-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THqCb40/5TwWdWQ/nlXxtlAO8Y1rKnpNY3oEAaVMWpT9HAXuTkfkBvjLt+HNcQ7p ay0piX0ow2m0jN2mFbORpw== 0000105634-07-000130.txt : 20071025 0000105634-07-000130.hdr.sgml : 20071025 20071025074742 ACCESSION NUMBER: 0000105634-07-000130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071025 DATE AS OF CHANGE: 20071025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCOR GROUP INC CENTRAL INDEX KEY: 0000105634 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] IRS NUMBER: 112125338 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08267 FILM NUMBER: 071189514 BUSINESS ADDRESS: STREET 1: 301 MERRITT SEVEN CORPORATE PK STREET 2: 6TH FLOOR CITY: NORWALK STATE: CT ZIP: 06851 BUSINESS PHONE: 203-849-7800 MAIL ADDRESS: STREET 1: 301 MERRITT SEVEN CORPORATE PARK STREET 2: 6TH FLOOR CITY: NORWALK STATE: CT ZIP: 06851 FORMER COMPANY: FORMER CONFORMED NAME: JWP INC/DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: JAMAICA WATER PROPERTIES INC DATE OF NAME CHANGE: 19860518 FORMER COMPANY: FORMER CONFORMED NAME: WELSBACH CORP DATE OF NAME CHANGE: 19761119 10-Q 1 a90710-q.txt 10-Q FOR PERIOD ENDING SEPTEMBER 30, 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2007 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 1-8267 EMCOR Group, Inc. ------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 11-2125338 - --------------------------------- -------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 301 Merritt Seven Norwalk, Connecticut 06851-1060 - --------------------------------- -------------------------------- (Address of Principal Executive (Zip Code) Offices) (203) 849-7800 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) N/A - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X| Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on October 19, 2007: 64,876,977 shares. EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of September 30, 2007 and December 31, 2006 1 Condensed Consolidated Statements of Operations - three months ended September 30, 2007 and 2006 3 Condensed Consolidated Statements of Operations - nine months ended September 30, 2007 and 2006 4 Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2007 and 2006 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - nine months ended September 30, 2007 and 2006 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3 Quantitative and Qualitative Disclosures about Market Risk 33 Item 4 Controls and Procedures 34 PART II - Other Information Item 1 Legal Proceedings 35 Item 4 Submission of Matters to a Vote of Security Holders 35 Item 6 Exhibits 36 PART I. - FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- September 30, December 31, 2007 2006 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 223,077 $ 273,735 Accounts receivable, net 1,442,228 1,184,418 Costs and estimated earnings in excess of billings on uncompleted contracts 155,130 147,848 Inventories 49,801 18,015 Prepaid expenses and other 51,441 38,397 ---------- ---------- Total current assets 1,921,677 1,662,413 Investments, notes and other long-term receivables 29,924 29,630 Property, plant and equipment, net 79,504 52,780 Goodwill 592,548 288,165 Identifiable intangible assets, net 206,647 38,251 Other assets 13,215 17,784 ---------- ---------- Total assets $2,843,515 $2,089,023 ========== ========== 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, 2007 2006 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under working capital credit line $ -- $ -- Current maturities of long-term debt and capital lease obligations 2,914 659 Accounts payable 542,615 496,407 Billings in excess of costs and estimated earnings on uncompleted contracts 612,789 412,069 Accrued payroll and benefits 208,850 177,490 Other accrued expenses and liabilities 124,634 121,723 ---------- ---------- Total current liabilities 1,491,802 1,208,348 Long-term debt and capital lease obligations 298,950 1,239 Other long-term obligations 228,664 169,127 ---------- ---------- Total liabilities 2,019,416 1,378,714 ---------- ---------- Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding -- -- Common stock, $0.01 par value, 200,000,000 shares authorized,67,672,474 and 67,296,072 shares issued, respectively 677 673 Capital surplus 381,200 354,905 Accumulated other comprehensive loss (18,888) (28,189) Retained earnings 475,977 399,804 Treasury stock, at cost 2,825,497 and 3,640,092 shares, respectively (14,867) (16,884) ---------- ---------- Total stockholders' equity 824,099 710,309 ---------- ---------- Total liabilities and stockholders' equity $2,843,515 $2,089,023 ========== ========== 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, 2007 2006 - ------------------------------------------------------------------------------ Revenues $1,500,798 $1,239,400 Cost of sales 1,331,887 1,095,412 ---------- ---------- Gross profit 168,911 143,988 Selling, general and administrative expenses 113,996 108,576 Restructuring expenses -- 604 ---------- ---------- Operating income 54,915 34,808 Interest expense (1,399) (361) Interest income 3,566 1,824 Minority interest (932) (828) ---------- ---------- Income from continuing operations before income taxes 56,150 35,443 Income tax provision 19,067 13,407 ---------- ---------- Income from continuing operations 37,083 22,036 Income from discontinued operations, net of income tax effect 1,253 517 ---------- ---------- Net income $ 38,336 $ 22,553 ========== ========== Net income per common share - Basic From continuing operations $ 0.57 $ 0.35 From discontinued operations 0.02 0.01 ---------- ---------- $ 0.59 $ 0.36 ========== ========== Net income per common share - Diluted From continuing operations $ 0.55 $ 0.33 From discontinued operations 0.02 0.01 ---------- ---------- $ 0.57 $ 0.34 ========== ========== 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, 2007 2006 - ------------------------------------------------------------------------------ Revenues $4,159,519 $3,554,335 Cost of sales 3,696,996 3,168,887 ---------- ---------- Gross profit 462,523 385,448 Selling, general and administrative expenses 348,711 315,219 Restructuring expenses 93 604 ---------- ---------- Operating income 113,719 69,625 Interest expense (2,487) (1,702) Interest income 10,143 3,894 Minority interest (2,046) (337) ---------- ---------- Income from continuing operations before income taxes 119,329 71,480 Income tax provision 45,370 25,790 ---------- ---------- Income from continuing operations 73,959 45,690 Income from discontinued operations, net of income tax effect 2,519 737 ---------- ---------- Net income $ 76,478 $ 46,427 ========== ========== Net income per common share - Basic From continuing operations $ 1.15 $ 0.73 From discontinued operations 0.04 0.01 ---------- ---------- $ 1.19 $ 0.74 ========== ========== Net income per common share - Diluted From continuing operations $ 1.11 $ 0.70 From discontinued operations 0.04 0.01 ---------- ---------- $ 1.15 $ 0.71 ========== ========== 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, 2007 2006 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 76,478 $ 46,427 Depreciation and amortization 14,092 12,866 Amortization of identifiable intangible assets 6,997 2,326 Minority interest 2,046 337 Deferred income taxes (17,860) 8,635 (Gain) loss on sale of discontinued operations, net of income taxes (976) 620 Excess tax benefits from share-based compensation (10,550) (2,928) Equity income from unconsolidated entities (4,089) (3,880) Other non-cash items 3,727 7,568 Distributions from unconsolidated entities 5,469 6,314 Changes in operating assets and liabilities, excluding assets and liabilities acquired 57,406 65,760 -------- -------- Net cash provided by operating activities 132,740 144,045 -------- -------- Cash flows from investing activities: Payments for acquisitions of businesses, identifiable intangible assets and related earn-out agreements (492,940) (5,436) Proceeds from sale of discontinued operations 5,494 1,262 Proceeds from sale of property, plant and equipment 2,717 313 Purchase of property, plant and equipment (14,360) (13,171) Investment in and advances to unconsolidated entities and joint ventures (1,510) (3,530) Net (disbursements) proceeds related to other investments (164) 1,916 -------- -------- Net cash used in investing activities (500,763) (18,646) -------- -------- Cash flows from financing activities: Proceeds from working capital credit line -- 149,500 Repayments of working capital credit line -- (149,500) Net borrowings (repayments) for long-term debt and debt issuance fees 296,007 (40) Repayments for capital lease obligations (540) (139) Proceeds from exercise of stock options 8,246 7,888 Excess tax benefits from share-based compensation 10,550 2,928 -------- -------- Net cash provided by financing activities 314,263 10,637 -------- -------- Effect of exchange rate changes on cash and cash equivalents 3,102 4,701 -------- -------- (Decrease) increase in cash and cash equivalents (50,658) 140,737 Cash and cash equivalents at beginning of year 273,735 103,785 -------- -------- Cash and cash equivalents at end of period $223,077 $244,522 ======== ======== Supplemental cash flow information: Cash paid for: Interest $ 5,139 $ 1,317 Income taxes $ 55,541 $ 20,336 Non-cash financing activities: Assets acquired under capital lease obligations $ 471 $ 163 Note receivable from sale of interest in joint venture and subsidiary $ 2,462 $ 246 Accrued acquisition costs $ 4,560 $ --
See Notes to Condensed Consolidated Financial Statements. EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)(Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated other Common Capital comprehensive Retained Treasury Comprehensive Total stock surplus income (loss)(1) earnings stock income - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 2006 $615,436 $666 $324,899 $(5,370) $313,170 $(17,929) Net income 46,427 -- -- -- 46,427 -- $46,427 Foreign currency translation adjustments 6,545 -- -- 6,545 -- -- 6,545 ------- Comprehensive income $52,972 ======= Issuance of treasury stock for restricted stock units (2) -- -- (551) -- -- 551 Treasury stock, at cost (3) (1,587) -- -- -- -- (1,587) Common stock issued under stock option plans, net (4) 12,041 6 10,482 -- -- 1,553 Value of issued restricted stock units 1,489 -- 1,489 -- -- -- Share-based compensation expense 4,948 -- 4,948 -- -- -- -------- ---- -------- -------- -------- -------- Balance, September 30, 2006 $685,299 $672 $341,267 $ 1,175 $359,597 $(17,412) ======== ==== ======== ======== ======== ======== Balance, January 1, 2007 $710,309 $673 $354,905 $(28,189) $399,804 $(16,884) Net income 76,478 -- -- -- 76,478 -- $76,478 Foreign currency translation adjustments 7,843 -- -- 7,843 -- -- 7,843 Amortization of unrecognized pension losses, net of tax benefit of $0.6 million 1,458 -- -- 1,458 -- -- 1,458 ------- Comprehensive income $85,779 ======= Effect of adopting FIN 48 (305) -- -- -- (305) -- Issuance of treasury stock for restricted stock units (2) -- -- (311) -- -- 311 Treasury stock, at cost (3) (1,117) -- -- -- -- (1,117) Common stock issued under stock option plans, net (4) 23,613 4 20,786 -- -- 2,823 Share-based compensation expense 5,820 -- 5,820 -- -- -- -------- ---- -------- -------- -------- -------- Balance, September 30, 2007 $824,099 $677 $381,200 $(18,888) $475,977 $(14,867) ======== ==== ======== ======== ======== ========
(1) Represents cumulative foreign currency translation adjustments and minimum pension liability adjustments. At December 31, 2006, EMCOR adopted Statement 158 and recognized the cumulative effect of recording the pension liability, net of the related deferred tax asset, as a reduction of accumulated other comprehensive income (loss). (2) Represents common stock transferred at cost from treasury stock upon the vesting of restricted stock units. (3) Represents value of shares of common stock withheld by EMCOR for income tax withholding requirements upon the vesting of restricted stock units. (4) Includes the tax benefit related to our share-based compensation plans of $15.4 million and $4.6 million for the nine months ended September 30, 2007 and September 30, 2006, respectively. 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 without audit, pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. References to the "Company," "EMCOR," "we," "us," "our" and words of similar import refer to EMCOR Group, Inc. and our consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our 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 our operations. The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007. On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock distribution of one common share for each common share owned on the record date of June 20, 2007. The capital stock accounts, all share data and earnings per share data give effect to the stock split, applied retroactively, to all periods presented. The results of operations for all periods presented reflect discontinued operations accounting due to the sale of an ownership interest in a consolidated joint venture and a subsidiary in each of August 2007 and January 2006, respectively. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B Acquisitions of Businesses In July 2007, we acquired three companies, which were not individually or in the aggregate material, for an aggregate of $34.1 million. Two of the companies primarily perform facilities services and have been included in our United States facilities services reporting segment, and the other primarily performs mechanical construction work and has been included in our United States mechanical construction and facilities services reporting segment. Goodwill and identifiable intangible assets attributable to these companies, representing the excess purchase price over the fair value of amounts assigned to the net tangible assets acquired, were preliminarily valued at $14.0 million and $13.4 million, respectively. In September 2007, we acquired FR X Ohmstede Acquisitions Co. ("Ohmstede") which has been included in our United States facilities services segment. The preliminary purchase price paid for Ohmstede was approximately $455.4 million, of which $300.0 million was paid from borrowings under a term loan and $155.4 million was paid from our funds. Additionally, approximately $4.6 million was accrued and $0.4 million was paid for directly related acquisition costs. Headquartered in Beaumont, Texas, Ohmstede is a leading provider of aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers for the refinery and petrochemical industries. We believe the addition of these companies furthers our goal of service and geographic diversification and expansion of our facilities services and fire protection operations, as well as offering industrial services with a focus on the refinery and petrochemical industries. Additionally, these acquisitions create more opportunities for our subsidiaries to collaborate on national facilities services contracts. The purchase prices of certain acquisitions are subject to finalization based on certain contingencies provided for in the purchase agreements. 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 preliminary estimated fair values of the respective assets and liabilities at the dates of the respective acquisitions. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE B Acquisitions of Businesses - (continued) The following table summarizes the preliminary purchase price allocation related to the 2007 acquisitions at the respective dates of acquisition (in thousands):
Other Ohmstede Acquisitions Total -------- ------------ -------- Current assets, including cash acquired $ 78,273 $ 28,153 $106,426 Property, plant and equipment 25,803 1,001 26,804 Goodwill 290,808 14,042 304,850 Identifiable intangible assets 162,768 13,428 176,196 Other assets -- 15 15 -------- -------- -------- Total assets acquired 557,652 56,639 614,291 -------- -------- -------- Current liabilities 31,442 22,531 53,973 Deferred income tax liability 70,770 -- 70,770 -------- -------- -------- Total liabilities assumed 102,212 22,531 124,743 -------- -------- -------- Net assets acquired $455,440 $ 34,108 $489,548 ======== ======== ========
The goodwill of $304.9 million was recorded based on preliminary purchase price allocations primarily to the United States mechanical construction and facilities services and United States facilities services segments. Goodwill results from the expected benefits of collaboration and synergies in future periods. It is expected that approximately $27.5 million of the goodwill and identifiable intangible assets associated with the acquisitions will be deductible for tax purposes. In accordance with FASB Statement No. 141, "Business Combinations" ("Statement 141") and FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"), goodwill will not be amortized, while certain other intangible assets with finite lives that have been preliminarily identified will be subject to amortization over their useful lives. Of the total purchase price paid for all 2007 acquisitions, approximately $176.2 million has been preliminarily allocated to identifiable intangible assets, which includes acquired contract backlog, customer relationships, trade names and non-competition agreements. Approximately $45.0 million has been allocated to trade names and is not being amortized as trade names have indefinite lives. Except for Ohmstede's contract backlog, which is being expensed in a manner consistent with its expected revenue recognition, the identifiable intangible amounts are subject to amortization on a straight-line method. The amortization periods range from four months to fifteen years. As of September 30, 2007, the purchase price accounting for our acquisition of a United States mechanical construction company in October 2006 was finalized. As a result, identifiable intangible assets ascribed to its goodwill, backlog and customer relationships and to a related non-competition agreement were adjusted with an insignificant impact. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE B Acquisitions of Businesses - (continued) The following tables present pro forma results of operations including all companies acquired during 2007 as if the acquisitions had occurred at the beginning of fiscal 2006. 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 2006, nor is it necessarily indicative of future operating results (in thousands, except per share data):
For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 2007 2006 2007 2006 ---------- ---------- ---------- ---------- Revenues $1,576,668 $1,312,927 $4,420,882 $3,770,935 Operating income $ 66,037 $ 42,945 $ 153,112 $ 81,807 Income from continuing operations $ 39,589 $ 22,450 $ 84,958 $ 39,749 Net income $ 40,842 $ 22,967 $ 87,477 $ 40,486 Diluted earnings per share from continuing operations $ 0.59 $ 0.34 $ 1.28 $ 0.61 Diluted earnings per share $ 0.61 $ 0.35 $ 1.31 $ 0.62
The above pro forma balances include additional interest expense associated with the Term Loan, the loss of interest income related to the use of cash for the acquisitions and the amortization expense associated with the preliminary value placed on the identifiable intangible assets related to companies acquired in the third quarter of 2007. The value ascribed to Ohmstede's contract backlog is being expensed in a manner consistent with its expected revenue recognition. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE C Dispositions of Assets Results of operations for the three and nine months ended September 30, 2007 and 2006 presented in our Condensed Consolidated Financial Statements reflect discontinued operations accounting. On August 6, 2007, we sold our majority ownership in a joint venture with CB Richard Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This transaction followed our purchase, for approximately $0.5 million, of certain assets of the joint venture. Included in the results of discontinued operations for the three and nine months ended September 30, 2007 was a preliminary estimated gain of $1.0 million (net of income taxes) resulting from the sale of the subsidiary. As of September 30, 2007, $5.5 million of purchase price has been received and the balance is reflected as a note receivable. The components of the results of discontinued operations for CBRE are as follows (in thousands):
For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 2007 2006 2007 2006 ------- ------- ------- ------- Revenues $13,236 $30,234 $79,095 $86,797 Income from discontinued operation $ 277 $ 517 $ 1,543 $ 1,357 Gain on sale of discontinued operation $ 976 $ -- $ 976 $ -- Net income from discontinued operation $ 1,253 $ 517 $ 2,519 $ 1,357 Diluted earnings per share from discontinued operation $ 0.02 $ 0.01 $ 0.04 $ 0.01
On January 31, 2006, we sold a subsidiary that had been part of our United States mechanical construction and facilities services segment. Included in the results of the discontinued operations for the nine months ended September 30, 2006 was a loss of $0.6 million (net of income taxes) resulting from the sale of the subsidiary. An aggregate of $1.2 million in cash and notes was received as consideration for this sale. The notes have been paid in full. The components of the results of operations for the discontinued operation are not presented, as they are not material to the consolidated results of operations for the nine months ended September 30, 2006. NOTE D Earnings Per Share Calculation of Basic and Diluted Earnings per Share The following tables summarize our calculation of Basic and Diluted Earnings per Share ("EPS") for the three and nine month periods ended September 30, 2007 and 2006: EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE D Earnings Per Share - (continued)
For the three months ended September 30, ----------------------------- 2007 2006 ----------- ----------- Numerator: Income before discontinued operations $37,083,000 $22,036,000 Income from discontinued operations 1,253,000 517,000 ----------- ----------- Net income available to common stockholders $38,336,000 $22,553,000 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 64,591,883 63,403,764 Effect of diluted securities - Share-based awards 2,330,128 2,379,254 ----------- ----------- Shares used to compute diluted earnings per share 66,922,011 65,783,018 =========== =========== Basic earnings per share: Continuing operations $ 0.57 $ 0.35 Discontinued operations 0.02 0.01 ----------- ----------- Total $ 0.59 $ 0.36 =========== =========== Diluted earnings per share: Continuing operations $ 0.55 $ 0.33 Discontinued operations 0.02 0.01 ----------- ----------- Total $ 0.57 $ 0.34 =========== ===========
For the nine months ended September 30, ----------------------------- 2007 2006 ----------- ----------- Numerator: Income before discontinued operations $73,959,000 $45,690,000 Income from discontinued operations 2,519,000 737,000 ----------- ----------- Net income available to common stockholders $76,478,000 $46,427,000 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 64,208,289 63,059,282 Effect of diluted securities - Share-based awards 2,414,669 2,192,805 ----------- ----------- Shares used to compute diluted earnings per share 66,622,958 65,252,087 =========== =========== Basic earnings per share: Continuing operations $ 1.15 $ 0.73 Discontinued operations 0.04 0.01 ----------- ----------- Total $ 1.19 $ 0.74 =========== =========== Diluted earnings per share: Continuing operations $ 1.11 $ 0.70 Discontinued operations 0.04 0.01 ----------- ----------- Total $ 1.15 $ 0.71 =========== ===========
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE D Earnings Per Share - (continued) There were 120,000 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, 2007, respectively. 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, 2006, respectively. NOTE E Inventories Inventories consist of the following amounts (in thousands):
September 30, December 31, 2007 2006 -------------- -------------- Raw materials and construction materials $ 22,996 $ 18,676 Work in process 27,758 -- Reserve for obsolescence (953) (661) -------------- -------------- $ 49,801 $ 18,015 ============== ==============
The September 2007 work in process inventories are attributable to the acquisition of Ohmstede. NOTE F Long-Term Debt Long-term debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands):
September 30, December 31, 2007 2006 -------------- -------------- Capitalized lease obligations $ 1,497 $ 1,566 Term Loan 300,000 -- Other 367 332 -------------- -------------- 301,864 1,898 Less: current maturities 2,914 659 -------------- -------------- $ 298,950 $ 1,239 ============== ==============
On September 19, 2007, we entered into a $300.0 million Term Loan Agreement ("Term Loan"). The proceeds were used to pay a portion of the consideration for the acquisition of Ohmstede and costs and expenses incident thereto. The Term Loan contains financial covenants, representations and warranties and events of default. The Term Loan covenants require, among other things, maintenance of certain financial ratios and certain restrictions with respect to payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, commencing March 2008 in the amount of $750,000, together with interest on the then outstanding principal amount. A final payment comprised of all remaining principal and interest is due on October 17, 2010. The Term Loan is secured by substantially all of our assets and substantially all of the assets of substantially all of our U.S. subsidiaries. The Term Loan bears interest at (1) the prime commercial lending rate announced by Bank of Montreal from time to time (7.75% at September 30, 2007) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar LIBOR (5.12% at September 30, 2007) plus 1.0% to 2.25% based on certain financial tests. The interest rate in effect at September 30, 2007 was 6.62%. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE G Common Stock On September 18, 2007, our stockholders approved an amendment to our Restated Certificate of Incorporation authorizing an increase in the number of shares of our common stock from 80 million shares to 200 million shares. On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock distribution of one common share for each common share owned, payable to shareholders of record on June 20, 2007. As of September 30, 2007 and December 31, 2006, 64,846,977 and 63,655,980 shares of our common stock were outstanding, respectively. The capital stock accounts give effect to the stock split, applied retroactively, to all periods presented. For the three months ended September 30, 2007 and 2006, 447,002 and 293,064 shares of common stock were issued upon the exercise of stock options and the satisfaction of required conditions in our share-based compensation plans, respectively. For the nine months ended September 30, 2007 and 2006, 1,226,258 and 1,259,340 shares of common stock were issued upon the exercise of stock options, the satisfaction of required conditions in our share-based compensation plans and the grants of direct stock, respectively. NOTE H Segment Information We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; central plant heating and cooling; premises electrical and lighting systems; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; water and wastewater treatment); (c) United States facilities services; (d) Canada construction and facilities services; (e) United Kingdom construction and facilities services; and (f) Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile maintenance and services; site-based operations and maintenance services; facilities management; installation and support for building systems; technical consulting and diagnostic services; small modification and retrofit projects; and program development, management and maintenance for energy systems), which services are not related to customers' construction programs, as well as industrial services operations, which primarily provide aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers for the refinery and petrochemical industries. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. Our "Other international construction and facilities services" segment, currently operating only in the Middle East, represents our operations outside of the United States, Canada and the United Kingdom. The following tables present information about industry segments and geographic areas (in thousands): EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE H Segment Information - (continued)
For the three months ended September 30, ---------------------------------------- 2007 2006 ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services $ 350,446 $ 312,864 United States mechanical construction and facilities services 604,302 471,597 United States facilities services 265,091 211,450 ---------- ---------- Total United States operations 1,219,839 995,911 Canada construction and facilities services 115,142 69,529 United Kingdom construction and facilities services 165,817 173,960 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $1,500,798 $1,239,400 ========== ==========
For the three months ended September 30, ---------------------------------------- 2007 2006 ---------- ---------- Total revenues: United States electrical construction and facilities services $ 351,842 $ 314,190 United States mechanical construction and facilities services 609,662 474,836 United States facilities services 268,175 213,383 Less intersegment revenues (9,840) (6,498) ---------- ---------- Total United States operations 1,219,839 995,911 Canada construction and facilities services 115,142 69,529 United Kingdom construction and facilities services 165,817 173,960 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $1,500,798 $1,239,400 ========== ==========
For the nine months ended September 30, ---------------------------------------- 2007 2006 ---------- ---------- Revenues from unrelated entities: United States electrical construction and facilities services $1,007,850 $ 930,582 United States mechanical construction and facilities services 1,684,649 1,270,670 United States facilities services 706,375 600,289 ---------- ---------- Total United States operations 3,398,874 2,801,541 Canada construction and facilities services 248,592 239,075 United Kingdom construction and facilities services 512,053 513,719 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $4,159,519 $3,554,335 ========== ==========
For the nine months ended September 30, ---------------------------------------- 2007 2006 ---------- ---------- Total revenues: United States electrical construction and facilities services $1,012,867 $ 934,581 United States mechanical construction and facilities services 1,691,725 1,280,928 United States facilities services 711,353 604,382 Less intersegment revenues (17,071) (18,350) ---------- ---------- Total United States operations 3,398,874 2,801,541 Canada construction and facilities services 248,592 239,075 United Kingdom construction and facilities services 512,053 513,719 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $4,159,519 $3,554,335 ========== ==========
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE H Segment Information - (continued)
For the three months ended September 30, ---------------------------------------- 2007 2006 -------- -------- Operating income (loss): United States electrical construction and facilities services $ 21,304 $ 11,577 United States mechanical construction and facilities services 33,445 21,819 United States facilities services 15,112 12,695 -------- -------- Total United States operations 69,861 46,091 Canada construction and facilities services 3,041 282 United Kingdom construction and facilities services (3,244) 1,344 Other international construction and facilities services (164) (296) Corporate administration (14,579) (12,009) Restructuring expenses -- (604) -------- -------- Total worldwide operations 54,915 34,808 Other corporate items: Interest expense (1,399) (361) Interest income 3,566 1,824 Minority interest (932) (828) -------- -------- Income from continuing operations before income taxes $ 56,150 $ 35,443 ======== ========
For the nine months ended September 30, ---------------------------------------- 2007 2006 -------- -------- Operating income (loss): United States electrical construction and facilities services $ 53,409 $ 31,015 United States mechanical construction and facilities services 75,271 40,253 United States facilities services 32,607 24,816 -------- -------- Total United States operations 161,287 96,084 Canada construction and facilities services 2,649 3,126 United Kingdom construction and facilities services (4,995) 6,907 Other international construction and facilities services (442) 254 Corporate administration (44,687) (36,142) Restructuring expenses (93) (604) -------- -------- Total worldwide operations 113,719 69,625 Other corporate items: Interest expense (2,487) (1,702) Interest income 10,143 3,894 Minority interest (2,046) (337) -------- -------- Income from continuing operations before income taxes $119,329 $ 71,480 ======== ========
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE H Segment Information - (continued)
September 30, December 31, 2007 2006 ------------- ------------- Total assets: United States electrical construction and facilities services $ 398,313 $ 363,656 United States mechanical construction and facilities services 808,049 748,044 United States facilities services 980,609 366,070 ---------- ---------- Total United States operations 2,186,971 1,477,770 Canada construction and facilities services 124,679 87,753 United Kingdom construction and facilities services 277,414 255,057 Other international construction and facilities services 175 590 Corporate administration 254,276 267,853 ---------- ---------- Total worldwide operations $2,843,515 $2,089,023 ========== ==========
Included in the operating income of $2.6 million for the Canada construction and facilities services segment for the nine months ended September 30, 2007 was a gain on the sale of property of $1.4 million. NOTE I Retirement Plans Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the "UK Plan"); however, no individuals joining that company after October 31, 2001 may participate in the plan. Components of Net Periodic Pension Benefit Cost The components of net periodic pension benefit cost of the UK Plan for the three and nine months ended September 30, 2007 and 2006 were as follows (in thousands):
For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 2007 2006 2007 2006 -------- -------- -------- -------- Service cost $1,674 $1,089 $ 4,936 $3,169 Interest cost 3,476 2,667 10,248 7,758 Expected return on plan assets (3,490) (2,843) (10,290) (8,270) Amortization of prior service cost and actuarial loss -- 19 -- 55 Amortization of unrecognized loss 694 426 2,045 1,238 ------ ------ ------- ------ Net periodic pension benefit cost $2,354 $1,358 $ 6,939 $3,950 ====== ====== ======= ======
2007 service cost reflects the utilization of revised actuarial mortality tables. Employer Contributions For the nine months ended September 30, 2007, our United Kingdom subsidiary contributed $7.8 million to its defined benefit pension plan and anticipates contributing an additional $3.6 million during the remainder of 2007. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE J Income Taxes For the three months ended September 30, 2007 and 2006, our income tax provision was $19.1 million and $13.4 million, respectively. For the nine months ended September 30, 2007 and 2006, our income tax provision was $45.4 million and $25.8 million, respectively. The income tax provisions were recorded at effective income tax rates of 38% and 36%, before certain adjustments, for the nine months ended September 30, 2007 and 2006, respectively. Our effective income tax rate was 34% for the three months ended September 30, 2007 and was lower than the effective income tax rate for the nine months ended September 30, 2007 primarily due to a reduction in the United Kingdom income before income taxes for fiscal 2007. The income tax provision for the nine months ended September 30, 2006 includes an adjustment of certain compensation arrangements for income tax purposes. On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN 48"). As a result of the adoption of FIN 48 and recognition of the cumulative effect of adoption of a new accounting principle, we recorded a $0.3 million increase in the liability for unrecognized income tax benefits, with an offsetting reduction in retained earnings. As of September 30, 2007, the total liability for unrecognized income tax benefits was $6.4 million, the reversal of which would reduce the effective income tax rate if and when recognized. We recognized interest and penalties related to uncertain tax positions in the income tax provision. As of September 30, 2007, we had approximately $1.6 million of accrued interest related to uncertain tax positions included in the liability on the Condensed Consolidated Balance Sheet, of which approximately $0.8 million and $1.1 million were recorded during the three and nine months ended September 30, 2007, respectively. It is possible that approximately $2.0 million of income tax liability primarily related to uncertain intercompany transfer pricing items will become a recognized income tax benefit in the next twelve months due to the closing of open tax years. The tax years 2003 to 2006 remain open to examination by United States taxing jurisdictions, and the tax years 2000 to 2006 remain open to examination by foreign taxing jurisdictions. NOTE K New Accounting Pronouncements On January 1, 2007, we adopted FIN 48. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Refer to Note J Income Taxes for information related to the effect of adoption of FIN 48. In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. Statement 157 is effective for our financial statements beginning with the first quarter of 2008. Early adoption is permitted. We have not determined the effect, if any, that the adoption of Statement 157 will have on our financial position and results of operations. EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE K New Accounting Pronouncements - (continued) In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Statement 159 is effective for our financial statements beginning with the first quarter of 2008. We have not determined the effect, if any, that the adoption of Statement 159 will have on our financial position and results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We are one of the largest mechanical and electrical construction and facilities services firms in the United States, Canada, the United Kingdom and in the world. We provide services to a broad range of commercial, industrial, utility and institutional customers through approximately 75 principal operating subsidiaries and joint venture entities. Our offices are located in the United States, Canada and the United Kingdom. In the Middle East, we carry on business through a joint venture. Overview On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock distribution of one common share for each common share owned on the record date of June 20, 2007. The earnings per share data give effect to the stock split, applied retroactively, to all periods presented. The following table presents selected financial data for the three months ended September 30, 2007 and 2006 (in millions, except percentages and earnings per share):
For the three months ended September 30, -------------------------- 2007 2006 -------- -------- Revenues $1,500.8 $1,239.4 Revenues increase from prior year 21.1% 4.6% Operating income $ 54.9 $ 34.8 Operating income as a percentage of revenues 3.7% 2.8% Net income $ 38.3 $ 22.6 Diluted earnings per share from continuing operations $ 0.55 $ 0.33
During the third quarter of 2007, our business continued to demonstrate strength as a result of the strong non-residential construction market and our ability to effectively manage our work thereby enabling us to achieve an improvement over the 2006 third quarter in both operating income and operating income as a percentage of revenues, which percentage we refer to as "operating margin". Operating margin during this quarter was 3.7% (compared to 2.8% during the comparable 2006 quarter) on revenues of $1.5 billion, both of which were new record highs for us in any quarter. The improvement in revenues, operating income and operating margin, when compared to the third quarter of 2006, can be attributed to: (a) increased availability in the United States of commercial, hospitality, high-tech and water/wastewater treatment construction projects as capital spending in these market sectors has continued to grow; (b) the addition of revenues and operating income from a United States mechanical construction company we acquired in October 2006; and (c) reduced losses from a company in our United States electrical construction and facilities services segment which company had reported losses in the third quarter of 2006. In addition, demand for our mobile services, in our United States facilities services segment, increased during the third quarter of 2007 when compared to the third quarter of 2006. The impact of companies acquired in 2007, although accretive to earnings, was not significant during this quarter. Negatively impacting the third quarter of 2007 was the performance of our United Kingdom construction and facilities services segment. This segment's operating loss of $3.2 million reflected the negative results of its rail division, which recognized losses on certain contracts during the quarter. While our selling, general and administrative expenses increased primarily due to (a) an increase in incentive-based compensation as a result of improved profits in 2007 compared to 2006 and (b) companies acquired since September 30, 2006, our operating income was positively impacted by our ability to increase revenues without having to substantially increase overhead costs, a reduction in staff and facilities, particularly those associated with our United States facilities services segment (as a result of restructuring activities during 2006), and a reduction in deferred compensation expense for which our liability decreased corresponding with a reduction in the market price of our common stock in the third quarter of 2007. Our cash and cash equivalents were $223.1 million at September 30, 2007 compared to $273.7 million at December 31, 2006. The decrease in cash and cash equivalents was primarily due to cash flows used for investing activities of $500.8 million primarily related to acquisitions. Offsetting the cash used for investing activities was cash provided by operating activities of $132.7 for the nine months ended September 30, 2007. Our reported net interest income for the nine months ended September 30, 2007 was $7.7 million, a $5.5 million improvement over the nine months ended September 30, 2006 net interest income of $2.2 million. This increase in interest income was primarily due to more cash available to invest combined with higher rates of return in the current year periods. However, on September 19, 2007, we financed the acquisition of FR X Ohmstede Acquisition Co. ("Ohmstede") with $300.0 million from newly incurred term loan debt and $155.4 million from our own funds. During this quarter, we completed the acquisition of four companies that contributed $3.8 million of operating income before amortization expense during the period we owned them. Three of the four acquisitions were completed in July 2007 and increased the geographical markets in which we offer our services. Our other acquisition, Ohmstede, has been included in our United States facilities services segment since the acquisition date and expands our industrial services to the refinery and petrochemical industries. Ohmstede's business primarily provides aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers. On August 6, 2007, we sold our majority ownership in a joint venture with CB Richard Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This transaction followed our purchase, for approximately $0.5 million, of certain assets of the joint venture. Included in the results of discontinued operations for the three and nine months ended September 30, 2007 was a preliminary estimated gain of $1.0 million (net of income taxes) resulting from the sale of the subsidiary. As of September 30, 2007, $5.5 million of purchase price has been received and the balance is reflected as a note receivable. Operating Segments We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; central plant heating and cooling; premises electrical and lighting systems; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; water and wastewater treatment); (c) United States facilities services; (d) Canada construction and facilities services; (e) United Kingdom construction and facilities services; and (f) Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile maintenance and services; site-based operations and maintenance services; facilities management; installation and support for building systems; technical consulting and diagnostic services; small modification and retrofit projects; and project development, management and maintenance for energy systems), which services are not generally related to customers' construction programs, as well as industrial services operations, which primarily provide aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers for the refinery and petrochemical industries. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. Our "Other international construction and facilities services" segment, currently operating only in the Middle East, represents our operations outside of the United States, Canada and the United Kingdom. Results of Operations The results presented reflect certain reclassifications of prior period amounts to conform to current year presentation. Revenues The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):
For the three months ended September 30, --------------------------------------------- % of % of 2007 Total 2006 Total ---------- ----- ---------- ----- Revenues: United States electrical construction and facilities services $ 350,446 23% $ 312,864 25% United States mechanical construction and facilities services 604,302 40% 471,597 38% United States facilities services 265,091 18% 211,450 17% ---------- ---------- Total United States operations 1,219,839 81% 995,911 80% Canada construction and facilities services 115,142 8% 69,529 6% United Kingdom construction and facilities services 165,817 11% 173,960 14% Other international construction and facilities services -- -- -- -- ---------- ---------- Total worldwide operations $1,500,798 $1,239,400 ========== ==========
For the nine months ended September 30, ---------------------------------------------- % of % of 2007 Total 2006 Total ---------- ----- ---------- ----- Revenues: United States electrical construction and facilities services $1,007,850 24% $ 930,582 26% United States mechanical construction and facilities services 1,684,649 41% 1,270,670 36% United States facilities services 706,375 17% 600,289 17% ---------- ---------- Total United States operations 3,398,874 82% 2,801,541 79% Canada construction and facilities services 248,592 6% 239,075 7% United Kingdom construction and facilities services 512,053 12% 513,719 14% Other international construction and facilities services -- -- -- -- ---------- ---------- Total worldwide operations $4,159,519 $3,554,335 ========== ==========
As described below in more detail, our revenues for the three months ended September 30, 2007 increased to $1.50 billion compared to $1.24 billion for the three months ended September 30, 2006. Revenues for the nine months ended September 30, 2007 increased to $4.16 billion compared to $3.55 billion for the nine months ended September 30, 2006. The increase in 2007 revenues was principally due to (a) increased availability in the United States of commercial, hospitality, high-tech and water/wastewater treatment construction projects as capital spending in these market sectors has continued to grow; (b) our acquisition of a United States mechanical construction company in October 2006; and (c) companies acquired since September 30, 2006. Our backlog at September 30, 2007 was $4.48 billion compared to $3.40 billion at September 30, 2006. Our backlog was $3.50 billion at December 31, 2006. These increases in backlog were primarily at the United States reporting segments and were due to increased demand for hospitality, healthcare, high-tech and industrial construction projects, companies acquired during the third quarter of 2007 and increased awards due to our active pursuit of opportunities in these and other market sectors. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of facilities services contracts. However, if the remaining term of a facilities services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only 12 months of revenues. Revenues of our United States electrical construction and facilities services segment for the three months ended September 30, 2007 increased $37.6 million compared to the three months ended September 30, 2006. Revenues for the nine months ended September 30, 2007 increased $77.3 million compared to the nine months ended September 30, 2006. The revenues increase was generally due to increased commercial, high-tech and hospitality projects as a result of the strong commercial, high-tech and hospitality construction markets. Revenues of our United States mechanical construction and facilities services segment for the three months ended September 30, 2007 increased $132.7 million compared to the three months ended September 30, 2006. Revenues for the nine months ended September 30, 2007 increased $414.0 million compared to the nine months ended September 30, 2006. The revenues increase was primarily attributable to increased availability of hospitality, healthcare, commercial, high-tech and water/wastewater treatment construction projects due to growth in these markets and the addition of $52.7 million and $134.7 million of revenues for the three and nine months ended September 30, 2007, respectively, from companies acquired since September 30, 2006. Our United States facilities services revenues increased $53.6 million for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. Revenues increased $106.1 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Companies acquired during the third quarter of 2007 contributed $38.2 million of the increase in revenues for the three and nine months ended September 30, 2007. These increases in revenues for both the three and nine months ended September 30, 2007 were also primarily attributable to the increased demand for both government site-based facilities services and for small project and other services performed by our mobile services group in this segment. Revenues of our Canada construction and facilities services segment increased by $45.6 million for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. Revenues increased $9.5 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The increase in revenues for the three months ended September 30, 2007 compared to the same period in 2006 was primarily related to the commencement of work on various large projects that had been delayed from earlier in 2007. The increases in revenues for the three and nine months ended September 30, 2007 were positively affected by $7.8 million and $9.3 million, respectively, relating to the rate of exchange for Canadian dollars to United States dollars as a result of the strengthening of the Canadian dollar. United Kingdom construction and facilities services revenues decreased $8.1 million and $1.7 million for the three and nine months ended September 30, 2007, respectively, compared to the three and nine months ended September 30, 2006, principally due to less rail project work performed as certain of our rail contracts are nearing completion and a decision not to pursue significant new contacts in the rail sector, partially offset by a $14.3 million and $43.1 million increase, respectively, relating to the rate of exchange for British pounds to United States dollars as a result of the strengthening of the British pound. Other international construction and facilities services activities consist of operations in the Middle East. All of the current projects in this market are being performed through a joint venture. The results of the joint venture were accounted for under the equity method. Cost of sales and Gross profit The following table presents our cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages):
For the three months ended Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ----------------------------------- 2007 2006 2007 2006 ---------- ---------- ---------- ---------- Cost of sales $1,331,887 $1,095,412 $3,696,996 $3,168,887 Gross profit 168,911 143,988 462,523 385,448 Gross profit, as a percentage of revenues 11.3% 11.6% 11.1% 10.8%
Our gross profit (revenues less cost of sales) increased $24.9 million for the three months ended September 30, 2007 compared to the three months ended September 30, 2006. Gross profit increased $77.1 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Gross profit as a percentage of revenues was 11.3% and 11.6% for the three months ended September 30, 2007 and 2006, respectively. Gross profit as a percentage of revenues was 11.1% and 10.8% for the nine months ended September 30, 2007 and 2006, respectively. The increase in gross profit for the 2007 periods compared to the 2006 periods was primarily attributable to: (a) increased awards to us of United States commercial, hospitality, high-tech and water/wastewater treatment construction projects; (b) improved performance on healthcare construction projects; (c) the addition of a United States mechanical construction company we acquired in October 2006; and (d) increased demand for small projects and other services performed by our mobile services group. The third quarter 2007 acquisitions contributed $7.4 million of gross profit for the three and nine months ended September 30, 2007. The increase in gross profit as a percentage of revenues for the nine month period primarily reflected the continuing trend in our construction project base toward higher margin work that is typically associated with the types of projects referred to in this paragraph and reduced losses from one company in our United States electrical construction and facilities services segment which had reported losses in the third quarter of 2006. However, gross profit improvement was partially offset by the losses recognized on certain United Kingdom rail contracts. Gross profit, as a percentage of revenues, decreased during the third quarter of 2007 compared to 2006 due to losses on the United Kingdom rail projects and less gross profit recognized due to amortization expense associated with the contract backlog of companies acquired in the third quarter of 2007. Selling, general and administrative expenses The following table presents our 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 Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ----------------------------------- 2007 2006 2007 2006 -------- -------- -------- -------- Selling, general and administrative expenses $113,996 $108,576 $348,711 $315,219 Selling, general and administrative expenses, as a percentage of revenues 7.6% 8.8% 8.4% 8.9%
Our selling, general and administrative expenses for the three months ended September 30, 2007 increased $5.4 million to $114.0 million compared to $108.6 million for the three months ended September 30, 2006. Selling, general and administrative expenses as a percentage of revenues were 7.6% for the three months ended September 30, 2007 compared to 8.8% for the three months ended September 30, 2006. Selling, general and administrative expenses as a percentage of revenues were 8.4% for the nine months ended September 30, 2007 compared to 8.9% for the nine months ended September 30, 2006. For the three and nine month periods ended September 30, 2007, compared to the three and nine months ended September 30, 2006, selling, general and administrative expenses increased primarily due to an increase in accruals for incentive-based compensation as a result of improved profits and the addition of companies acquired since September 30, 2006. However, this decrease in selling, general and administrative expenses as a percentage of revenues was primarily due to our ability to increase revenues without having to substantially increase overhead costs, a reduction in staff and facilities, particularly those associated with our United States facilities services segment (as a result of restructuring activities during 2006) and a reduction in deferred compensation expense for which our liability decreased corresponding with a reduction in the market price of our common stock in the third quarter of 2007. Restructuring expenses Restructuring expenses, primarily related to employee severance obligations, were zero and $0.09 million for the three and nine months ended September 30, 2007, respectively. As of September 30, 2007, we had no unpaid severance obligations. Restructuring expenses were $0.6 million for the three and nine months ended September 30, 2006, respectively. As of September 30, 2006, there were $0.1 million of unpaid restructuring obligations. Operating income The following table presents our operating income (loss) and operating income (loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages):
For the three months ended September 30, ----------------------------------------- % of % of Segment Segment 2007 Revenues 2006 Revenues -------- -------- -------- -------- Operating income (loss): United States electrical construction and facilities services $ 21,304 6.1% $ 11,577 3.7% United States mechanical construction and facilities services 33,445 5.5% 21,819 4.6% United States facilities services 15,112 5.7% 12,695 6.0% -------- -------- Total United States operations 69,861 5.7% 46,091 4.6% Canada construction and facilities services 3,041 2.6% 282 0.4% United Kingdom construction and facilities services (3,244) -- 1,344 0.8% Other international construction and facilities services (164) -- (296) -- Corporate administration (14,579) -- (12,009) -- Restructuring expenses -- -- (604) -- -------- -------- Total worldwide operations 54,915 3.7% 34,808 2.8% Other corporate items: Interest expense (1,399) (361) Interest income 3,566 1,824 Minority interest (932) (828) -------- -------- Income from continuing operations before income taxes $ 56,150 $ 35,443 ======== ========
For the nine months ended September 30, ----------------------------------------- % of % of Segment Segment 2007 Revenues 2006 Revenues -------- -------- -------- -------- Operating income (loss): United States electrical construction and facilities services $ 53,409 5.3% $ 31,015 3.3% United States mechanical construction and facilities services 75,271 4.5% 40,253 3.2% United States facilities services 32,607 4.6% 24,816 4.1% -------- -------- Total United States operations 161,287 4.7% 96,084 3.4% Canada construction and facilities services 2,649 1.1% 3,126 1.3% United Kingdom construction and facilities services (4,995) -- 6,907 1.3% Other international construction and facilities services (442) -- 254 -- Corporate administration (44,687) -- (36,142) -- Restructuring expenses (93) -- (604) -- -------- -------- Total worldwide operations 113,719 2.7% 69,625 2.0% Other corporate items: Interest expense (2,487) (1,702) Interest income 10,143 3,894 Minority interest (2,046) (337) -------- -------- Income from continuing operations before income taxes $119,329 $ 71,480 ======== ========
As described below in more detail, our operating income increased by $20.1 million for the three months ended September 30, 2007 to $54.9 million compared to operating income of $34.8 million for the three months ended September 30, 2006. Operating income increased by $44.1 million for the nine months ended September 30, 2007 to $113.7 million compared to operating income of $69.6 million for the nine months ended September 30, 2006. United States electrical construction and facilities services operating income of $21.3 million for the three months ended September 30, 2007 increased $9.7 million compared to operating income of $11.6 million for the three months ended September 30, 2006. Operating income of $53.4 million for the nine months ending September 30, 2007 increased $22.4 million compared to operating income of $31.0 million for the nine months ended September 30, 2006. This increase in operating income in the three and nine months ended September 30, 2007 was primarily the result of increased revenues from the strong commercial and hospitality construction markets, the performance of water/wastewater treatment construction projects and completion of certain high-tech projects, in addition to higher margin work typically associated with commercial, hospitality and high-tech construction projects. Additionally, we had reduced losses from one company in this segment for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006, respectively. Selling, general and administrative expenses increased for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006, respectively, principally due to increases in incentive compensation, partially offset by our continued focus on overhead cost control that resulted in cost reductions at certain subsidiaries and a reduction in deferred compensation expense for which our liability decreased corresponding with a reduction in the market price of our common stock in the third quarter of 2007. United States mechanical construction and facilities services operating income for the three months ended September 30, 2007 was $33.4 million, an $11.6 million improvement compared to operating income of $21.8 million for the three months ended September 30, 2006. Operating income for the nine months ended September 30, 2007 was $75.3 million, a $35.0 million improvement compared to operating income of $40.3 million for the nine months ended September 30, 2006. These improvements were primarily due to increased hospitality, commercial, high-tech and water/wastewater treatment construction projects, improved performance of healthcare construction projects, the addition of a United States mechanical construction company we acquired in October 2006 and higher margin work typically associated with hospitality, commercial and high-tech construction projects. The increases in selling, general and administrative expenses were primarily attributable to companies acquired after September 30, 2006 and increases in incentive compensation for the three and nine months ended September 30, 2007 when compared to the same periods of 2006, partially offset by a reduction in deferred compensation expense for which our liability decreased corresponding with a reduction in the market price of our common stock in the third quarter of 2007. United States facilities services operating income for the three months ended September 30, 2007 was $15.1 million compared to operating income of $12.7 million for the third quarter of 2006. Operating income for the nine months ended September 30, 2007 was $32.6 million compared to operating income of $24.8 million for the first nine months of 2006. This increase in operating income for the 2007 three and nine month periods was primarily due to more efficient performance on certain site-based contracts, increased revenues from site-based government facilities services contracts, a continuing shift toward new site-based contracts with higher margins than had been the case with some past contracts, increased income from small projects and other services by our mobile services group in this segment and the reduction in staff and facilities effected primarily in the third and fourth quarters of 2006. Companies acquired during the third quarter of 2007 contributed $3.8 million to the increase in operating income before amortization expense for the three and nine months ended September 30, 2007. Amortization expense related to identifiable intangible assets attributable to third quarter 2007 acquisitions was $2.3 million for the three and nine months ended September 30, 2007. Our Canada construction and facilities services operating income was $3.0 million for the three months ended September 30, 2007 compared to operating income of $0.3 million for the three months ended September 30, 2006. This segment's operating income was $2.6 million for the nine months ended September 30, 2007 compared to operating income of $3.1 million for the nine months ended September 30, 2006. Included in the operating income for the nine months ended September 30, 2007 was a $1.4 million gain on sale of property. The improvement in third quarter operating income was primarily attributable to the increase in revenues and improved contract performance compared to the prior year's third quarter. Our United Kingdom construction and facilities services operating loss for the three months ended September 30, 2007 was $3.2 million compared to operating income of $1.3 million for the three months ended September 30, 2006. Operating loss for the nine months ended September 30, 2007 was $5.0 million compared to operating income of $6.9 million for the nine months ended September 30, 2006. These operating losses in the 2007 three and nine months periods compared to the same 2006 periods were primarily attributable to losses on certain rail projects and an increase in pension costs associated with the United Kingdom defined benefit pension plan, partially offset by improved operating income from facilities services work. These operating losses were unfavorably impacted by $0.6 million for the three and nine months ended September 30, 2007 relating to the rate of exchange for British pounds to United States dollars as a result of the strengthening of the British pound. Other international construction and facilities services operating loss was $0.2 million for the three months ended September 30, 2007 compared to operating loss of $0.3 million for the three months ended September 30, 2006. Operating loss was $0.4 million for the nine months ended September 30, 2007 compared to operating income of $0.3 million for the nine months ended September 30, 2006. Our corporate administration expenses for the three months ended September 30, 2007 were $14.6 million compared to $12.0 million for the three months ended September 30, 2006. For the nine months ended September 30, 2007, corporate administration expenses were $44.7 million compared to $36.1 million for the nine months ended September 30, 2006. The increase in these expenses was primarily due to increased compensation accruals based on achievement of earnings for the three and nine months ended September 30, 2007. Additionally, compensation and related staffing expenses increased for the three and nine months ended September 30, 2007, compared to the same prior year periods, in order to support current and projected business growth. Interest income for the three months ended September 30, 2007 was $3.6 million compared to $1.8 million for the three months ended September 30, 2006. Interest income for the nine months ended September 30, 2007 was $10.1 million compared to $3.9 million for the nine months ended September 30, 2006. The increases in interest income were primarily related to more cash available to invest combined with higher rates of return in the current year periods. Interest expense for the three months ended September 30, 2007 and 2006 was $1.4 million and $0.4 million, respectively. Interest expense for the nine months ended September 30, 2007 and 2006 was $2.5 million and $1.7 million, respectively. This increase in interest expense was primarily due to the $300.0 million of long-term debt incurred in September 2007 to finance part of the Ohmstede acquisition. For the three months ended September 30, 2007 and 2006, our income tax provision was $19.1 million and $13.4 million, respectively. For the nine months ended September 30, 2007 and 2006, our income tax provision was $45.4 million and $25.8 million, respectively. The income tax provisions were recorded at effective income tax rates of 38% and 36%, before certain adjustments, for the nine months ended September 30, 2007 and 2006, respectively. Our effective income tax rate was 34% for the three months ended September 30, 2007 and was lower than the effective income tax rate for the nine months ended September 30, 2007 primarily due to a revised estimate of the United Kingdom income before income taxes for fiscal 2007. The income tax provision for the nine months ended September 30, 2006 includes an adjustment of certain compensation arrangements for income tax purposes. Liquidity and Capital Resources The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities and the effect of exchange rate changes on cash and cash equivalents (in thousands):
For the nine months ended Sept. 30, ----------------------------------- 2007 2006 ---------- ---------- Net cash provided by operating activities $ 132,740 $144,045 Net cash used in investing activities $(500,763) $(18,646) Net cash provided by financing activities $ 314,263 $ 10,637 Effect of exchange rate changes on cash and cash equivalents $ 3,102 $ 4,701
Our consolidated cash balance decreased by approximately $50.7 million from $273.7 million at December 31, 2006 to $223.1 million at September 30, 2007. The decrease in net cash provided by operating activities for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to an increase in accounts receivable related to the growth in our revenues, particularly during the current quarter. Net cash used in investing activities of $500.8 million in the nine months ended September 30, 2007 increased $482.1 million compared to $18.6 million used in the nine months ended September 30, 2006 and was primarily due to a $487.5 million increase in payments for acquisitions of Ohmstede and other businesses, identifiable intangible assets and related earn-out agreements, partially offset by a $4.2 million increase in proceeds from the sale of discontinued operations, a $2.4 million increase in proceeds from sale of property, plant and equipment and a $2.0 million decrease in investment and advances to unconsolidated entities and joint ventures. Net cash used for financing activities of $314.3 million in the nine months ended September 30, 2007 compared to $10.6 million provided by financing activities for the nine months ended September 30, 2006 was primarily attributable to the $300.0 million of long-term debt incurred in September 2007 to finance part of the Ohmstede acquisition.
Payments Due by Period --------------------------------- Less Contractual than 1-3 4-5 After Obligations Total 1 year years years 5 years - -------------------------------- -------- ------ ------ ----- ------- Other long-term debt $ 0.4 $ 0.1 $ 0.2 $ 0.1 $ -- Capital lease obligations 1.5 0.5 0.8 0.2 -- Operating leases 184.2 48.0 70.8 36.9 28.5 Open purchase obligations (1) 909.9 682.5 216.6 10.8 -- Other long-term obligations (2) 254.4 31.6 196.4 26.4 -- -------- ------ ------ ----- ------ Total Contractual Obligations $1,350.4 $762.7 $484.8 $74.4 $ 28.5 ======== ====== ====== ===== ======
Amount of Commitment Expiration by Period --------------------------------- Less Other Commercial Total than 1-3 4-5 After Commitments Committed 1 year years years 5 years - -------------------------------- --------- ------ ------ ----- ------- Revolving Credit Facility (3) $ -- $ -- $ -- $ -- $ -- Term Loan 300.0 2.3 297.7 -- -- Letters of credit 50.8 -- 50.8 -- -- Guarantees 25.0 -- -- -- 25.0 -------- ------ ------ ----- ------ Total Commercial Obligations $ 375.8 $ 2.3 $348.5 $ -- $ 25.0 ======== ====== ====== ===== ======
(1) Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in EMCOR's condensed consolidated balance sheets and should not impact future cash flows, as amounts will be recovered through customer billings. (2) Represents primarily insurance related liabilities, a pension plan liability and liabilities for unrecognized income tax benefits classified as other long-term liabilities in the condensed consolidated balance sheets. Cash payments for insurance related liabilities may be payable beyond three years, but it is not practical to estimate these payments. We provide funding to our pension plans based on the minimum funding required by applicable regulations. In determining the minimum required funding, we utilize current actuarial assumptions and exchange rates to forecast estimates of amounts that may be payable for up to five years in the future. In our judgment, minimum funding estimates beyond a five year time horizon cannot be reliably estimated, and therefore, have not been included in the table. At our discretion, we may fund more than the minimum required funding. (3) We classify these borrowings as short-term on our Condensed Consolidated Balance Sheets because of our intent and ability to repay the amounts on a short-term basis. As of September 30, 2007, there were no borrowings outstanding under the Revolving Credit Facility. Our revolving credit agreement (the "Revolving Credit Facility") provides for a credit facility of $375.0 million. As of September 30, 2007 and December 31, 2006, we had approximately $50.8 million and $55.6 million of letters of credit outstanding, respectively, under the Revolving Credit Facility. There were no borrowings under the Revolving Credit Facility as of September 30, 2007 or December 31, 2006. On September 19, 2007, we entered into a $300.0 million Term Loan Agreement ("Term Loan"). The proceeds were used to pay a portion of the consideration for the acquisition of Ohmstede and costs and expenses incident thereto. The Term Loan contains financial covenants, representations and warranties and events of default. The Term Loan covenants require, among other things, maintenance of certain financial ratios and certain restrictions with respect to payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, commencing March 2008 in the amount of $750,000, together with interest on the then outstanding principal amount. A final payment comprised of all remaining principal and interest is due on October 17, 2010. The Term Loan is secured by substantially all of our assets and substantially all of the assets of substantially all of our U.S. subsidiaries. The Term Loan bears interest at (1) the prime commercial lending rate announced by Bank of Montreal from time to time (7.75% at September 30, 2007) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar LIBOR (5.12% at September 30, 2007) plus 1.0% to 2.25% based on certain financial tests. The interest rate in effect at September 30, 2007 was 6.62%. Our Canadian subsidiary, Comstock Canada Ltd., has a credit agreement with a bank providing for an overdraft facility of up to Cdn. $0.5 million. The facility is secured by a standby letter of credit and provides for interest at the bank's prime rate, which was 6.25% at September 30, 2007. There were no borrowings outstanding under this credit agreement at September 30, 2007 or December 31, 2006. One of our subsidiaries has guaranteed $25.0 million of borrowings of a venture in which we have a 40% interest; the other venture partner, Baltimore Gas and Electric, has a 60% interest. The venture designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in air conditioning commercial properties. These guarantees are not expected to have a material effect on our financial position or results of operations. We and Baltimore Gas and Electric are jointly and severally liable, in the event of default, for the venture's $25.0 million in borrowings. The terms of our construction contracts frequently require that we obtain from surety companies ("Surety Companies") and provide to our customers payment and performance bonds ("Surety Bonds") as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2007, based on our percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, had there been defaults on all our existing contractual obligations, would have been approximately $1.3 billion. The Surety Bonds are issued by Surety Companies which charge varying amounts of premiums based on the size and type of bond. In recent years, there has been a reduction in the aggregate surety bond issuance capacity of Surety Companies due to industry consolidations and other factors. Consequently, the availability of Surety Bonds has become more limited and the terms upon which Surety Bonds are available have become more restrictive. We continually monitor our available limits of Surety Bonds and discuss with our current and other Surety Bond providers the amount of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond we have previously obtained. However, if we experience changes in our bonding relationships or if there are further changes in the surety industry, we may need to seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds such as letters of credit or guarantees by EMCOR Group, Inc., by seeking to convince customers to forego the requirement for Surety Bonds, by increasing our activities in business segments that less frequently require Surety Bonds such as the facilities services segment and/or by refraining from bidding for certain projects that require large Surety Bonds. There can be no assurance that we will be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds to replace projects requiring Surety Bonds that we may decline to pursue. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flows. We do not have any other financial guarantees or off-balance sheet arrangements other than those disclosed herein. Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain the Revolving Credit Facility that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient to enable us to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash. We may also increase liquidity through an equity offering or issuance of other debt instruments. Short-term changes in macroeconomic trends may have an effect, positively or negatively, on liquidity. In addition to managing borrowings, our focus on the facilities services market is intended to provide an additional buffer against economic downturns inasmuch as the facilities services business is characterized by annual and multi-year contracts that provide a more predictable stream of cash flow than the construction business. Short-term liquidity is also impacted by the type and length of construction contracts in place. During economic downturns, such as the downturn that the engineering and construction industry experienced from 2001 through 2004, there were typically fewer small discretionary projects from the private sector, and companies like us aggressively bid larger long-term infrastructure and public sector contracts. Performance of long duration contracts typically requires working capital until initial billing milestones are achieved. While we strive to maintain a net over-billed position with our customers, there can be no assurance that a net over-billed position can be maintained; however, we have been successful during the 2006 and 2007 periods of strong demand for non-residential construction services to substantially increase our net over-billed position. Our 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", were $457.7 million and $264.2 million as of September 30, 2007 and December 31, 2006, respectively. Long-term liquidity requirements can be expected to be met through cash generated from operating activities, our Revolving Credit Facility and, if required, the sale of various secured or unsecured debt and/or equity interests in the public and private markets. Based upon our current credit ratings and financial position, we can reasonably expect to be able (a) to incur long-term debt, such as the Term Loan of $300.0 million borrowed in September 2007 to fund, in part, the purchase of Ohmstede and/or (b) to issue equity. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction services, which is in turn influenced by macroeconomic trends including interest rates and governmental economic policy. In addition to the primary revenue risk factor, our ability to perform work at profitable levels is critical in meeting long-term liquidity requirements. We believe that our current cash balances and our borrowing capacity available under our Revolving Credit Facility or other forms of financing available through debt or equity offerings, combined with cash expected to be generated from operations, will be sufficient to provide short-term and foreseeable long-term liquidity and meet expected capital expenditure requirements. However, we are a party to lawsuits and other proceedings in which other parties seek to recover from us amounts ranging from a few thousand dollars to over $78.0 million. If we were required to pay damages in one or more such proceedings, such payments could have a material adverse effect on our financial position, results of operations and/or cash flows. Certain Insurance Matters As of September 30, 2007 and December 31, 2006, we utilized approximately $44.8 million and $51.6 million, respectively, of letters of credit obtained under our Revolving Credit Facility as collateral for our insurance obligations. New Accounting Pronouncements On January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the adoption of FIN 48 and recognition of the cumulative effect of adoption of a new accounting principle, we recorded a $0.3 million increase in the liability for unrecognized income tax benefits, with an offsetting reduction in retained earnings. As of September 30, 2007, the total liability for unrecognized income tax benefits was $6.4 million, the reversal of which would reduce the effective income tax rate if and when recognized. We recognized interest and penalties related to uncertain tax positions in the income tax provision. As of September 30, 2007, we had approximately $1.6 million of accrued interest related to uncertain tax positions included in the liability on the Condensed Consolidated Balance Sheet, of which approximately $0.8 million and $1.1 million were recorded during the three and nine months ended September 30, 2007. It is possible that approximately $2.0 million of income tax liability related to uncertain intercompany transfer pricing items will become a recognized income tax benefit in the next twelve months due to the closing of open tax years. The tax years 2003 to 2006 remain open to examination by United States taxing jurisdictions, and the tax years 2000 to 2006 remain open to examination by foreign taxing jurisdictions. In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. Statement 157 is effective for our financial statements beginning with the first quarter of 2008. Early adoption is permitted. We have not determined the effect, if any, the adoption of Statement 157 will have on our financial position and results of operations. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Statement 159 is effective for our financial statements beginning with the first quarter of 2008. We have not determined the effect, if any, the adoption of Statement 159 will have on our financial position and results of operations. 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. Our 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 the annual report on Form 10-K for the year ended December 31, 2006. There was no initial adoption of any accounting policies during the three and nine months ended September 30, 2007, except for the adoption of FIN 48. We believe that some of the more critical judgment areas in the application of accounting policies that affect our 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) goodwill and identifiable intangible assets. Revenue Recognition for Long-term Construction Contracts and Services Contracts We believe our most critical accounting policy is revenue recognition from long-term construction contracts for which we use 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 our industry. Percentage-of-completion for each contract is measured principally by the ratio of costs incurred to date to perform each contract to the estimated total costs to perform such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date to perform each contract to the estimated total labor costs to fully perform 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 our Condensed Consolidated Balance Sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the Condensed 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 we seek 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 unbilled revenues and collect amounts after billing. Due to uncertainties inherent in estimates employed in applying percentage-of-completion accounting, estimates may be revised as project work progresses. Application of percentage-of-completion accounting requires that the impact of revised estimates be reported prospectively in the condensed consolidated financial statements. In addition to revenue recognition for long-term construction contracts, we recognize revenues from service contracts as such contracts are performed in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition, revised and updated" ("SAB 104"). There are two basic types of services contracts: (a) fixed price services contracts which are signed in advance for maintenance, repair and retrofit work over periods typically ranging from one to three years (pursuant to which our employees may be at a customer's site full time) and (b) services contracts which may or may not be signed in advance for similar maintenance, repair and retrofit work on an as needed basis (frequently referred to as time and material work). Fixed price facilities services contracts are generally performed over the contract period, and, accordingly, revenue is recognized on a pro-rata basis over the life of the contract. Revenues derived from other services contracts are recognized when the services are performed in accordance with SAB 104. Expenses related to all services contracts are recognized as incurred. Accounts Receivable We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of the past due balances. The provision for doubtful accounts during the three and nine months ended September 30, 2007 reflects a reduction of $2.6 million and $2.9 million, respectively. For the three and the nine months ended September 30, 2006, the provision for doubtful accounts was $1.1 million and $2.4 million, respectively. At September 30, 2007 and December 31, 2006, accounts receivable of $1,442.2 million and $1,184.4 million, respectively, included allowances of $22.3 million and $25.0 million, respectively. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to deterioration of its financial condition or its credit ratings. The allowance requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis and as additional information is received. Insurance Liabilities We have loss payment deductibles for certain workers' compensation, auto liability, general liability and property claims, have self-insured retentions for certain other casualty claims and are self-insured for employee-related health care claims. Losses are recorded based upon estimates of our liability for claims incurred and for 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. We believe the liabilities recognized on our balance sheets 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 will be recorded in the period that the experience becomes known. Income Taxes We have net deferred tax liabilities resulting from non-deductible temporary differences of $23.3 million at September 30, 2007 and net deferred tax assets resulting from deductible temporary differences of $28.2 million at December 31, 2006, respectively, which will impact our taxable income in future periods. The change during 2007 in the deductible temporary differences primarily related to non-deductible goodwill and identifiable intangible assets from the Ohmstede acquisition and other items reflected as temporary differences. 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, 2007 and December 31, 2006, the total valuation allowance on gross deferred tax assets was approximately $10.9 million and $12.9 million, respectively, the decrease in which was attributable to a capital gain recognized on the sale of our interest in the CBRE joint venture. The tax benefit of this sale was recorded in results from discontinued operations in the Condensed Consolidated Statement of Operations. Goodwill and Identifiable Intangible Assets As of September 30, 2007, we had $592.5 million and $206.6 million, respectively, of goodwill and net identifiable intangible assets (primarily based on the market values of our backlog, customer relationships, non-competition agreements and trade names), primarily arising out of the acquisition of companies. As of December 31, 2006, goodwill and net identifiable intangible assets were $288.2 million and $38.3 million, respectively. The increases in the goodwill and net identifiable intangible assets (net of accumulated amortization) since December 31, 2006 were related to the acquisition of four companies during the third quarter of 2007. During 2007, the purchase price accounting for our acquisition of a United States mechanical construction company in October 2006 was finalized. As a result, identifiable intangible assets ascribed to its goodwill, backlog and customer relationships and to a non-competition agreement were adjusted with an insignificant impact. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. These forecasts reflect assumptions regarding the ability to successfully integrate acquired companies. FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142") requires that goodwill and other intangible assets with indefinite useful lives not be amortized, but instead be tested at least annually for impairment (which we test each October 1), and be written down if impaired, rather than amortized as previous standards required. Furthermore, Statement 142 requires that identifiable intangible assets with finite lives be amortized over their useful lives. Changes in strategy and/or market conditions may result in adjustments to recorded intangible asset balances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have not used any material derivative financial instruments during the three and nine months ended September 30, 2007 and 2006, including trading or speculation on changes in interest rates or commodity prices of materials used in our business. We are exposed to market risk for changes in interest rates for borrowings under the Revolving Credit Facility and the Term Loan. Borrowings under the Revolving Credit Facility and the Term Loan bear interest at variable rates, and the fair value of borrowings are not affected by changes in market interest rates. As of September 30, 2007, there were no borrowings outstanding under the Revolving Credit Facility and the balance on the Term Loan was $300.0 million. Both instruments bear interest at (1) a rate which is the prime commercial lending rate announced by Harris Nesbitt from time to time (7.75% at September 30, 2007) plus 0.0% to 0.5% based on certain financial tests or (2) United States dollar LIBOR (5.12% at September 30, 2007) plus 1.0% to 2.25% based on certain financial tests. The interest rates in effect at September 30, 2007 were 7.75% and 6.62% for the prime commercial lending rate and the United States dollar LIBOR, respectively. Letter of credit fees issued under the Revolving Credit Facility range from 1.0% to 2.25% of the respective face amounts of the letters of credit issued and are charged based on the type of letter of credit issued and certain financial tests. The Revolving Credit Facility and the Term Loan expire in October 2010. There is no guarantee that we will be able to renew the Revolving Credit Facility at its expiration. Based on the $300.0 million borrowings outstanding on the Term Loan, if the overall interest rates were to increase by 1.0%, the net of tax interest expense would increase approximately $1.8 million in the next twelve months. Conversely, if the overall interest rates were to decrease by 1.0%, interest expense, net of income taxes, would decrease by approximately $1.8 million in the next twelve months. We are also exposed to construction market risk and its potential related impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if our customers' ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, we believe we take appropriate action to manage market and other risks, but there is no assurance that we 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Amounts invested in our 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 our condensed consolidated balance sheets. We believe the exposure to the effects that fluctuating foreign currencies may have on the consolidated results of operations is limited because the foreign operations primarily invoice customers and collect obligations in their respective local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in their same local currencies. In addition, we are exposed to market risk of fluctuations in prices of certain commodities such as copper and steel utilized in both our construction and facilities services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 6,000 vehicles. While we believe we can increase our prices to adjust for some price increases in commodities and energy, there can be no assurance that continued price increases of commodities and energy, if they occur, will be recoverable. ITEM 4. CONTROLS AND PROCEDURES. Based on an evaluation of our disclosure controls and procedures (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934), our Chairman of the Board of Directors and Chief Executive Officer, Frank T. MacInnis, and our Chief Financial Officer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchanges Act of 1934) are effective as of the end of the period covered by this report. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. - OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS There have been no new material developments during the quarter ended September 30, 2007 regarding legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2006 (the "2006 Form 10-K") or in our Form 10-Q for the quarter ended June 30, 2007. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. A special meeting of stockholders of EMCOR (the "Special Meeting") was held on September 18, 2007. At the Special Meeting, our stockholders approved an amendment to our Restated Certificate of Incorporation authorizing an increase in the number of shares of our common stock from 80 million shares to 200 million shares. 38,855,056 shares voted in favor of approval, 15,997,601 shares voted against approval and 7,640 shares abstained from voting thereon. ITEM 6. EXHIBITS.
Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- 2(a-1) Purchase Agreement dated as of February 11, 2002 by Exhibit 2.1 to EMCOR's Report on Form and among Comfort Systems USA, Inc. and EMCOR-CSI 8-K dated February 14, 2002 Holding Co. 2(a-2) Purchase and Sale Agreement dated as of August 20, 2007 Exhibit 2.1 to EMCOR's Report on Form 8-K between FR X Ohmstede Holdings LLC and EMCOR Group, Inc. (Date of Report August 20, 2007) 3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10 December 15, 1994 3(a-2) Amendment dated November 28, 1995 to the Restated Exhibit 3(a-2) to EMCOR's Annual Report on Certificate of Incorporation of EMCOR Form 10-K for the year ended December 31, 1995 ("1995 Form 10-K") 3(a-3) Amendment dated February 12, 1998 to the Restated Exhibit 3(a-3) to EMCOR's Annual Report on Certificate of Incorporation Form 10-K for the year ended December 31, 1997 ("1997 Form 10-K") 3(a-4) Amendment dated January 27, 2006 to the Restated Exhibit 3(a-4) to EMCOR's Annual Report on Certificate of Incorporation Form 10-K for the year ended December 31, 2005 ("2005 Form 10-K") 3(a-5) Amendment dated September 18, 2007 to the Restated Exhibit A to EMCOR'S Proxy Statement Certificate of Incorporation dated August 17, 2007 for Special Meeting of Stockholders held September 18, 2007 3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K") 4(a) U.S. $375,000,000 Credit Agreement dated October 14, Exhibit 4 to EMCOR's Report on Form 8-K 2005 by and among EMCOR Group, Inc. and certain of its (Date of Report October 17, 2005) subsidiaries and Harris N.A. individually and as Agent for the Lenders which are or became parties thereto (the "Credit Agreement") 4(b) Assignment and Acceptance dated October 14, 2005 between Exhibit 4(b) to 2005 Form 10-K Harris Nesbitt Financing, Inc. ("HNF") as assignor, and Bank of Montreal, as assignee of 100% interest of HNF in the Credit Agreement to Bank of Montreal 4(c) Commitment Amount Increase Request dated November 21, Exhibit 4(c) to 2005 Form 10-K 2005 between EMCOR and the Northern Trust Company effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(d) Commitment Amount Increase Request dated November 21, Exhibit 4(d) to 2005 Form 10-K 2005 between EMCOR and Bank of Montreal effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(e) Commitment Amount Increase Request dated November 21, Exhibit 4(e) to 2005 Form 10-K 2005 between EMCOR and National City Bank of Indiana effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(f) Assignment and Acceptance dated November 29, 2005 Exhibit 4(f) to 2005 Form 10-K between Bank of Montreal, as assignor, and Fifth Third Bank, as assignee, of 30% interest of Bank of Montreal in the Credit Agreement to Fifth Third Bank
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- 4(g) Assignment and Acceptance dated November 29, 2005 Exhibit 4(g) to 2005 Form 10-K between Bank of Montreal, as assignor, and Northern Trust Company, as assignee, of 20% interest of Bank of Montreal in the Credit Agreement to Bank of Montreal 4(h) Term Loan Agreement dated as of September 19, 2007 Exhibit 4.1(a) to EMCOR's Form 8-K among EMCOR, Bank of Montreal, as Administrative (Date of Report September 9, 2007) Agent, and the several financial institutions listed on the signature pages thereof 4(i) Second Amended and Restated Security Agreement dated as Exhibit 4.1(b) to EMCOR's Form 8-K of September 19, 2007 among EMCOR, certain of its U.S. (Date of Report September 9, 2007) subsidiaries, and Harris N.A., as Agent 4(j) Second Amended and Restated Pledge Agreement dated as Exhibit 4.1(c) to EMCOR's Form 8-K of September 19, 2007 among EMCOR, certain of its U.S. (Date of Report September 9, 2007) subsidiaries, and Harris N.A., as Agent 4(k) Guaranty Agreement by certain of EMCOR's U.S. Exhibit 4.1(d) to EMCOR's Form 8-K subsidiaries in favor of Harris N.A., as Agent (Date of Report September 9, 2007) 4(l) First Amendment dated as of September 19, 2007 to Exhibit 4.1(e) to EMCOR's Form 8-K Amended and Restated Credit Agreement effective October (Date of Report September 9, 2007) 14, 2005 among EMCOR, Harris N.A., as Agent, and certain other lenders party thereto 10(a) Severance Agreement between EMCOR and Frank T. MacInnis Exhibit 10.2 to EMCOR's Report on Form 8-K (Date of Report April 25, 2005)("April 2005 Form 8-K") 10(b) Form of Severance Agreement ("Severance Agreement") Exhibit 10.1 to the April 2005 Form between EMCOR and each of Sheldon I. Cammaker, R. 8-K Kevin Matz and Mark A. Pompa 10(c) Form of Amendment to Severance Agreement between EMCOR Exhibit 10(c) to EMCOR's Quarterly and each of Frank T. MacInnis, Sheldon I. Cammaker, Report on Form 10-Q for the quarter Mark A. Pompa and R. Kevin Matz ended March 31, 2007 ("March 2007 Form 10-Q") 10(d) Letter Agreement dated October 12, 2004 between Anthony Exhibit 10.1 to EMCOR's Report on Guzzi and EMCOR (the "Guzzi Letter Agreement") Form 8-K (Date of Report October 12, 2004) 10(e) Form of Confidentiality Agreement Exhibit C to Guzzi Letter Agreement 10(f) Form of Indemnification Agreement between EMCOR and Exhibit F to Guzzi Letter Agreement each of its officers and directors 10(g-1) Severance Agreement ("Guzzi Severance Agreement")dated Exhibit D to the Guzzi Letter Agreement October 25, 2005 between Anthony Guzzi and EMCOR 10(g-2) Amendment to Guzzi Severance Agreement Exhibit 10(g-2) to the March 2007 Form 10-Q 10(h-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10 10(h-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2001 ("2001 Form 10-K") 10(h-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2001 Form 10-K
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- 10(i-1) 1995 Non-Employee Directors' Non-Qualified Stock Option Exhibit 10(p) to 2001 Form 10-K Plan ("1995 Option Plan") 10(i-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2001 Form 10-K 10(j-1) 1997 Non-Employee Directors' Non-Qualified Stock Option Exhibit 10(k) to EMCOR's Annual Report on Plan ("1997 Option Plan") Form 10-K for the year ended December 31, 1999 ("1999 Form 10-K") 10(j-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2001 Form 10-K 10(k) 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K 10(l-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(a) to EMCOR's Quarterly Report Frank T. MacInnis and EMCOR ("MacInnis Continuity on Form 10-Q for the quarter ended June 30, Agreement") 1998 ("June 1998 Form 10-Q") 10(l-2) Amendment dated as of May 4, 1999 to MacInnis Continuity Exhibit 10(h) for the quarter ended June 30, Agreement 1999 ("June 1999 Form 10-Q") 10(l-3) Amendment dated as of March 1, 2007 to MacInnis Exhibit 10(l-3) to the March 2007 Form Continuity Agreement 10-Q 10(m-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q Sheldon I. Cammaker and EMCOR ("Cammaker Continuity Agreement") 10(m-2) Amendment dated as of May 4, 1999 to Cammaker Exhibit 10(i) to the June 1999 Form 10-Q Continuity Agreement 10(m-3) Amendment dated as of March 1, 2007 to Cammaker Exhibit 10(m-3) to the March 2007 Form Continuity Agreement 10-Q 10(n-1) Continuity Agreement dated as of June 22, 1998 between R. Exhibit 10(f) to the June 1998 Form 10-Q Kevin Matz and EMCOR ("Matz Continuity Agreement") 10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q Agreement 10(n-3) Amendment dated as of January 1, 2002 to Matz Continuity Exhibit 10(o-3) to Form 10-Q for the quarter Agreement ended March 31, 2002 ("March 2002 10-Q") 10(n-4) Amendment dated as of March 1, 2007 to Matz Continuity Exhibit 10(n-4) to the March 2007 Form Agreement 10-Q 10(o-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form 10-Q Mark A. Pompa and EMCOR ("Pompa Continuity Agreement") 10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Exhibit 10(n) to the June 1999 Form 10-Q Agreement 10(o-3) Amendment dated as of January 1, 2002 to Pompa Exhibit 10(p-3) to the March 2002 10-Q Continuity Agreement 10(o-4) Amendment dated as of March 1, 2007 to Pompa Exhibit 10(o-4) to the March 2007 Form Continuity Agreement 10-Q 10(p-1) Change of Control Agreement dated as of October 25, 2004 Exhibit E to Guzzi Letter Agreement between Anthony Guzzi ("Guzzi") and EMCOR ("Guzzi Continuity Agreement")
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or No. Description Page Number - ----------- ------------------------------------------------------- ------------------------------------------- 10(p-2) Amendment dated as of March 1, 2007 to Guzzi Continuity Exhibit 10(p-2) to the March 2007 Form Agreement 10-Q 10(q) Release and Settlement Agreement dated December 22, Exhibit 10(q) to 1999 Form 10-K 1999 between Thomas D. Cunningham and EMCOR 10(r) Separation Agreement and Mutual release dated April 3, Exhibit 10.1 to EMCOR's Report on Form 2006 between Leicle E. Chesser and EMCOR 8-K (Date of Report April 4, 2006) 10(s-1) Executive Stock Bonus Plan, as amended (the "Stock Bonus Exhibit 4.1 to EMCOR's Registration Plan") Statement on Form S-8 (No. 333-112940) filed with the Securities and Exchange Commission on February 18, 2004 (the "2004 Form S-8") 10(s-2) Amendment to Executive Stock Bonus Plan Exhibit 10(s-2) to the March 2007 Form 10-Q 10(s-3) Form of Certificate Representing Restrictive Stock Units Exhibit 10.1 to EMCOR's Report on Form ("RSU's") issued under the Stock Bonus Plan Manditorily 8-K (Date of Report March 4, 2005) Awarded ("March 4, 2005 Form 8-K") 10(s-4) Form of Certificate Representing RSU's issued under the Exhibit 10.2 to March 4, 2005 Form 8-K Stock Bonus Plan Voluntarily Awarded 10(t) Incentive Plan for Senior Executive Officers of EMCOR Exhibit 10.3 to March 4, 2005 Form 8-K Group, Inc. ("Incentive Plan for Senior Executives") 10(u) First Amendment to Incentive Plan for Senior Executives Exhibit 10(t) to 2005 Form 10-K 10(v) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of Report December 15, 2005) 10(w-1) 2003 Non-Employee Directors' Stock Option Exhibit A to EMCOR's proxy statement ("2003 Proxy Statement") Plan for its annual meeting held on June 12, 2003 10(w-2) First Amendment to 2003 Non-Employee Directors' Stock Exhibit 10(u-2) to EMCOR's Annual Report Option Plan on Form 10-K for the year ended December 31, 2006 ("2006 Form 10-K") 10(x-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement 10(x-2) Amendments to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2003 ("2003 Form 10-K") 10(x-3) Second Amendment to 2003 Management Stock Incentive Exhibit 10(u-3) to 2006 Form 10-K Plan 10(y) Form of Stock Option Agreement evidencing grant of stock Exhibit 10.1 to Form 8-K (Date of options under the 2003 Management Stock Incentive Plan Report January 5, 2005) 10(z) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for its annual meeting held June 16, 2005 ("2005 Proxy Statement") 10(a)(a) 2005 Management Stock Incentive Plan Exhibit C to EMCOR's 2003 Proxy Statement
ITEM 6. EXHIBITS. - (continued)
Exhibit Incorporated By Reference to or No. Description Page Number - ------------ ------------------------------------------------------- ------------------------------------------- 10(a)(a-1) First Amendment to 2005 Management Stock Incentive Plan Exhibit 10(z) to 2006 Form 10-K 10(b)(b) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement 10(b)(b-1) First Amendment to 2005 Stock Plan for Directors Exhibit 10(a)(a-2) to 2006 Form 10-K 10(c)(c) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8 dated May 5, 1999 10(d)(d) Form of EMCOR Option Agreement for Messrs. Frank T. Exhibit 4.5 to 2004 Form S-8 MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz and Mark A. Pompa (collectively the "Executive Officers") for options granted January 4, 1999, January 3, 2000 and January 2, 2001 10(e)(e) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.6 to 2004 Form S-8 granted December 14, 2001 10(f)(f) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.7 to 2004 Form S-8 granted January 2, 2002, January 2, 2003 and January 2, 2004 10(g)(g) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8 June 19, 2002, October 25, 2002 and February 27, 2003 10(h)(h) Form of EMCOR Option Agreement for Executive Officers Exhibit 10(g)(g) to 2005 Form 10-K and Guzzi dated January 3, 2005 10(i)(i) 2007 Incentive Plan Exhibit B to EMCOR's Proxy Statement for its annual meeting held June 20, 2007 10(j)(j) Release and Settlement Agreement dated February 25, 2004 Exhibit 10(a)(a) to EMCOR's Annual between Jeffrey M. Levy and EMCOR Report on Form 10-K for the year ended December 31, 2004 ("2004 Form 10-K") 10(k)(k) Form of letter agreement between EMCOR and each Exhibit 10(b)(b) to 2004 Form 10-K Executive Officer with respect to acceleration of options granted January 2, 2003 and January 2, 2004 11 Computation of Basic EPS and Diluted EPS for the three Note C of the Notes to the Condensed and nine months ended September 30, 2007 and 2006 Consolidated Financial Statements 31.1 Certification Pursuant to Section 302 of the Sarbanes- Page ___ Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer * 31.2 Certification Pursuant to Section 302 of the Sarbanes- Page ___ Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer * 32.1 Certification Pursuant to Section 906 of the Sarbanes- Page ___ Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer ** 32.2 Certification Pursuant to Section 906 of the Sarbanes- Page ___ Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer **
- -------------- * Filed Herewith ** Furnished Herewith 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 25, 2007 EMCOR GROUP, INC. ------------------------------------------------- (Registrant) By: /s/FRANK T. MACINNIS ------------------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/MARK A. POMPA ------------------------------------------------- Mark A. Pompa Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Exhibit 31.1 CERTIFICATION I, Frank T. MacInnis, Chairman of the Board of Directors 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) Disclosed in this report any change in the registrants 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 25, 2007 /s/FRANK T. MACINNIS ------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Mark A. Pompa, 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) Disclosed in this report any change in the registrants 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 25, 2007 /s/MARK A. POMPA ------------------------------------ Mark A. Pompa 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 OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2007 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 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 25, 2007 /s/FRANK T. MACINNIS ----------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A. Pompa, 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 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 25, 2007 /s/MARK A. POMPA ----------------------------------- Mark A. Pompa Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----