2) CES (3) Acquisitions(3) Pro Forma ------------------------------------------------------------------------------------ Revenues $2,848,983 $ 94,084 $302,112 $15,221 $3,260,400 Operating income $ 75,313 $ (40) $ 18,286 $ 1,395 $ 94,954 Interest income (expense), net $ (1,101) $ 162 $ (5,092) $ 6 $ (6,025) Income before income taxes $ 74,212 $ 122 $ 13,194 $ 1,401 $ 88,929 Net income $ 41,558 $ 68 $ 7,389 $ 784 $ 49,799 Basic earnings per share $ 2.80 $ 0.01 $ 0.50 $ 0.05 $ 3.36 Diluted earnings per share $ 2.69 $ 0.00 $ 0.48 $ 0.05 $ 3.22
The pro forma results of operations, for segment information, is included in Note F Segment Information. (1) Adjustments to arrive at pro forma results of operations for the three months ended September 30, 2002 represent results of operations from July 1, 2002 through September 30, 2002. (2) Adjustments to arrive at pro forma results of operations for the nine months ended September 30, 2002 represent results of operations from January 1, 2002 through the acquisition date of March 1, 2002. (3) Adjustments to arrive at pro forma results of operations for the nine months ended September 30, 2002 represent results of operations from January 1, 2002 through September 30, 2002. NOTE H Legal Proceedings See Part II - Other Information, Item 1 - Legal Proceedings. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Highlights Revenues of EMCOR Group, Inc. ("EMCOR") for the three months ended September 30, 2003 and 2002 were $1,157.6 million and $1,052.3 million, respectively. Net income for the three months ended September 30, 2003 was $6.5 million compared to net income of $19.5 million for the three months ended September 30, 2002. Diluted Earnings Per Share ("Diluted EPS") was $0.42 per share for the three months ended September 30, 2003 compared to Diluted EPS of $1.26 per share for the three months ended September 30, 2002. Revenues for the nine months ended September 30, 2003 and 2002 were $3,363.0 million and $2,849.0 million, respectively. Net income for the nine months ended September 30, 2003 and 2002 was $18.0 million and $41.6 million, respectively. Diluted EPS was $1.16 per share for the nine months ended September 30, 2003 compared to $2.69 per share for the same period in the prior year. On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. ("CSU") a group of companies (the "Acquired Comfort Companies"). On December 19, 2002, EMCOR acquired all the capital stock of Consolidated Engineering Services, Inc. ("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two additional companies during 2002. These acquisitions were accounted for by the purchase method, and the purchase prices have been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at their respective dates of acquisition. The CES purchase price allocation is preliminary and subject to finalization, which could lead to the recognition of additional intangible assets subject to amortization. Operating Segments EMCOR has the following reportable segments which provide services associated with the design, integration, installation, startup, operation and maintenance of various systems: United States electrical construction and facilities services (systems for generation and distribution of electrical power; lighting systems; low voltage systems such as fire alarm, security, communications and process control systems; and voice and data systems), United States mechanical construction and facilities services (systems for heating, ventilation, air conditioning, refrigeration and clean room ventilation systems; and plumbing, process and high-purity piping systems), United States facilities services, Canada construction and facilities services, United Kingdom construction and facilities services, and Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which primarily provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile operation and maintenance services, site-based operation and maintenance services, call center services, facility planning and consulting and energy management programs) which services are not related to customers' construction programs. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. "Other international construction and facilities services" represents EMCOR's operations outside of the United States, Canada, and the United Kingdom (primarily in South Africa and the Middle East during the periods presented). Results of Operations The results presented reflect certain reclassifications of prior period amounts to conform to current year presentation. Revenues The following table presents EMCOR's operating segment revenues and their respective percentage of total revenues (in thousands, except for percentages):
For the three months ended September 30, ---------------------------------------- % of % of 2003 Total 2002 Total ---- ----- ---- ----- Revenues: United States electrical construction and facilities services $ 354,341 31% $ 291,999 28% United States mechanical construction and facilities services 422,015 36% 454,123 43% United States facilities services 162,474 14% 70,740 7% ---------- ---------- Total United States operations ........................... 938,830 81% 816,862 78% Canada construction and facilities services .............. 83,222 7% 91,329 9% United Kingdom construction and facilities services ...... 135,536 12% 144,094 14% Other international construction and facilities services.. -- -- -- -- ---------- ---------- Total worldwide operations ............................... $1,157,588 100% $1,052,285 100% ========== ==========
For the nine months ended September 30, --------------------------------------- % of % of 2003 Total 2002 Total ---- ----- ---- ----- Revenues: United States electrical construction and facilities services $ 930,250 28% $ 864,879 30% United States mechanical construction and facilities services 1,264,606 38% 1,203,663 42% United States facilities services ........................ 495,663 15% 174,993 6% ---------- ---------- Total United States operations ........................... 2,690,519 80% 2,243,535 79% Canada construction and facilities services .............. 267,548 8% 229,980 8% United Kingdom construction and facilities services ...... 404,929 12% 375,468 13% Other international construction and facilities services.. -- -- -- -- ---------- ---------- Total worldwide operations ............................... $3,362,996 100% $2,848,983 100% ========== ==========
EMCOR's revenues increased $105.3 million for the three months ended September 30, 2003 compared to 2002 third quarter revenues, of which $106.6 million in revenues was attributable to companies acquired in 2002. Revenues increased $514.0 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, of which $421.6 million in revenues was attributable to companies acquired in 2002. Revenues from EMCOR companies (excluding those acquired in 2002) decreased by $1.3 million for the three month period ended September 30, 2003 compared to the same period in the prior year, principally due to continued recessionary economic conditions resulting in a reduction in new commercial and industrial construction projects and discretionary spending, typically associated with projects of less than six months duration related to improvements, enhancements and repairs of facilities, in the commercial office and industrial markets. However, such revenues were positively affected by an increase in the number of longer-term transportation infrastructure, power generation and healthcare construction projects and an increase in the number of site-based facilities services operation and maintenance contracts. In addition, these positive factors combined to provide a revenues increase (after excluding revenues from companies acquired in 2002) of $92.4 million for the nine months ended September 30, 2003 compared to the same period in the prior year. Revenues of United States electrical construction and facilities services business units for the three months ended September 30, 2003 were $354.3 million compared to $292.0 million for the three months ended September 30, 2002. Revenues of this segment for the nine months ended September 30, 2003 were $930.3 million compared to $864.9 million in the same period in 2002. The revenues for the three and nine month periods ended September 30, 2003, when compared to the same periods in 2002, reflect an increase in revenues from transportation infrastructure programs, power generation and healthcare projects, offset by a reduction in discretionary spending in the commercial office and industrial markets attributable to continued recessionary economic conditions. Revenues of United States mechanical construction and facilities services business units for the three months ended September 30, 2003 were $422.0 million compared to $454.1 million for the three months ended September 30, 2002. Revenues of this segment for the nine months ended September 30, 2003 were $1,264.6 million compared to $1,203.7 million in the same period in the prior year. The decrease in revenues for the three months ended September 30, 2003 compared to the same period in the prior year was due to a reduction in discretionary spending in the commercial office and industrial markets attributable to continued recessionary economic conditions, increased competition, as well as a reduction in demand for services as a result of cooler than normal weather conditions in parts of the United States. The increase in revenues of $60.9 million for the nine month period was primarily attributable to revenues from companies acquired in 2002. United States facilities services revenues for the three months ended September 30, 2003 were $162.5 million compared to $70.7 million for the same three months in 2002. Revenues for the nine months ended September 30, 2003 were $495.7 million compared to $175.0 million in the same period in 2002. The revenues increases of $91.8 million and $320.7 million for the three and nine month periods, respectively, were primarily attributable to revenues of $ 97.6 million and $309.9 million, respectively, from companies acquired in 2002; the balance of the increase in revenues for the periods ended September 30, 2003 was attributable to increased site-based facilities operation and maintenance services performed by EMCOR's other subsidiaries. However, the increase in revenues was partially offset by a reduction in demand for mobile services, which services had been adversely affected by cooler than normal weather conditions in parts of the United States, curtailment of discretionary spending due to the economic recession, and increased competition. Revenues of Canada construction and facilities services for the three months ended September 30, 2003 were $83.2 million compared to $91.3 million for the three months ended September 30, 2002. Revenues for the nine months ended September 30, 2003 were $267.5 million compared to $230.0 million in the same period in the prior year. The decrease in revenues for the three month period was primarily attributable to a temporary scale-back in work on certain long-term power generation construction projects due to project scheduling, partially offset by increased work on industrial outage construction projects. The increase in revenues for the nine month period was primarily attributable to continuing work on long-term power generation and industrial outage construction projects. Revenues of United Kingdom construction and facilities services business units for the three months ended September 30, 2003 were $135.5 million compared to $144.1 million for the three months ended September 30, 2002. Revenues for the nine months ended September 30, 2003 were $404.9 million compared to $375.5 million in the same period in the prior year. The decrease in revenues for the three month period was due to a managed change in bidding criteria for construction. The increase in revenues for the nine month period was principally attributable to an increase in contracts in the facilities services and transportation infrastructure construction markets. Other international construction and facilities services activities consist of EMCOR's operations primarily in the Middle East and South Africa. All of the current projects in these markets are being performed by joint ventures in which EMCOR has less than majority ownership. Accordingly, the results of these joint venture operations are accounted for under the equity method of accounting, and revenues attributable to such joint ventures are not reflected as revenues in the consolidated financial statements. This segment consists of operations that represented certain historical strategic opportunities which are not currently significant to EMCOR's operations. EMCOR continues to selectively pursue new business in the Middle East markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors. Cost of sales and Gross profit The following table presents EMCOR's cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages): For the three months ended September 30, -------------------------- 2003 2002 ---- ---- Cost of sales $1,039,382 $ 923,052 Gross profit $ 118,206 $ 129,233 Gross profit, as a percentage of revenues 10.2% 12.3% For the nine months ended September 30, -------------------------- 2003 2002 ---- ---- Cost of sales $3,004,746 $2,510,148 Gross profit $ 358,250 $ 338,835 Gross profit, as a percentage of revenues 10.7% 11.9% Gross profit (revenues less cost of sales) for the three months ended September 30, 2003 decreased $11.0 million to $118.2 million, compared to $129.2 million of gross profit for the three months ended September 30, 2002. As a percentage of revenues, gross profit for the three months ended September 30, 2003 and 2002, respectively, decreased to 10.2% from 12.3%. Gross profit of $358.3 million for the nine months ended September 30, 2003 was $19.4 million higher than the $338.8 million gross profit in the same period last year. As a percentage of revenues, gross profit decreased to 10.7% from 11.9% for the nine months ended September 30, 2003 and 2002, respectively. The decrease in gross profit for the three month period compared to the comparable prior year period was due to an increase in less profitable public sector construction work and a reduction in more profitable private sector, discretionary and small project work in the United States due to the economic recession, unfavorable contract performance on certain construction projects, increased competition, and market conditions attributable to the recession not favorable to construction project closeouts. (The foregoing factors are hereafter referred to collectively as "Unfavorable Market Conditions.") The increase in gross profit for the nine month period ended September 30, 2003 compared to the comparable prior year period was attributable to acquisitions and increased facilities services work which is generally performed at gross profit, as a percentage of revenues, higher than construction work; this gross profit was partially offset by the same factors that adversely affected the three month period gross profit ended September 30, 2003. The decrease in gross profit, as a percentage of revenues, for both the three and nine months ended September 30, 2003 was attributable to Unfavorable Market Conditions. Companies acquired in 2002 contributed $22.1 million and $76.2 million of gross profit in the three and nine month periods ended September 30, 2003, respectively. 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, -------------------------- 2003 2002 ---- ---- Selling, general and administrative expenses $104,671 $ 93,375 Selling, general and administrative expenses, as a percentage of revenues 9.0% 8.9% For the nine months ended September 30 ------------------------- 2003 2002 ---- ---- Selling, general and administrative expenses $320,484 $263,522 Selling, general and administrative expenses, as a percentage of revenues 9.5% 9.2% Selling, general and administrative expenses for the three months ended September 30, 2003 increased $11.3 million to $104.7 million compared to $93.4 million for the three months ended September 30, 2002. Selling, general and administrative expenses as a percentage of revenues were 9.0% for the three months ended September 30, 2003, compared to 8.9% for the three months ended September 30, 2002. Selling, general and administrative expenses for the nine months ended September 30, 2003 were $320.5 million, an increase of $57.0 million compared to $263.5 million for the nine months ended September 30, 2002. Selling, general and administrative expenses as a percentage of revenues were 9.5% for the nine months ended September 30, 2003, compared to 9.2% for the nine months ended September 30, 2002. For the three and nine month periods ended September 30, 2003, respectively, selling, general and administrative expenses included amortization expense of $0.5 million and $2.3 million attributable to identifiable intangible assets associated with acquisitions. Selling, general and administrative expenses (excluding companies acquired in 2002) were approximately $87.4 million (8.3% of revenues) and $254.3 million (8.6% of revenues) for the three and nine month periods ended September 30, 2003, respectively, compared to $93.4 million (8.9% of revenues) and $263.5 million (9.2% of revenues) for the three and nine months ended September 30, 2002, which decrease in selling, general and administrative expenses was attributable to a managed reduction of both variable and fixed expenses across EMCOR as a result of changes in its business activities. 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 2003 Revenues 2002 Revenues ---- -------- ---- -------- Operating income (loss): United States electrical construction and facilities services $14,899 4.2% $21,855 7.5% United States mechanical construction and facilities services 3,688 0.9% 15,751 3.5% United States facilities services 5,589 3.4% 2,897 4.1% ------- ------- Total United States operations 24,176 2.6% 40,503 5.0% Canada construction and facilities services 1,350 1.6% 1,276 1.4% United Kingdom construction and facilities services (3,174) 435 0.3% Other international construction and facilities services 131 142 Corporate administration (8,948) (6,498) ------- ------- Total worldwide operations 13,535 1.2% 35,858 3.4% Other corporate items: Interest expense (2,131) (1,411) Interest income 144 338 ------- ------- Income before income taxes $11,548 $34,785 ======= =======
For the nine months ended September 30, ------------------------------------------------- % of % of Segment Segment 2003 Revenues 2002 Revenues ---- -------- ---- -------- Operating income (loss): United States electrical construction and facilities services $44,017 4.7% $52,814 6.1% United States mechanical construction and facilities services 14,267 1.1% 41,563 3.5% United States facilities services 12,328 2.5% 2,377 1.4% ------- ------- Total United States operations 70,612 2.6% 96,754 4.3% Canada construction and facilities services 3,116 1.2% 1,510 0.7% United Kingdom construction and facilities services (10,514) 88 Other international construction and facilities services 19 85 Corporate administration (25,467) (23,124) ------- ------- Total worldwide operations 37,766 1.1% 75,313 2.6% Other corporate items: Interest expense (6,159) (2,751) Interest income 528 1,650 ------- ------- Income before income taxes $32,135 $74,212 ======= =======
EMCOR had operating income of $13.5 million for the three months ended September 30, 2003 compared with operating income of $35.9 million for the three months ended September 30, 2002. Operating income was $37.8 million and $75.3 million for the nine months ended September 30, 2003 and 2002, respectively. The decrease of $22.4 million and $37.5 million in operating income for the three and nine month periods ended September 30, 2003 as compared to the same periods in 2002 was due to Unfavorable Market Conditions, and a reduction in demand for services as a result of cooler than normal weather conditions in parts of the United States. The operating income decreases were partially offset by operating income attributable to 2002 acquisitions of $4.8 million and $10.0 million for the three and nine month periods ended September 30, 2003, respectively, and operating income attributable to increased transportation infrastructure, healthcare and institutional projects and site-based facilities management contracts. United States electrical construction and facilities services operating income for the three months ended September 30, 2003 was $14.9 million or 4.2% of revenues, compared to $21.9 million or 7.5% of revenues for the three months ended September 30, 2002. Operating income for the nine months ended September 30, 2003 was $44.0 million, or 4.7% of revenues, compared to $52.8 million, or 6.1% of revenues, for the nine months ended September 30, 2002. The operating income decreases of $7.0 million and $8.8 million for the three month and nine month periods ended September 30, 2003, respectively, compared to the comparable periods in the prior year were due to Unfavorable Market Conditions. These operating income decreases were partially offset by significant increased contributions from transportation infrastructure and power generation projects in the Western United States. United States mechanical construction and facilities services operating income for the three months ended September 30, 2003 was $3.7 million or 0.9% of revenues, compared to $15.8 million or 3.5% of revenues for the three months ended September 30, 2002. Operating income for the nine months ended September 30, 2003 was $14.3 million, or 1.1% of revenues, compared to $41.6 million, or 3.5% of revenues, for the nine months ended September 30, 2002. The decrease in operating income for both the three and nine month periods ended September 30, 2003 compared to the comparable prior year periods was attributable to Unfavorable Market Conditions. United States facilities services operating income was $5.6 million for the three months ended September 30, 2003 compared to operating income of $2.9 million for the three months ended September 30, 2002. For the nine months ended September 30, 2003 and 2002, operating income was $12.3 million and $2.4 million, respectively. The increase in operating income for the 2003 three and nine month periods compared to the same periods in 2002 was attributable to operating income of $4.5 million and $10.6 million, respectively, earned by companies acquired in 2002 and to increased site-based facilities management contracts of other EMCOR subsidiaries; however, this increase was partially offset by a decrease in revenues derived from mobile maintenance services as a result of the cooler than normal weather conditions in parts of the United States and a decrease in discretionary spending related to the economic recession, as well as certain costs related to the integration of CES primarily incurred during the first six months of the year. Canada construction and facilities services operating income was $1.4 million for the three months ended September 30, 2003, compared to $1.3 million for the three months ended September 30, 2002. For the nine months ended September 30, 2003, operating income was $3.1 million compared to operating income of $1.5 million for the same period in the prior year. The increase in operating income for both the three and nine month periods was primarily due to operating income earned on continuing long-term power generation construction projects and industrial outage work. United Kingdom construction and facilities services operating losses for the three months ended September 30, 2003 were $3.2 million compared to operating income of $0.4 million for the same period in the prior year. For the nine months ended September 30, 2003, operating losses were $10.5 million compared to operating income of $0.09 million for the same period in the prior year. The operating losses for the three and nine months ended September 30, 2003 was attributable to unfavorable performance of, and settlements and close-outs on, certain projects, unfavorable market conditions and costs associated with reorganizing operations, which losses were reduced by operating income earned on other projects in the construction and facilities services markets. Other international construction and facilities services operating income was $0.1 million for the three months ended September 30, 2003 compared to operating income of $0.1 million for three months ended September 30, 2002. For the nine months ended September 30, 2003, operating income was $0.02 million compared to operating income of $0.09 million for the same period in the prior year. This segment consists of operations that represented certain historical strategic opportunities which are not currently significant to EMCOR's operations. EMCOR continues to selectively pursue new business in the Middle East; however, the availability of opportunities has been significantly reduced as a result of local economic factors. General corporate expense for the three months ended September 30, 2003 was $8.9 million compared to $6.5 million for the three months ended September 30, 2002. For the nine months ended September 30, 2003, general corporate expense was $25.5 million compared to $23.1 million for the same period in the prior year. The increase in general corporate expenses was primarily due to increased operations support activities related to the management and integration of more than 30 companies acquired during 2002, offset partially by cost reductions attributable to reduced variable expenditures. Included as a component of general corporate expense during 2002 were the effects of market value fluctuations of shares issuable in respect of restricted stock units under the Executive Stock Bonus Plan ("ESBP"), which plan was subject to variable plan accounting under its then current terms. For the three months ended September 30, 2002, approximately $0.8 million of income was recorded related to the ESBP, while for the nine months ended September 30, 2002 approximately $0.4 million of expense had been recorded. As of October 2002, the terms of the ESBP were changed resulting in fixed plan accounting for both existing and new grants in respect of periods subsequent thereto. Interest expense for the three months ended September 30, 2003 and 2002 was $2.1 million and $1.4 million, respectively. Interest expense for the nine months ended September 30, 2003 and 2002 was $6.2 million and $2.8 million, respectively. The increase in interest expense for both the three and nine month periods was primarily due to $156.0 million of borrowings under the working capital credit line for the acquisition of CES on December 19, 2002 and to increased working capital needs related to a shift to long-term public sector construction projects, which typically require greater working capital than private sector projects. Interest income decreased $0.2 million and $1.1 million for the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002 due to less cash on hand cash used to pay a portion of the CES acquisition price in December 2002 and cash used in operating activities. The income tax provision decreased to $5.1 million for the three months ended September 30, 2003 compared to $15.3 million for the same period in 2002. For the nine months ended September 30, 2003, the income tax provision was $14.1 million versus $32.7 million for the nine months ended September 30, 2002. The decreases in this provision compared to the prior periods were primarily due to reduced income before taxes. The effective income tax rate was approximately 44% for both the three and nine months ended September 30, 2003 and 2002. EMCOR's contract backlog was $3.1 billion at September 30, 2003 and $2.9 billion at December 31, 2002. The $0.2 billion increase in backlog was primarily due to an increase in backlog for the United States and the United Kingdom. EMCOR's contract backlog at September 30, 2003 was $3.1 billion compared to $2.8 billion at September 30, 2002. The increase was primarily attributable to backlog of $0.2 billion for CES subsidiaries acquired in 2002 and net growth in backlog of $0.1 billion from contracts awarded to other subsidiaries in the United States, the United Kingdom and Canada. Liquidity and Capital Resources The following table presents EMCOR's net cash (used in) provided by operating activities, investing activities and financing activities (in thousands): For the nine months ended September 30, ------------------------- 2003 2002 ---- ---- Net cash (used in) provided by operating activities $(53,186) $ 90,113 Net cash used in investing activities $(20,360) $(191,376) Net cash provided by financing activities $ 62,605 $ 350 EMCOR's consolidated cash balance decreased by approximately $10.9 million from $93.1 million at December 31, 2002 to $82.2 million at September 30, 2003. Net cash used in operating activities of $53.2 million for the nine months ended September 30, 2003 reflected a $143.3 million decrease from the $90.1 million of net cash provided by operating activities in the same period last year. The increase in net cash used in operating activities was primarily attributable to a net increase in working capital requirements related to an increase in accounts receivable and a decrease in accounts payable and contracts in progress. Net cash used in investing activities of $20.4 million decreased by $171.0 million compared to $191.4 million in the same period last year. The decrease in cash used in investing activities was due primarily to payments of $169.8 million for the acquisition of the Acquired Comfort Companies in the first half of 2002. Net cash provided by financing activities of $62.6 million represented a $62.3 million increase from the net cash provided by financing activities of $0.4 million for the nine months ended September 30, 2002. The increase in net cash provided by financing activities was primarily attributable to an increase in borrowings under working capital credit lines, partially offset by a reduction in net repayments of long-term debt. The following is a summary of EMCOR's material contractual obligations and other commercial commitments (in millions):
Payments Due by Period ---------------------- Less Contractual than 1-3 4-5 After Obligations Total 1 year years years 5 years -------------------------------- ----- ------ ----- ----- ------- Other long-term debt $ 0.6 $ 0.2 $ 0.2 $ 0.2 $ -- Capital lease obligations 0.5 0.1 0.2 0.2 -- Operating leases 128.6 36.5 50.7 24.5 16.9 Open purchase obligations (1) 638.7 431.1 207.0 0.6 -- Other long-term obligations (2) 94.4 -- 94.4 -- -- ------ ------ ------ ----- ----- Total Contractual Obligations $862.8 $467.9 $352.5 $25.5 $16.9 ====== ====== ====== ===== =====
Amount of Commitment Expiration by Period ----------------------------------------- Total Less Other Commercial Amounts than 1-3 4-5 After Commitments Committed 1 year years years 5 years ----------------------------- --------- ------ ----- ----- ------- Revolving credit facility (3) $195.0 $ -- $ -- $195.0 $ -- Letters of credit 41.5 5.8 4.3 5.3 26.1 Guarantees 25.0 -- -- -- 25.0 ------ ------ ------ ------ ----- Total Commercial Commitments $261.5 $ 5.8 $ 4.3 $200.3 $51.1 ====== ====== ====== ====== =====
(1) Represent open purchase orders for material and subcontracting costs related to the Company's construction and service contracts. These purchase orders are not reflected in EMCOR's consolidated balance sheet and should not impact future cash flows as amounts will be recovered through customer billings. (2) Represent primarily insurance related liabilities, the timing for which payments beyond one year is not practical to estimate. (3) EMCOR classifies these borrowings as short-term on its consolidated balance sheet because of EMCOR's intent and ability to repay the amounts on a short-term basis. The revolving credit facility expires in September 2007. As of September 30, 2003, EMCOR's total borrowing capacity under its revolving credit facility was $350.0 million. EMCOR had approximately $41.5 million of letters of credit outstanding under the revolving credit facility as of that date. The amount of borrowings outstanding under the revolving credit facility as of September 30, 2003 and December 31, 2002 was $195.0 million and $112.0 million, respectively. A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a 60% interest. The venture designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in air conditioning of commercial properties. These guarantees are not expected to have a material effect on EMCOR's financial position or results of operations. Each of the venturers is jointly and severally liable, in the event of default, for the venture's $25.0 million borrowing due December 2031. During September 2002, each venture partner contributed equity to the venture, of which EMCOR's contribution was $14.0 million. There are $0.5 million in current maturities of EMCOR's long-term debt and capital lease obligations outstanding as of September 30, 2003. EMCOR is contingently liable to sureties in respect of performance and payment bonds issued by sureties, usually at the request of customers in connection with construction projects which secure EMCOR payment and performance obligations under contracts for such projects. In addition, at the request of labor unions representing certain EMCOR employees, bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. As of September 30, 2003 sureties had issued bonds for the account of EMCOR in the aggregate amount of approximately $2.0 billion. The bonds are issued by EMCOR's sureties in return for a premium which can vary depending on the size and type of the bonds. The largest individual bond is approximately $170.0 million. EMCOR has agreed to indemnify the sureties for any payments made by them in respect of bonds issued on EMCOR's behalf. EMCOR does not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein. The primary source of liquidity for EMCOR has been, and is expected to continue to be, cash generated by operating activities. EMCOR also maintains a revolving credit facility that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient, or to enable EMCOR to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash on short notice or for any other reason. EMCOR may also increase liquidity through an equity offering or other debt instruments. Short-term changes in macroeconomic trends may have an affect, positively or negatively, on liquidity. In addition to managing borrowings, EMCOR's focus on the facilities services market is intended to provide an additional buffer against economic downturns as the facilities services market is characterized by annual and multi-year contracts that provide a more predictable stream of cash flow than the construction market. The acquisition in December 2002 of CES, which is primarily focused on the facilities services market, is part of EMCOR's plan to grow its facilities services business. Short-term liquidity is also impacted by the type and length of construction contracts in place. During economic downturns, such as the 2001 through 2003 period, construction contracts trend away from short-cycle contracts toward larger long-term infrastructure and public sector contracts. Performance of long duration contracts typically require working capital until initial billing milestones are achieved. While EMCOR strives to maintain a net over-billed position with its customers, there can be no assurance that a net over-billed position can be maintained. EMCOR's net over-billings, defined as the balance sheet accounts billings in excess of costs and estimated earnings on uncompleted contracts less cost and estimated earnings in excess of billings on uncompleted contracts, was $99.7 million and $127.3 million as of September 30, 2003 and December 31, 2002, respectively. Long-term liquidity requirements can be expected to be met through cash generated from operating activities, the revolving credit facility, and the sale of various secured or unsecured debt and/or equity interests in the public and private markets. Based upon EMCOR's current credit ratings and financial position, EMCOR can reasonably expect to be able to issue long-term debt instruments and/or equity. Over the long term, EMCOR's primary revenue risk factor continues to be the level of demand for non-residential construction services, which is in turn influenced by macroeconomic trends including interest rates and governmental economic policy. In order to provide protection against negative demand cycles in private sector construction services, EMCOR has increased its participation, and its backlog of contracts, in the public sector and in the facilities services market. EMCOR believes that current cash balances and borrowing capacity available under its existing line of credit or other forms of financing available through debt or equity offerings, combined with cash expected to be generated from operations, will be sufficient to provide short-term and foreseeable long-term liquidity and meet expected capital expenditure requirements. However, EMCOR is a party to lawsuits and other proceedings in which other parties seek to recover from it amounts ranging from a few thousand dollars to over $60.0 million. If EMCOR was required to pay damages in one or more such proceedings, such payments could have a material adverse effect on its financial position, results of operations and/or cash flows. Certain Insurance Matters As of September 30, 2003 and December 31, 2002, EMCOR utilized approximately $33.2 million and $24.5 million, respectively, of letters of credit issued pursuant to its revolving credit facility as collateral for its insurance obligations. Application of Critical Accounting Policies The condensed consolidated financial statements are based on the application of significant accounting policies, which require management to make significant estimates and assumptions. EMCOR's significant accounting policies are described in Note B - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of its annual report on Form 10-K for the year ended December 31, 2002. There was no initial adoption of any accounting policies during the three and nine months ended September 30, 2003 other than those listed under "New Accounting Pronouncements" below. EMCOR believes that some of the more critical judgment areas in the application of accounting policies that affect its financial condition and results of operations are estimates and judgments pertaining to (a) revenue recognition from (i) long term construction contracts for which the percentage of completion method of accounting is used and (ii) services contracts, (b) collectibility or valuation of accounts receivable, (c) insurance liabilities, (d) income taxes and (e) intangible assets. Revenue Recognition for Long-term Construction Contracts and Services Contracts EMCOR believes its most critical accounting policy is revenue recognition from long-term construction contracts for which EMCOR uses the percentage-of-completion method of accounting. Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with accounting principles generally accepted in the United States, Statement of Position No. 81-1, "Accounting for Performance of Construction - Type and Certain Production - Type Contracts" and, accordingly, the method used for revenue recognition within EMCOR's industry. Percentage-of-completion for each contract is measured principally by the ratio of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of EMCOR's electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts in EMCOR's consolidated balance sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the consolidated balance sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Costs and estimated earnings in excess of billings on uncompleted contracts also include amounts 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 and take into account factors that may affect the ability to bill and collect amounts billed. Due to uncertainties inherent within estimates employed to apply percentage-of-completion accounting, estimates may 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. In addition to revenue recognition for long-term construction contracts, EMCOR recognizes revenues from services contracts as these services are performed in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). There are two basic types of services: (1) those provided pursuant to fixed price services contracts which are signed in advance for operation and maintenance services work over periods typically ranging from one to three years (for which EMCOR employees may be assigned to the customer's site full time) and (2) services for similar operation and maintenance services work performed on an as needed basis. Fixed price services contracts are generally performed evenly over the contract period, and accordingly, revenue is recognized on a pro-rata basis over the term of the contract. Revenues derived from other services are recognized when the services are rendered in accordance with SAB 101. Expenses related to service contracts are recognized as services are provided. Accounts Receivable EMCOR is required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the realization of receivables, which assessment factors include the creditworthiness of the customer, EMCOR's prior collection history with the customer and related aging of past due balances. At September 30, 2003 and December 31, 2002, accounts receivable of $1,012.9 million and $965.0 million, respectively, included allowances of $41.9 million and $40.6 million, respectively. Specific accounts receivable are evaluated when EMCOR believes a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, credit ratings or bankruptcy. The allowance requirements are based on the best facts available and are re-evaluated and adjusted as additional information is received. Insurance Liabilities EMCOR has deductibles for certain workers' compensation, auto liability, general liability and property claims, has self-insured retentions for certain other casualty claims, and is self-insured for employee-related health care claims. Losses are recorded based upon estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of these obligations. EMCOR believes its recorded liabilities for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences and effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and recorded in the period that the experience becomes known. Income Taxes EMCOR has net deferred tax assets primarily resulting from deductible temporary differences, which will reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of September 30, 2003 and December 31, 2002, the total valuation allowance on net deferred tax assets was approximately $2.1 million. Intangible Assets As of September 30, 2003, EMCOR had goodwill and net identifiable intangible assets of $293.5 million and $11.6 million, respectively, in connection with the acquisition of certain companies. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. Certain of these forecasts reflect assumptions regarding the ability to successfully integrate acquired companies. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires identifiable intangible assets other than goodwill to be amortized over their useful lives unless their lives are determined to be indefinite. Changes in strategy and/or market conditions may result in adjustments to identifiable intangible asset balances. As of September 30, 2003, no indicators of impairment of EMCOR's goodwill or identifiable intangible assets existed in accordance with the provisions of SFAS 142. New Accounting Pronouncements In November 2002, the Financial Accounting Standards Board (the "FASB") issued Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the "Interpretation"). FIN 45 clarifies the requirements of FASB Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 may require that, upon issuance of a guarantee, the guarantor recognize a liability for the fair value of the obligation it assumes under the guarantee. The disclosure provisions of the Interpretations are effective for financial statements of interim or annual periods that end after December 15, 2002. The Interpretation's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The guarantor's previous accounting for guarantees that were issued before the date of FIN 45's initial application may not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation. EMCOR has determined that the adoption of FIN 45 only impacted its disclosures and the accounting for guarantees was not impacted as of September 30, 2003. In January 2003, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 was effective for fiscal years beginning after December 15, 2002 and was adopted by EMCOR for all periods presented. EMCOR did not change to the fair value based method of accounting for stock-based employee compensation, and accordingly, adoption of SFAS 148 has impacted only disclosures, not the financial results, of EMCOR. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. EMCOR is currently evaluating the effect the adoption of the provisions of FIN 46 will have on EMCOR's consolidated financial condition or results of operations. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, (b) in connection with other FASB projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. EMCOR has determined that the provisions of SFAS 149 will have no affect on EMCOR's consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. EMCOR does not have any financial instruments that meet the provisions of SFAS 150; therefore, EMCOR has determined that the provisions of SFAS 150 will have no effect on EMCOR's consolidated financial position, results of operations or cash flows. 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 markets, increased competition, pricing pressures, risks associated with foreign operations and other factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EMCOR has not used derivative financial instruments for any purpose during the three and nine months ended September 30, 2003 and 2002, including trading or speculating on changes in interest rates or commodity prices of materials used in its business. EMCOR is exposed to market risk for changes in interest rates for borrowings under its revolving credit facility. Borrowings under the credit facility bear interest at variable rates, and the fair value of this borrowing is not significantly affected by changes in market interest rates. As of September 30, 2003, there were $195.0 million of borrowings outstanding under the revolving credit facility, and these borrowings bear interest at (1) a rate which is the prime commercial lending rate announced by Harris Trust and Savings Bank from time to time (4.00% at September 30, 2003) plus 0% to 1.0% based on certain financial tests or (2) at a LIBOR rate (1.15% at September 30, 2003) plus 1.5% to 2.5% based on certain financial tests. Based on borrowings of $195.0 million, if interest rates were to increase by 1.0%, the net of tax interest expense would increase $1.2 million in the next twelve months. Conversely, if interest rates were to decrease by 1.0%, interest expense would decrease by $1.2 million in the next 12 months. The revolving credit facility expires in September 2007. There is no guarantee that EMCOR will be able to renew the facility at its expiration. EMCOR is also exposed to market risk and the market's potential related impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if customers' ability to pay these obligations is negatively impacted by economic conditions. EMCOR continually monitors the creditworthiness of its customers and maintains on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, EMCOR believes it takes appropriate action to manage market and other risks, but there is no assurance that it will be able to reasonably identify all risks with respect to collectibility of these assets. See also the previous discussion of Accounts Receivable under the heading, "Application of Critical Accounting Policies" in the Management's Discussion and Analysis of Results of Operations and Financial Condition. Amounts invested in EMCOR's foreign operations are translated into U. S. dollars at the exchange rates in effect at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), a component of stockholders' equity, in its condensed consolidated balance sheets. EMCOR believes the exposure to the effects that fluctuating foreign currencies may have on its consolidated results of operations is limited because the foreign operations primarily invoice customers and collect obligations in their respective local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in the same local currencies. ITEM 4. CONTROLS AND PROCEDURES Based on an evaluation of EMCOR's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-Q as required by paragraph (b) of Rules 13a-15 or 15d-15 promulgated under the Securities Exchange Act of 1934, the Chairman of the Board and Chief Executive Officer of EMCOR, Frank T. MacInnis, and the Chief Financial Officer of EMCOR, Leicle E. Chesser, have concluded that EMCOR's disclosure controls and procedures are effective. PART II - OTHER INFORMATION Item 1. Legal Proceedings Except as set forth below, there have been no new developments during the quarter ended September 30, 2003 regarding legal proceedings reported in EMCOR's Annual Report on Form 10-K for the year ended December 31, 2002. On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim in arbitration against EMCOR's United Kingdom subsidiary, Drake & Scull Engineering Limited ("D&S"), in connection with a subcontract D&S entered into with Mowlem with respect to a project for the United Kingdom Ministry of Defence at Abbey Wood in Bristol, U.K. Mowlem seeks damages arising out of alleged defects in the D&S design and construction of the mechanical and electrical engineering services for the project. Mowlem's claim is for (pound)39.5 million (approximately $60.9 million), which includes costs allegedly incurred by Mowlem in connection with rectification of the alleged defects, overhead, legal fees, delay and disruption costs related to such defects, and interest on such amounts. The claim also includes amounts allegedly attributable to D&S in connection with a settlement agreement Mowlem entered into with the Ministry of Defence. D&S believes it has good and meritorious defenses to the Mowlem claim. D&S has denied liability and has asserted a counterclaim for approximately (pound)11.6 million (approximately $18.3 million) for certain design, labor and delay and disruption costs incurred by D&S in connection with its subcontract with Mowlem. 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. Section 1 & 2, the Clayton Act, 15 U.S.C. Section 15 & 26, The Labor Management Relations Act, 29 U.S.C. Section 187 (a), and New York state law. Plaintiff, Cool Wind Ventilation Corp., alleged 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 alleged that the defendant 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 alleged that it and others were prevented from competing in the most lucrative area of the sheet metal ductwork industry. Heritage answered the amended complaint, denying all claims of wrongdoing. In July 2003 the matter was settled and the action was dismissed with prejudice. The settlement did not require Heritage to pay any damages or desist from engaging in any of the conduct alleged in the amended complaint. Item 6 - Exhibits and Reports on Form 8-K (a)Exhibits Incorporated by Reference to, Exhibit No. Description or Page Number ----------- ----------- ----------------------------- 3(a-1) Restated Certificate of Exhibit 3(a-1) to Form 10-K Incorporation of EMCOR filed December 15, 1994 3(a-2) Amendment dated November 28, 1995 Exhibit 3(a-2) to EMCOR's to the Restated Certificate of Annual Report on Form 10-K for Incorporation of EMCOR the year ended December 31, 1995 3(a-3) Amendment dated February 12, 1998 Exhibit 3(a-3)to EMCOR's to the restated Certificate of Annual Report on Form 10-K for Incorporation the year ended December 31, 1997 3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 1998 4.1(a) U.S. $275,000,000 Credit Agreement Exhibit 4.1(a) to EMCOR's Report by and among EMCOR Group, Inc. and on Form 8-K dated October 4, certain of its Subsidiaries and 2002 Harris Trust and Savings Bank individually and as Agent ("Harris") and the Lenders which are or become parties thereto ated as of September 26, 2002 (the "Credit Agreement") 4.1(b) Amendment and Waiver letter dated Exhibit 4.1(b) to EMCOR's December 10, 2002 to the Credit Annual Report on Form 10-K for Agreement the year ended December 31, 2002 4.1(c) First Amendment to Credit Agreement Exhibit 4.1(c) to EMCOR's dated as of June 2003 Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 4.1(d) Second Amendment to Credit Exhibit 4.1(d) to EMCOR's Agreement dated as of June 2003 Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 ITEM 6 - Exhibits and Reports on Form 8-K - (Continued) Incorporated by Reference to, Exhibit No. Description or Page Number ----------- ----------- ----------------------------- 4.1(e) Commitment Amount Increase Request Exhibit 4.1(e) to EMCOR's dated June 26, 2003 among Harris, Quarterly Report on Form 10-Q National City Bank and EMCOR for the quarter ended June 30, 2003 4.1(f) Commitment Amount Increase Request Exhibit 4.1(f) to EMCOR's dated June 26, 2003 among Harris, Quarterly Report on Form 10-Q Webster Bank and EMCOR for the quarter ended June 30, 2003 4.1(g) Commitment Amount Increase Request Exhibit 4.1(g) to EMCOR's dated June 26, 2003 among Harris, Quarterly Report on Form 10-Q Union Bank of California, N.A. and for the quarter ended June 30, EMCOR 2003 4.1(h) Commitment Amount Increase Request Exhibit 4.1(h) to EMCOR's dated June 26, 2003 among Harris, Quarterly Report on Form 10-Q Sovereign Bank and EMCOR for the quarter ended June 30, 2003 4.1(i) Commitment Amount Increase Request Exhibit 4.1(i) to EMCOR's dated July 9, 2003 among Harris, Quarterly Report on Form 10-Q Bank Hapoalim B.M. and EMCOR for the quarter ended June 30, 2003 4.1(j) Commitment Amount Increase Request Exhibit 4.1(j) to EMCOR's dated July 9, 2003 among Harris, Quarterly Report on Form 10-Q The Governor and Company of Bank for the quarter ended June 30, of Scotland and EMCOR 2003 4.1(k) Commitment Amount Increase Request Exhibit 4.1(k) to EMCOR's dated July 9, 2003 among Harris, Quarterly Report on Form 10-Q U.S Bank, National Association and for the quarter ended June 30, EMCOR 2003 10(a) 2003 Non Employee Directors' Stock Exhibit A to EMCOR's Proxy Option Plan Statement for its Annual Meeting of Stockholders held June 12, 2003(the "2003 Proxy Statement") 10(b) 2003 Management Stock Incentive Exhibit B to the 2003 Proxy Plan Statement 10(c) Key Executive Incentive Bonus Plan Exhibit C to the 2003 Proxy Statement 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, 2003 and 2002 Item 6 - Exhibits and Reports on Form 8-K - (Continued) Incorporated by Reference to, Exhibit No. Description or Page Number ----------- ----------- ----------------------------- 31.1 Additional Exhibit - Page Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer 31.2 Additional Exhibit - Page Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer 32.1 Additional Exhibit Page Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer 32.2 Additional Exhibit Page Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (b) The following reports on Form 8-K were filed during the quarter ended September 30, 2003: (1) Current Report on Form 8-K, dated as of July 24, 2003 - Press release dated July 24, 2003 with respect to the results of operations for EMCOR's fiscal 2003 second quarter ended June 30, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 23, 2003 EMCOR GROUP, INC. -------------------------------------- (Registrant) By: /s/FRANK T. MACINNIS -------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer /s/LEICLE E. CHESSER -------------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ MARK A. POMPA -------------------------------------- Mark A. Pompa Senior Vice President, Chief Accounting Officer and Treasurer (Principal Accounting Officer) Exhibit 31.1 CERTIFICATION I, Frank T. MacInnis, Chairman of the Board and Chief Executive Officer of EMCOR Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 23, 2003 /s/ FRANK T. MACINNIS ---------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Leicle E. Chesser, Executive Vice President and Chief Financial Officer of EMCOR Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 23, 2003 /s/ LEICLE E. CHESSER ----------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer Exhibit 32.1 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank T. MacInnis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 23, 2003 /s/ FRANK T. MACINNIS ----------------------------------------- Frank T. MacInnis Chief Executive Officer A signed original of this written statement required in Section 906 has been provided to EMCOR Group, Inc. and will be retained by EMCOR Group, Inc. and furnished to the Securities and Exchange Commission of its staff upon request. Exhibit 32.2 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leicle E. Chesser, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 23, 2003 /s/ LEICLE E. CHESSER ----------------------------------------- Leicle E. Chesser Chief Financial Officer A signed original of this written statement required in Section 906 has been provided to EMCOR Group, Inc. and will be retained by EMCOR Group, Inc. and furnished to the Securities and Exchange Commission of its staff upon request.