SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 0-2315
EMCOR Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-2125338
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 Merritt Seven Corporate Park
Norwalk, Connecticut 06851-1060
- --------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(203) 849-7800
- ---------------------------------
(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on
July 21, 2003: 14,990,715 shares.
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
as of June 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Operations -
three months ended June 30, 2003 and 2002 3
Condensed Consolidated Statements of Operations -
six months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income -
six months ended June 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk 28
Item 4 Controls and Procedures 29
PART II - Other Information
Item 1 Legal Proceedings 29
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 6 Exhibits and Reports on Form 8-K 32
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,752 $ 93,103
Accounts receivable, net 986,307 964,968
Costs and estimated earnings in excess
of billings on uncompleted contracts 257,988 235,809
Inventories 11,944 12,271
Prepaid expenses and other 34,737 28,784
---------- ----------
Total current assets 1,348,728 1,334,935
Investments, notes and other long-term
receivables 28,999 24,642
Property, plant and equipment, net 69,832 70,750
Goodwill 293,889 290,412
Identifiable intangible assets, net 12,094 13,845
Other assets 20,945 23,907
---------- ----------
Total assets $1,774,487 $1,758,491
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
(Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under working capital credit line $ 166,800 $ 112,000
Current maturities of long-term debt and capital
lease obligations 588 22,276
Accounts payable 380,720 409,562
Billings in excess of costs and estimated
earnings on uncompleted contracts 379,432 363,092
Accrued payroll and benefits 128,037 159,416
Other accrued expenses and liabilities 115,791 113,529
---------- ----------
Total current liabilities 1,171,368 1,179,875
Long-term debt and capital lease obligations 689 905
Other long-term obligations 93,321 87,841
---------- ----------
Total liabilities 1,265,378 1,268,621
---------- ----------
Stockholders' equity:
Preferred stock, $0.10 par value, 1,000,000 shares
authorized, zero issued and outstanding -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 16,120,032 and 16,050,862 shares
issued, respectively 161 161
Capital surplus 315,007 312,393
Accumulated other comprehensive loss (91) (5,148)
Retained earnings 210,829 199,300
Treasury stock, at cost 1,129,317 and 1,131,985
shares, respectively (16,797) (16,836)
---------- ----------
Total stockholders' equity 509,109 489,870
---------- ----------
Total liabilities and stockholders' equity $1,774,487 $1,758,491
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
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Three months ended June 30, 2003 2002
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Revenues $1,144,378 $986,399
Cost of sales 1,021,103 866,183
---------- --------
Gross profit 123,275 120,216
Selling, general and administrative expenses 106,638 93,292
---------- --------
Operating income 16,637 26,924
Interest expense, net 1,842 445
---------- --------
Income before income taxes 14,795 26,479
Income tax provision 6,522 11,651
---------- --------
Net income $ 8,273 $ 14,828
========== ========
Basic earnings per share $ 0.55 $ 1.00
========== ========
Diluted earnings per share $ 0.53 $ 0.96
========== ========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
- --------------------------------------------------------------------------------
Six months ended June 30, 2003 2002
- --------------------------------------------------------------------------------
Revenues $2,205,408 $1,796,698
Cost of sales 1,965,364 1,587,096
---------- ----------
Gross profit 240,044 209,602
Selling, general and administrative expenses 215,813 170,147
---------- ----------
Operating income 24,231 39,455
Interest expense, net 3,644 28
---------- ----------
Income before income taxes 20,587 39,427
Income tax provision 9,058 17,348
---------- ----------
Net income $ 11,529 $ 22,079
========== ==========
Basic earnings per share $ 0.77 $ 1.49
========== ==========
Diluted earnings per share $ 0.74 $ 1.43
========== ==========
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
- -------------------------------------------------------------------------------
Six months ended June 30, 2003 2002
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,529 $ 22,079
Depreciation and amortization 10,347 7,305
Amortization of identifiable intangible assets 1,751 --
Other non-cash expenses 4,153 2,471
Changes in operating assets and liabilities,
excluding the effect of business acquired (80,927) 36,231
-------- --------
Net cash (used in) provided by operating activities (53,147) 68,086
-------- --------
Cash flows from investing activities:
Payments for acquisitions of businesses, net of
cash acquired, and related earn-out agreements (3,478) (164,649)
Proceeds from sale of assets 732 360
Purchase of property, plant and equipment (9,216) (9,039)
Net (disbursements) proceeds related to other
investments (4,357) 5,480
-------- --------
Net cash used in investing activities (16,319) (167,848)
-------- --------
Cash flows from financing activities:
Proceeds from working capital credit lines 878,198 50,000
Repayments of working capital credit lines (823,398) (50,000)
Net repayments for long-term debt (22,139) (1,578)
Net borrowings (repayments) for capital lease
obligations 235 (10)
Net proceeds from exercise of stock options 1,219 1,300
-------- --------
Net cash provided by (used in) financing activities 34,115 (288)
-------- --------
Decrease in cash and cash equivalents (35,351) (100,050)
Cash and cash equivalents at beginning of year 93,103 189,766
-------- --------
Cash and cash equivalents at end of period $ 57,752 $ 89,716
======== ========
Supplemental cash flow information:
Cash paid for:
Interest $ 3,297 $ 488
Income taxes $ 11,597 $ 22,130
Non-cash financing activities:
Debt assumed in acquisition $ -- $ 22,115
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Capital comprehensive Retained Treasury Comprehensive
Total stock surplus loss (1) earnings stock income
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836)
Net income 22,079 -- -- -- 22,079 -- $22,079
Foreign currency translation
adjustments 2,697 -- -- 2,697 -- -- 2,697
-------
Comprehensive income -- -- -- -- -- -- $24,776
=======
Common stock issued under
stock option plans 1,300 0 1,300 -- -- --
Value of Restricted Stock
Units (2) 2,901 -- 2,901 -- -- --
-------- ---- -------- -------- -------- --------
Balance, June 30, 2002 $450,910 $159 $311,837 $(2,727) $158,477 $(16,836)
======== ==== ======== ======= ======== ========
Balance, January 1, 2003 $489,870 $161 $312,393 $(5,148) $199,300 $(16,836)
Net income 11,529 -- -- -- 11,529 -- $11,529
Foreign currency translation
adjustments 5,057 -- -- 5,057 -- -- 5,057
-------
Comprehensive income -- -- -- -- -- -- $16,586
=======
Common stock issued under
stock option plans 1,219 0 1,180 -- -- 39
Value of Restricted Stock
Units (3) 1,434 -- 1,434 -- -- --
-------- ---- -------- ------- -------- --------
Balance, June 30, 2003 $509,109 $161 $315,007 $ (91) $210,829 $(16,797)
======== ==== ======== ======= ======== ========
(1) Represents cumulative foreign currency translation adjustments and minimum
pension liability adjustments.
(2) Shares of common stock will be issued in respect of restricted stock units
granted pursuant to EMCOR's Executive Stock Bonus Plan. This amount
represents the value of restricted stock units at the date of grant plus
the related compensation expense recorded in 2002 due to an increase in
market value of the underlying common stock. As of October 2002, the terms
of the Executive Stock Bonus Plan were changed resulting in prospective
fixed plan accounting for both existing and new grants.
(3) Shares of common stock will be issued in respect of restricted stock units.
This amount represents the value of restricted stock units at the date of
grant.
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
by EMCOR Group, Inc. and Subsidiaries ("EMCOR"), without audit, pursuant to the
interim period reporting requirements of Form 10-Q. Consequently, certain
information and note disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States have been condensed or omitted. Readers of this report should
refer to the consolidated financial statements and the notes thereto included in
EMCOR's latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
In the opinion of EMCOR, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of a normal
recurring nature) necessary to present fairly the financial position of EMCOR
and the results of its operations. The results of operations for the three and
six month periods ended June 30, 2003 are not necessarily indicative of the
results to be expected for the year ending December 31, 2003.
On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. ("CSU") a group
of companies (the "Acquired Comfort Companies"). On December 19, 2002, EMCOR
acquired all the capital stock of Consolidated Engineering Services, Inc.
("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two
additional companies during 2002. These acquisitions were accounted for by the
purchase method, and the purchase prices have been allocated to the assets
acquired and liabilities assumed, based upon the estimated fair values of these
assets and liabilities at their respective dates of acquisition. The purchase
price for CES is subject to adjustment based on the difference between the net
assets of CES on the closing date and an agreed upon preclosing date. The
purchase price allocation is also subject to finalization.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
NOTE B New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (the "FASB") issued
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the
"Interpretation"). FIN 45 clarifies the requirements of FASB Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 may require, that upon issuance of a guarantee, the
guarantor to recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of the Interpretation
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The Interpretation's provisions for initial recognition
and measurement should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The guarantor's previous accounting for guarantees that were issued
before the date of FIN 45's initial application may not be revised or restated
to reflect the effect of the recognition and measurement provisions of the
Interpretation. EMCOR has determined that the adoption of FIN 45 will only
impact disclosures and that its accounting for guarantees is not impacted as of
June 30, 2003.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123
NOTE B New Accounting Pronouncements - (Continued)
to require prominent disclosures in both annual and interim financial statements
of the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal years
beginning after December 15, 2002 and was adopted by EMCOR for all periods
presented herein. EMCOR did not change to the fair value based method of
accounting for stock-based employee compensation; therefore, adoption of SFAS
148 will only impact disclosures, not the financial results, of EMCOR.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. EMCOR is currently evaluating the effect that adoption of Fin 46 will have
on EMCOR's consolidated financial condition or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. The new guidance
amends SFAS 133 for decisions made: (a) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
(b) in connection with other Board projects dealing with financial instruments,
and (c) regarding implementation issues raised in relation to the application of
the definition of a derivative. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. It is not expected that the provisions of SFAS
149 will have a material impact on EMCOR's consolidated financial position,
results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003. EMCOR
does not have any financial instruments that meet the provisions of SFAS 150;
therefore, adopting the provisions of SFAS 150 is not expected to have a
material impact on EMCOR's consolidated financial position, results of
operations or cash flows.
NOTE C Earnings Per Share
Calculation of Basic and Diluted Earnings per share
The following tables summarize EMCOR's calculation of Basic and Diluted Earnings
per Share ("EPS") for the three and six month periods ended June 30, 2003 and
2002:
Three months ended
June 30, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
Basic EPS
Income available to common
stockholders $8,273,000 14,988,836 $0.55
=====
Effect of Dilutive Securities:
Options -- 517,963
---------- ----------
Diluted EPS $8,273,000 15,506,799 $0.53
========== ========== =====
Six months ended
June 30, 2003
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
Basic EPS
Income available to common
stockholders $11,529,000 14,959,666 $0.77
=====
Effect of Dilutive Securities:
Options -- 516,996
----------- ----------
Diluted EPS $11,529,000 15,476,662 $0.74
=========== ========== =====
NOTE C Earnings Per Share - (Continued)
Three months ended
June 30, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
Basic EPS
Income available to common
stockholders $14,828,000 14,863,074 $1.00
=====
Effect of Dilutive Securities:
Options -- 628,228
----------- ----------
Diluted EPS $14,828,000 15,491,302 $0.96
=========== ========== =====
Six months ended
June 30, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
Basic EPS
Income available to common
stockholders $22,079,000 14,846,079 $1.49
=====
Effect of Dilutive Securities:
Options -- 605,216
----------- ----------
Diluted EPS $22,079,000 15,451,295 $1.43
=========== ========== =====
There were options to purchase 219,403 shares of common stock outstanding during
both the three and six month periods ended June 30, 2003, which options were
anti-dilutive and required to be excluded from the calculation of diluted EPS.
There were no anti-dilutive stock options that were required to be excluded from
the calculation of diluted EPS for the three and six month periods ended June
30, 2002.
NOTE D Valuation of Stock Option Grants
At June 30, 2003, EMCOR had eight stock-based compensation plans and programs.
EMCOR applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized in the
accompanying Condensed Consolidated Statements of Operations for the three and
six month periods ended June 30, 2003 and 2002 in respect of stock options
granted during those periods inasmuch as EMCOR grants stock options at fair
market value. Had compensation cost for these options been determined consistent
with SFAS 123 and SFAS 148, EMCOR's net income, basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS") would have been reduced
from the "as reported amounts" below to the "pro forma amounts" below for the
three and six months ended June 30, 2003 and 2002 (in thousands, except per
share amounts):
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported..................................................... $8,273 $14,828 $11,529 $22,079
Less: Total stock-based compensation expense determined
under a fair value based method, net of related tax effects.. 321 422 633 2,548
------ ------- ------- -------
Pro Forma....................................................... $7,952 $14,406 $10,896 $19,531
====== ======= ======= =======
Basic EPS:
As reported..................................................... $ 0.55 $ 1.00 $ 0.77 $ 1.49
Pro Forma....................................................... $ 0.53 $ 0.97 $ 0.73 $ 1.32
Diluted EPS:
As reported..................................................... $ 0.53 $ 0.96 $ 0.74 $ 1.43
Pro Forma....................................................... $ 0.51 $ 0.93 $ 0.70 $ 1.26
Common Stock
As of June 30, 2003 and December 31, 2002, 14,990,715 and 14,918,877 shares of
EMCOR common stock were outstanding, respectively.
NOTE E Long-Term Debt
Long-term debt in the accompanying Condensed Consolidated Balance Sheets
consisted of the following amounts (in thousands):
June 30, December 31,
2003 2002
-------- ------------
Notes Payable at 10.0%, due 2003 $ -- $21,815
Capitalized lease obligations 586 351
Other 691 1,015
------ -------
1,277 23,181
Less: current maturities 588 22,276
------ -------
$ 689 $ 905
====== =======
The Notes Payable of $21.8 million at December 31, 2002 were notes made by CSU
to former owners of certain Acquired Comfort Companies, which notes were assumed
by EMCOR in connection with the acquisition of the Acquired Comfort Companies.
The Notes Payable accrued interest at 10.0% per annum, and they were paid in
full in April 2003.
NOTE F Segment Information
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: United States electrical construction and facilities
services (systems for generation and distribution of electrical power; lighting
systems; low voltage systems such as fire alarm, security, communications and
process control systems; and voice and data systems), United States mechanical
construction and facilities services (systems for heating, ventilation, air
conditioning, refrigeration and clean room process ventilation systems; and
plumbing, process and high-purity piping systems), United States facilities
services, Canada construction and facilities services, United Kingdom
construction and facilities services, and Other international construction and
facilities services. The segment "United States facilities services" principally
consists of those operations which primarily provide a portfolio of services
needed to support the operation and maintenance of customers' facilities (mobile
operation and maintenance services, site-based operation and maintenance
services, call center services, facility planning and consulting and energy
management programs) which services are not related to customer' construction
programs. The Canada, United Kingdom and Other international segments perform
electrical construction, mechanical construction and facilities services. "Other
international construction and facilities services" represents EMCOR's
operations outside of the United States, Canada, and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
The following tables present information about industry segments and geographic
areas. The tables also present pro forma revenues and operating income as if the
2002 acquisitions had occurred at the beginning of fiscal 2002. Certain
reclassifications of prior year amounts have been made to conform to current
year segment presentation. The unaudited pro forma revenues and operating income
are not necessarily indicative of future operating results (in thousands):
For the three months ended June 30,
As Reported Pro Forma
--------------------- ----------
2003 2002 2002
---------- -------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 322,035 $289,275 $ 289,465
United States mechanical construction and facilities services 426,088 437,873 450,269
United States facilities services 164,777 52,813 148,854
---------- -------- ----------
Total United States operations 912,900 779,961 888,588
Canada construction and facilities services 91,264 84,132 84,132
United Kingdom construction and facilities services 140,214 122,306 122,306
Other international construction and facilities services -- -- --
---------- -------- ----------
Total worldwide operations $1,144,378 $986,399 $1,095,026
========== ======== ==========
Total revenues:
United States electrical construction and facilities services $ 328,176 $291,448 $ 291,638
United States mechanical construction and facilities services 428,236 441,162 453,558
United States facilities services 165,174 53,209 149,250
Less intersegment revenues (8,686) (5,858) (5,858)
---------- -------- ----------
Total United States operations 912,900 779,961 888,588
Canada construction and facilities services 91,264 84,132 84,132
United Kingdom construction and facilities services 140,214 122,306 122,306
Other international construction and facilities services -- -- --
---------- -------- ----------
Total worldwide operations $1,144 378 $986,399 $1,095,026
========== ======== ==========
NOTE F Segment Information - (Continued)
For the six months ended June 30,
As Reported Pro Forma
----------------------- ----------
2003 2002 2002
---------- ---------- ----------
Revenues from unrelated entities:
United States electrical construction and facilities services $ 575,909 $ 577,013 $ 579,055
United States mechanical construction and facilities services 842,591 745,043 863,360
United States facilities services 333,189 104,617 288,314
---------- ---------- ----------
Total United States operations 1,751,689 1,426,673 1,730,729
Canada construction and facilities services 184,326 138,651 138,651
United Kingdom construction and facilities services 269,393 231,374 231,374
Other international construction and facilities services -- -- --
---------- ---------- ----------
Total worldwide operations $2,205,408 $1,796,698 $2,100,754
========== ========== ==========
Total revenues:
United States electrical construction and facilities services $ 592,075 $ 581,747 $ 583,789
United States mechanical construction and facilities services 845,197 751,155 869,472
United States facilities services 334,266 105,475 289,172
Less intersegment revenues (19,849) (11,704) (11,704)
---------- ---------- ----------
Total United States operations 1,751,689 1,426,673 1,730,729
Canada construction and facilities services 184,326 138,651 138,651
United Kingdom construction and facilities services 269,393 231,374 231,374
Other international construction and facilities services -- -- --
---------- ---------- ----------
Total worldwide operations $2,205,408 $1,796,698 $2,100,754
========== ========== ==========
For the three months ended June 30,
As Reported Pro Forma
----------------------- ----------
2003 2002 2002
---------- ---------- ----------
Operating income (loss):
United States electrical construction and facilities services $ 16,156 $ 14,507 $ 14,530
United States mechanical construction and facilities services 6,243 19,170 19,588
United States facilities services 4,566 301 6,852
---------- ---------- ----------
Total United States operations 26,965 33,978 40,970
Canada construction and facilities services 1,145 693 693
United Kingdom construction and facilities services (2,862) 689 689
Other international construction and facilities services (272) 206 206
Corporate administration (8,339) (8,642) (8,642)
---------- ---------- ----------
Total worldwide operations 16,637 26,924 33,916
Other corporate items:
Interest expense (2,031) (823) (2,520)
Interest income 189 378 381
---------- ---------- ----------
Income before income taxes $ 14,795 $ 26,479 $ 31,777
========== ========== ==========
For the six months ended June 30,
As Reported Pro Forma
----------------------- ----------
2003 2002 2002
---------- ---------- ----------
Operating income (loss):
United States electrical construction and facilities services $ 29,110 $ 30,870 $ 31,172
United States mechanical construction and facilities services 10,586 25,929 27,470
---------- ---------- ----------
Total United States operations 46,436 56,250 68,744
Canada construction and facilities services 1,766 235 235
United Kingdom construction and facilities services (7,337) (309) (309)
Other international construction and facilities services (115) (95) (95)
Corporate administration (16,519) (16,626) (16,626)
---------- ---------- ----------
Total worldwide operations 24,231 39,455 51,949
Other corporate items:
Interest expense (4,028) (1,340) (4,573)
Interest income 384 1,312 1,317
---------- ---------- ----------
Income before income taxes $ 20,587 $ 39,427 $ 48,693
========== ========== ==========
June 30, Dec. 31,
2003 2002
---------- ----------
Total assets:
United States electrical construction and facilities services $ 346,537 $ 308,752
United States mechanical construction and facilities services 793,896 810,498
United States facilities services 286,856 292,218
---------- ----------
Total United States operations 1,427,289 1,411,468
Canada construction and facilities services 96,470 77,727
United Kingdom construction and facilities services 183,129 191,563
Other international construction and facilities services 4,201 5,071
Corporate administration 63,398 72,662
---------- ----------
Total worldwide operations $1,774,487 $1,758,491
========== ==========
NOTE G Pro Forma Results of Operations
The following tables present pro forma results of operations including all
companies acquired during 2002. The results of operations presented assume the
acquisitions had occurred at the beginning of fiscal 2002. The pro forma results
of operations are not necessarily indicative of the results of operations had
the acquisitions actually occurred at the beginning of fiscal 2002, nor is it
necessarily indicative of future operating results (in thousands, except per
share data):
NOTE G Pro Forma Results of Operations - (Continued)
Adjustments to Arrive at Pro Forma Results of Operations
--------------------------------------------------------
For the three months ended
June 30, 2002
---------------------------------------------------------
EMCOR Other
as Reported CES (1) Acquisitions(1) Pro Forma
---------------------------------------------------------
Revenues $986,399 $102,265 $6,362 $1,095,026
Operating income $ 26,924 $ 6,778 $ 214 $ 33,916
Interest income (expense), net $ (445) $ (1,697) $ 3 $ (2,139)
Income before income taxes $ 26,479 $ 5,081 $ 217 $ 31,777
Net income $ 14,828 $ 2,845 $ 122 $ 17,795
Basic earnings per share $ 1.00 $ 0.19 $ 0.01 $ 1.20
Diluted earnings per share $ 0.96 $ 0.18 $ 0.01 $ 1.15
For the six months ended
June 30, 2002
---------------------------------------------------------------------
Acquired
EMCOR Comfort Other
as Reported Companies(2) CES(3) Acquisitions(3) Pro Forma
--------------------------------------------------------------------
Revenues $1,796,698 $94,084 $196,572 $ 13,400 $2,100,754
Operating income $ 39,455 $ (40) $ 11,161 $ 1,373 $ 51,949
Interest income (expense), net $ (28) $ 162 $ (3,395) $ 5 $ (3,256)
Income before income taxes $ 39,427 $ 122 $ 7,766 $ 1,378 $ 48,693
Net income $ 22,079 $ 68 $ 4,349 $ 772 $ 27,268
Basic earnings per share $ 1.49 $ 0.01 $ 0.29 $ 0.05 $ 1.84
Diluted earnings per share $ 1.43 $ 0.00 $ 0.28 $ 0.05 $ 1.76
The pro forma results of operations, for segment information, is included in
Note F Segment Information.
(1) Adjustments to arrive at pro forma results of operations for the three
months ended June 30, 2002 represent results of operations from April 1,
2002 through June 30, 2002.
(2) Adjustments to arrive at pro forma results of operations for the six months
ended June 30, 2002 represent results of operations from January 1, 2002
through the acquisition date of March 1, 2002.
(3) Adjustments to arrive at pro forma results of operations for the six months
ended June 30, 2002 represent results of operations from January 1, 2002
through June 30, 2002.
NOTE H Legal Proceedings
See Part II - Other Information, Item 1 - Legal Proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Highlights
EMCOR Group, Inc.'s ("EMCOR") revenues for the three months ended June 30, 2003
and 2002 were $1,144.4 million and $986.4 million, respectively. Net income for
the three months ended June 30, 2003 was $8.3 million compared to net income of
$14.8 million for the three months ended June 30, 2002. Diluted Earnings Per
Share ("Diluted EPS") was $0.53 per share for the three months ended June 30,
2003 compared to Diluted EPS of $0.96 per share for the three months ended June
30, 2002.
Revenues for the six months ended June 30, 2003 and 2002 were $2,205.4 million
and $1,796.7 million, respectively. Net income for the six months ended June 30,
2003 and 2002 was $11.5 million and $22.1 million, respectively. Diluted EPS was
$0.74 per share for the six months ended June 30, 2003 compared to $1.43 per
share for the same period in the prior year.
On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. ("CSU") a group
of companies (the "Acquired Comfort Companies"). On December 19, 2002, EMCOR
acquired all the capital stock of Consolidated Engineering Services, Inc.
("CES") from Archstone-Smith Operating Trust and others. EMCOR acquired two
additional companies during 2002. These acquisitions were accounted for by the
purchase method, and the purchase prices have been allocated to the assets
acquired and liabilities assumed, based upon the estimated fair values of these
assets and liabilities at their respective dates of acquisition. The purchase
price for CES is subject to adjustment based on the difference between the net
assets of CES on the closing date and an agreed upon preclosing date. The
purchase price allocation is also subject to finalization.
Operating Segments
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: United States electrical construction and facilities
services (systems for generation and distribution of electrical power; lighting
systems; low voltage systems such as fire alarm, security, communications and
process control systems; and voice and data systems), United States mechanical
construction and facilities services (systems for heating, ventilation, air
conditioning, refrigeration and clean room process ventilation systems; and
plumbing, process and high-purity piping systems), United States facilities
services, Canada construction and facilities services, United Kingdom
construction and facilities services, and Other international construction and
facilities services. The segment "United States facilities services" principally
consists of those operations which primarily provide a portfolio of services
needed to support the operation and maintenance of customers' facilities (mobile
operation and maintenance services, site-based operation and maintenance
services, call center services, facility planning and consulting and energy
management programs) which services are not related to customers' construction
programs. The Canada, United Kingdom and Other international segments perform
electrical construction, mechanical construction and facilities services. "Other
international construction and facilities services" represents EMCOR's
operations outside of the United States, Canada, and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
Results of Operations
The results presented reflect certain reclassifications of prior period amounts
to conform to current year presentation.
Revenues
The following table presents EMCOR's operating segment revenues and their
respective percentage of total revenues (in thousands, except for percentages):
For the three months ended June 30,
-----------------------------------
% of % of
2003 Total 2002 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 322,035 28% $ 289,275 29%
United States mechanical construction and facilities services 426,088 37% 437,873 44%
United States facilities services 164,777 14% 52,813 5%
---------- ----------
Total United States operations 912,900 80% 779,961 79%
Canada construction and facilities services 91,264 8% 84,132 9%
United Kingdom construction and facilities services 140,214 12% 122,306 12%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $1,144,378 100% $ 986,399 100%
========== ==========
For the six months ended June 30,
---------------------------------
% of % of
2003 Total 2002 Total
---- ----- ---- -----
Revenues:
United States electrical construction and facilities services $ 575,909 26% $ 577,013 32%
United States mechanical construction and facilities services 842,591 38% 745,043 41%
United States facilities services 333,189 15% 104,617 6%
---------- ----------
Total United States operations 1,751,689 79% 1,426,673 79%
Canada construction and facilities services 184,326 8% 138,651 8%
United Kingdom construction and facilities services 269,393 12% 231,374 13%
Other international construction and facilities services -- -- -- --
---------- ----------
Total worldwide operations $2,205,408 100% $1,796,698 100%
========== ==========
EMCOR's revenues increased $158.0 million for the three months ended June 30,
2003 compared to the second quarter of 2002, of which $114.4 million was
attributable to companies acquired in 2002 and the balance was attributable to
EMCOR's other subsidiaries. Revenues increased $408.7 million for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002, of which
$315.0 million was attributable to companies acquired in 2002 and the balance to
EMCOR's other subsidiaries. Excluding the impact of 2002 acquisitions, the
increase in revenues of $43.6 million for the three month period ended June 30,
2003 compared to the same period in the prior year was principally due to an
increase in the number of longer-term public transportation infrastructure,
power generation and healthcare construction projects and an increase in the
number of site-based facilities services operation and maintenance contracts,
partially offset by a reduction in new construction projects and discretionary
spending, typically associated with projects of less than six months duration
related to improvements, enhancements and repairs of facilities, in the
commercial office and industrial markets. In addition to these factors, the
revenues increase of $93.7 million for the six months ended June 30, 2003
compared to the same period in the prior year was partially offset by a decrease
in private sector fast-track and development projects.
Revenues of United States electrical construction and facilities services
business units for the three months ended June 30, 2003 were $322.0 million
compared to $289.3 million for the three months ended June 30, 2002. Revenues of
this segment for the six months ended June 30, 2003 were $575.9 million compared
to $577.0 million in the same period a year earlier. The revenues for the three
and six month periods ended June 30, 2003, when compared to the same periods in
2002, reflected an increase in revenues from transportation infrastructure
programs, power generation and healthcare projects, offset by a reduction in new
construction projects and discretionary spending in the commercial office and
industrial markets attributable to the economic slow-down. The six month period
ended June 30, 2003 also reflected the absence of fast-track projects.
Revenues of United States mechanical construction and facilities services
business units for the three months ended June 30, 2003 were $426.1 million
compared to $437.9 million for the three months ended June 30, 2002. Revenues of
this segment for the six months ended June 30, 2003 were $842.6 million compared
to $745.0 million in the same period in the prior year. The decrease in revenues
for the three months ended June 30, 2003 compared to the same period in the
prior year was due to a reduction in discretionary spending in the commercial
office and industrial markets due to the economic slow-down, as well as a
reduction in demand for services as a result of cooler than normal weather
conditions in the United States. The increase in revenues of $97.5 million for
the six month period was primarily attributable to revenues from companies
acquired in 2002.
United States facilities services revenues for the three months ended June 30,
2003 were $164.8 million compared to $52.8 million for the same three months in
2002. Revenues for the six months ended June 30, 2003 were $333.2 million
compared to $104.6 million in the same period in 2002. The revenues increases of
$112.0 million and $228.6 million for the three and six month periods,
respectively, were primarily attributable to revenues of $103.5 million and
$212.3 million, respectively, from companies acquired in 2002 and the balance to
increases in site-based facilities operation and maintenance services performed
by EMCOR's other subsidiaries, partially offset by a reduction in demand for
mobile services related to cooler than normal weather conditions in the United
States and in discretionary spending due to the economic slow-down.
Revenues of Canada construction and facilities services for the three months
ended June 30, 2003 were $91.3 million compared to $84.1 million for the three
months ended June 30, 2002. Revenues for the six months ended June 30, 2003 were
$184.3 million compared to $138.7 million in the same period in the prior year.
The increase in revenues for both the three and six month periods was primarily
attributable to continuing work on longer-term power generation construction
projects.
Revenues of United Kingdom construction and facilities services business units
for the three months ended June 30, 2003 were $140.2 million compared to $122.3
million for the three months ended June 30, 2002. Revenues for the six months
ended June 30, 2003 were $269.4 million compared to $231.4 million in the same
period in the prior year. The increase in revenues for both the three and six
month periods was principally attributable to the start-up of recently awarded
contracts in the facilities services and transportation infrastructure
construction markets.
Other international construction and facilities services activities consist of
EMCOR's operations primarily in the Middle East and South Africa. All of the
current projects in these markets are being performed by joint ventures in which
EMCOR has less than majority ownership. Accordingly, the results of these joint
venture operations are accounted for under the equity method of accounting, and
revenues attributable to such joint ventures are not reflected as revenues in
the consolidated financial statements. EMCOR continues to selectively pursue new
business in these markets and Continental Europe; however, the availability of
opportunities has been significantly reduced as a result of local economic
factors.
Cost of sales and Gross profit
The following table presents EMCOR's cost of sales, gross profit, and gross
profit as a percentage of revenues (in thousands, except for percentages):
For the three months ended June 30,
-----------------------------------
2003 2002
---- ----
Cost of sales $1,021,103 $ 866,183
Gross profit $ 123,275 $ 120,216
Gross profit, as a percentage of revenues 10.8% 12.2%
For the six months ended June 30,
-----------------------------------
2003 2002
---- ----
Cost of sales $1,965,364 $1,587,096
Gross profit $ 240,044 $ 209,602
Gross profit, as a percentage of revenues 10.9% 11.7%
Gross profit (revenues less cost of sales) increased $3.1 million for the three
months ended June 30, 2003 to $123.3 million compared to $120.2 million gross
profit for the three months ended June 30, 2002. As a percentage of revenues,
gross profit decreased to 10.8% from 12.2% for the three months ended June 30,
2003 and 2002, respectively. Gross profit for the six months ended June 30, 2003
of $240.0 million was $30.4 million higher than the $209.6 gross profit in the
same period last year. As a percentage of revenues, gross profit decreased to
10.9% from 11.7% for the six months ended June 30, 2003 and 2002, respectively.
The increase in gross profit in both the three and six month 2003 periods, was
primarily due to gross profit of $22.4 million and $54.2 million, respectively,
from companies acquired in 2002. This increase was partially offset by a
decrease in gross profit for the three and six months ended June 30, 2003
compared to the same periods in the prior year primarily attributable to losses
from construction activity in the United Kingdom and a reduction in gross profit
from certain mechanical construction operations. The decrease in gross profit as
a percentage of revenues was attributable to a change in the mix of work
performed with a higher percentage of longer-term (over one year duration) new
construction projects in the institutional, healthcare and transportation
sectors and a lower percentage of work in the commercial sector, particularly
fast-track (less than six months) office construction and renovation work. New
construction projects are typically characterized by lower gross profits than
fast-track commercial work. In addition, gross profit declines were also
attributable to a decrease in discretionary spending and competitive pressures
due to the economic slow-down. These decreases were partially offset by an
increase in facilities services work which is generally performed at gross
margins higher than construction work. The revenue for such work increased over
the prior year due to 2002 acquisitions.
Selling, general and administrative expenses
The following table presents EMCOR's selling, general and administrative
expenses, and selling, general and administrative expenses as a percentage of
revenues (in thousands, except for percentages):
For the three months ended June 30,
-----------------------------------
2003 2002
---- ----
Selling, general and administrative expenses $106,638 $ 93,292
Selling, general and administrative expenses,
as a percentage of revenues 9.3% 9.5%
For the six months ended June 30,
---------------------------------
2003 2002
---- ----
Selling, general and administrative expenses $215,813 $170,147
Selling, general and administrative expenses,
as a percentage of revenues 9.8% 9.5%
Selling, general and administrative expenses for the three months ended June 30,
2003 increased $13.3 million to $106.6 million compared to $93.3 million for the
three months ended June 30, 2002. Selling, general and administrative expenses
as a percentage of revenues were 9.3% for the three months ended June 30, 2003,
compared to 9.5% for the three months ended June 30, 2002. Selling, general and
administrative expenses for the six months ended June 30, 2003 were $215.8
million, an increase of $45.7 million compared to $170.1 million for the six
months ended June 30, 2002. Selling, general and administrative expenses as a
percentage of revenues were 9.8% for the six months ended June 30, 2003,
compared to 9.5% for the six months ended June 30, 2002. Included in selling,
general and administrative expenses was amortization expense of identifiable
intangible assets associated with acquisitions of $0.9 million and $1.8 million
for the three and six month periods ended June 30, 2003, respectively. Excluding
2002 acquisitions, selling, general and administrative expenses (including costs
of acquisitions integration) were approximately $89.2 million (8.6% of revenues)
and $166.8 million (8.8% of revenues) for the three and six month periods ended
June 30, 2003, respectively, compared to $93.3 million (9.5% of revenues) and
$170.1 million (9.5% of revenues) for the same three and six month periods ended
June 30, 2002. The decrease in selling, general and administrative expenses,
excluding the 2002 acquired companies, was attributable to a managed reduction
of both variable and fixed expenses across EMCOR as a result of changes in its
business activities.
Operating income
The following table presents EMCOR's operating income and operating income as a
percentage of segment revenues (in thousands, except for percentages):
For the three months ended June 30,
-----------------------------------
% of % of
Segment Segment
2003 Revenues 2002 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $16,156 5.0% $14,507 5.0%
United States mechanical construction and facilities services 6,243 1.5% 19,170 4.4%
United States facilities services 4,566 2.8% 301 0.6%
------- -------
Total United States operations 26,965 3.0% 33,978 4.4%
Canada construction and facilities services 1,145 1.3% 693 0.8%
United Kingdom construction and facilities services (2,862) 689 0.6%
Corporate administration (8,339) (8,642)
------- -------
Total worldwide operations 16,637 1.5% 26,924 2.7%
Other corporate items:
Interest expense (2,031) (823)
Interest income 189 378
------- -------
Income before income taxes $14,795 $26,479
======= =======
For the six months ended June 30,
---------------------------------
% of % of
Segment Segment
2003 Revenues 2002 Revenues
---- -------- ---- --------
Operating income (loss):
United States electrical construction and facilities services $29,110 5.1% $30,870 5.4%
United States mechanical construction and facilities services 10,586 1.3% 25,929 3.5%
United States facilities services 6,740 2.0% (549)
------- -------
Total United States operations 46,436 2.7% 56,250 3.9%
Canada construction and facilities services 1,766 1.0% 235 0.2%
United Kingdom construction and facilities services (7,337) (309)
Other international construction and facilities services (115) (95)
Corporate administration. (16,519) (16,626)
------- -------
Total worldwide operations 24,231 1.1% 39,455 2.2%
Other corporate items:
Interest expense (4,028) (1,340)
Interest income 384 1,312
------- -------
Income before income taxes $20,587 $39,427
======= =======
EMCOR had operating income of $16.6 million for the three months ended June 30,
2003 compared with operating income of $26.9 million for the three months ended
June 30, 2002. Operating income was $24.2 million and $39.5 million for the six
months ended June 30, 2003 and 2002, respectively. The decrease of $10.3 million
and $15.2 million in operating income for the three and six month periods ended
June 30, 2003 as compared to the same periods in 2002 was due primarily to
operating losses in the United Kingdom, as well as a reduction in operating
income from certain United States mechanical construction operations, due to a
reduction in discretionary spending related to the economic slow-down, a change
in the type of work performed to longer-term construction projects that
generally has produced lower gross profits than fast-track commercial work and a
reduction in demand for services as a result of cooler than normal weather
conditions in the United States. These conditions were partially offset by
operating income attributable to 2002 acquisitions, an increase in
transportation infrastructure, healthcare and institutional projects, and an
increase in certain other longer-term projects in both the United States and
Canada, as well as operating income from the United States facilities services
markets.
United States electrical construction and facilities services operating income
for the three months ended June 30, 2003 was $16.2 million or 5.0% of revenues,
compared to $14.5 million or 5.0% of revenues for the three months ended June
30, 2002. Operating income for the six months ended June 30, 2003 was $29.1
million, or 5.1% of revenues, compared to $30.9 million, or 5.4% of revenues,
for the six months ended June 30, 2002. The operating income increase of $1.7
million for the three months ended June 30, 2003 compared to the prior year was
primarily attributable to certain transportation infrastructure projects and to
close-outs and continuing work on power generation projects. The operating
income decrease of $1.8 million for the six month period ended June 30, 2003
compared to the same period in the prior year was attributable to a reduction in
discretionary spending in the commercial office and industrial markets due to
the economic slow-down, partially offset by positive operating income
contributed by the transportation infrastructure and power generation projects.
United States mechanical construction and facilities services operating income
for the three months ended June 30, 2003 was $6.2 million or 1.5% of revenues,
compared to $19.2 million or 4.4% of revenues for the three months ended June
30, 2002. Operating income for the six months ended June 30, 2003 was $10.6
million, or 1.3% of revenues, compared to $25.9 million, or 3.5% of revenues,
for the six months ended June 30, 2002. The decrease in operating income for
both the three and six month periods ended June 30, 2003 compared to the
comparable prior year periods was primarily attributable to certain construction
operations which experienced reductions in operating income due to a reduction
in discretionary spending related to the economic slow-down, a change in the
type of work performed to longer-term construction projects that generally has
produced lower gross profits than fast-track commercial work and a reduction in
the demand for services as a result of cooler than normal weather conditions in
the United States.
United States facilities services operating income was $4.6 million for the
three months ended June 30, 2003 compared to operating income of $0.3 million
for the three months ended June 30, 2002. For the six months ended June 30, 2003
and 2002, operating income was $6.7 million and operating losses were $0.5
million, respectively. The increase in operating income for the 2003 three and
six month periods compared to the first and second quarter of 2002 was
attributable to operating income of $4.1 million and $6.1 million, respectively,
earned by companies acquired in 2002 and to operating income from site-based
facilities management contracts in this segment, partially offset by a decrease
in mobile maintenance services related to the cooler than normal weather
conditions in the United States and a decrease in discretionary spending related
to the economic slow-down, as well as certain costs related to the integration
of CES.
Canada construction and facilities services operating income was $1.1 million
for the three months ended June 30, 2003, compared to $0.7 million for the three
months ended June 30, 2002. For the six months ended June 30, 2003, operating
income was $1.8 million compared to operating income of $0.2 million for the
same period in the prior year. The increase in operating income for both the
three and six month periods was primarily due to operating income earned on
continuing longer-term power generation construction projects.
United Kingdom construction and facilities services operating losses for the
three months ended June 30, 2003 were $2.9 million compared to operating income
of $0.7 million for the same period in the prior year. For the six months ended
June 30, 2003, operating losses were $7.3 million compared to an operating loss
of $0.3 million for the same period in the prior year. The increase in operating
loss for the three and six months ended June 30, 2003 compared to the same
periods in 2002 was attributable to unfavorable performance, settlements and
close-outs on certain projects which offset operating income earned on certain
projects in the construction and facilities services markets.
Other international construction and facilities services operating losses were
$0.3 million for the three months ended June 30, 2003 compared to operating
income of $0.2 million for three months ended June 30, 2002. For the six months
ended June 30, 2003 and 2002, operating losses were $0.1 million for both
periods. EMCOR continues to selectively pursue new business in the Middle East
and South Africa as well as Continental Europe; however, the availability of
opportunities has been significantly reduced as a result of local economic
factors.
General corporate expense for the three months ended June 30, 2003 was $8.3
million compared to $8.6 million for the three months ended June 30, 2002. For
the six months ended June 30, 2003, general corporate expense was $16.5 million
compared to $16.6 million for the same period in the prior year. The decrease in
general corporate expenses was primarily due to cost reductions attributable to
reduced variable expenditures, offset by increased operations support activities
related to the management and integration of more than 30 companies acquired
during 2002.
Interest expense for the three months ended June 30, 2003 and 2002 was $2.0
million and $0.8 million, respectively. Interest expense for the six months
ended June 30, 2003 and 2002 was $4.0 million and $1.3 million, respectively.
The increase in interest expense for both the three and six month periods was
primarily due to $156.0 million of borrowings under the working capital credit
line for the acquisition of CES on December 19, 2002 and to increased working
capital needs related to a shift to increased revenues from longer-term new
construction projects which typically require working capital during their
inception until initial billing milestones are achieved. Interest income
decreased $0.2 million and $0.9 million for the three and six months ended June
30, 2003, respectively, compared to the same periods in 2002 due to lower cash
on hand related to cash used to pay a portion of the CES acquisition price in
December 2002 and cash used in operating activities.
The income tax provision decreased to $6.5 million for the three months ended
June 30, 2003 compared to $11.7 million for the same period in 2002. For the six
months ended June 30, 2003, the income tax provision was $9.1 million versus
$17.3 million for the six months ended June 30, 2002. The decreases in this
provision compared to the prior periods were primarily due to reduced income
before taxes. The effective income tax rate was approximately 44% for both the
three and six months ended June 30, 2003 and 2002.
EMCOR's contract backlog was $3.2 billion at June 30, 2003 and $2.9 billion at
December 31, 2002. The $0.3 billion increase in backlog was primarily due to an
increase in backlog for the United States and the United Kingdom.
EMCOR's contract backlog at June 30, 2003 was $3.2 billion compared to $2.8
billion at June 30, 2002. The increase was primarily attributable to backlog of
$0.2 billion for CES subsidiaries acquired in 2002 and net growth in backlog of
$0.2 billion from contracts awarded to other subsidiaries in the United States,
the United Kingdom and Canada.
Liquidity and Capital Resources
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities (in thousands):
For the six months ended
June 30,
------------------------
2003 2002
---- ----
Net cash (used in) provided by operating activities $(53,147) $ 68,086
Net cash used in investing activities $(16,319) $(167,848)
Net cash provided by (used in) financing activities $ 34,115 $ (288)
EMCOR's consolidated cash balance decreased by approximately $35.4 million from
$93.1 million at December 31, 2002 to $57.8 million at June 30, 2003. Net cash
used in operating activities of $53.1 million for the six months ended June 30,
2003 was a $121.2 million decrease from the net cash provided by operating
activities of $68.1 million in the same period last year. The increase in net
cash used in operating activities was primarily attributable to a net increase
in working capital requirements related to a decrease in accounts payable and
contracts in progress, partially offset by a decrease in accounts receivable.
Net cash used in investing activities of $16.3 million decreased by $151.5
million compared to $167.8 million in the same period last year. The decrease in
cash used in investing activities was due primarily to payments of $164.6
million for the acquisition of the Acquired Comfort Companies in the first half
of 2002 and a decrease in EMCOR's investments, notes and other long-term
receivables in the first half of 2002 compared to an increase in this account in
the first half of 2003. Net cash provided by financing activities of $34.1
million represented a $34.4 million increase from the net cash used in financing
activities of $0.3 million for the six months ended June 30, 2002. The increase
in net cash provided by financing activities was attributable to an increase in
borrowings under working capital credit lines, partially offset by a reduction
in net repayments of long-term debt and capital lease payments.
The following is a summary of EMCOR's material contractual obligations and other
commercial commitments (in millions):
Payments Due by Period
----------------------
Less
Contractual than 1-3 4-5 After
Obligations Total 1 year years years 5 years
- -------------------------------- ----- ------ ----- ----- -------
Other long-term debt $ 0.7 $ 0.3 $ 0.2 $ 0.2 $ --
Capital lease obligations 0.6 0.2 0.2 0.2 --
Operating leases 147.6 40.3 59.1 28.7 19.5
Open purchase obligations (1) 550.1 385.4 156.2 8.5 --
Other long-term obligations (2) 93.3 -- 93.3 -- --
------ ------ ------ ----- -----
Total Contractual Obligations $792.3 $426.2 $309.0 $37.6 $19.5
====== ====== ====== ===== =====
Amount of Commitment Expiration by Period
-----------------------------------------
Total Less
Other Commercial Amounts than 1-3 4-5 After
Commitments Committed 1 year years years 5 years
- ----------------------------- --------- ------ ----- ----- -------
Revolving credit facility (3) $166.8 $ -- $ -- $166.8 $ --
Letters of credit 50.3 13.2 0.6 1.3 35.2
Guarantees 25.0 -- -- -- 25.0
------ ------ ------ ------ -----
Total Commercial Commitments $242.1 $ 13.2 $ 0.6 $168.1 $60.2
====== ====== ====== ====== =====
(1) Represent open purchase orders for material and subcontracting costs
related to the Company's construction and service contracts. These purchase
orders are not reflected in EMCOR's consolidated balance sheet and should
not impact future cash flows as amounts will be recovered through customer
billings.
(2) Represent primarily insurance related liabilities, the timing for which
payments beyond one year is not practical to estimate.
(3) EMCOR classifies these borrowings as short-term on its consolidated balance
sheet because of EMCOR's intent and ability to repay the amounts on a
short-term basis. The revolving credit facility expires in September 2007.
As of June 30, 2003, EMCOR's total borrowing capacity under its revolving credit
facility was $296.0 million. EMCOR had approximately $50.3 million of letters of
credit outstanding under the revolving credit facility as of that date. The
amount of borrowings outstanding under the revolving credit facility as of June
30, 2003 and December 31, 2002 were $166.8 million and $112.0 million,
respectively. Effective July 9, 2003, EMCOR increased its total borrowing
capacity under its revolving credit facility to $350.0 million.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it has a
40% interest; the other venture partner, Baltimore Gas and Electric, has a 60%
interest. The venture designs, constructs, owns, operates, leases and maintains
facilities to produce chilled water for sale to customers for use in air
conditioning of commercial properties. These guarantees are not expected to have
a material effect on EMCOR's financial position or results of operations. Each
of the venturers is jointly and severally liable, in the event of default, for
the venture's $25.0 million borrowing due December 2031. During September 2002,
each venture partner contributed equity to the venture, of which EMCOR's
contribution was $14.0 million.
There are $0.6 million in current maturities of EMCOR's long-term debt and
capital lease obligations as of June 30, 2003.
EMCOR is contingently liable to sureties in respect of performance and payment
bonds issued by sureties, usually at the request of customers in connection with
construction projects which secure EMCOR payment and performance obligations
under contracts for such projects. In addition, at the request of labor unions
representing certain EMCOR employees, bonds are sometimes provided to secure
obligations for wages and benefits payable to or for such employees. As of June
30, 2003 and December 31, 2002, sureties had issued bonds for the account of
EMCOR in the aggregate amount of approximately $2.1 billion. To the extent such
bonds were for the benefit of customers (as distinct from labor unions), they
related to approximately 1,100 construction projects. The bonds are issued by
EMCOR's sureties in return for a premium which can vary depending on the size
and type of the bonds. The largest individual bond is approximately $170.0
million. EMCOR has agreed to indemnify the sureties for any payments made by
them in respect of bonds issued on EMCOR's behalf.
EMCOR does not have any other material financial guarantees or off-balance sheet
arrangements other than those disclosed herein.
The primary source of liquidity for EMCOR has been, and is expected to continue
to be, cash generated by operating activities. EMCOR also maintains a revolving
credit facility that may be utilized, among other things, to meet short-term
liquidity needs in the event cash generated by operating activities is
insufficient, or to enable EMCOR to seize opportunities to participate in joint
ventures or to make acquisitions that may require access to cash on short notice
or for any other reason. EMCOR may also increase liquidity through an equity
offering or other debt instruments. Short-term changes in macroeconomic trends
may have an affect, positively or negatively, on liquidity. In order to manage
through these uncertainties, EMCOR currently has the capacity to borrow funds,
if necessary, to meet short-term requirements. In addition to managing
borrowings, EMCOR's focus on the facilities services market is intended to
provide an additional buffer against economic downturns as the facilities
services market is characterized by annual and multi-year contracts that provide
a more predictable stream of cash flows than the construction market. The
acquisition of CES in December 2002, which is primarily focused on the
facilities services market, is part of EMCOR's plan to grow its facilities
services business. Short-term liquidity is also impacted by the type and length
of construction contracts in place. During economic downturns, such as the 2001
through 2003 period, construction contracts trend away from short-cycle
contracts toward larger longer-term infrastructure and public sector contracts.
Performance of longer duration contracts typically require working capital
during their inception until initial billing milestones are achieved. While
EMCOR strives to maintain a net over-billed position with its customers, there
can be no assurance that a net over-billed position can be maintained. EMCOR's
net over-billings, defined as the balance sheet accounts billings in excess of
costs and estimated earnings on uncompleted contracts less cost and estimated
earnings in excess of billings on uncompleted contracts, was $121.4 million and
$127.3 million as of June 30, 2003 and December 31, 2002, respectively.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the revolving credit facility, and the sale
of various secured or unsecured debt and/or equity interests in the public and
private markets. Based upon EMCOR's current credit ratings and financial
position, EMCOR can reasonably expect to be able to issue long-term debt
instruments and/or equity. Over the long term, EMCOR's primary revenue risk
factor continues to be the level of demand for non-residential construction
services, which is in turn influenced by macroeconomic trends including interest
rates and governmental economic policy. In order to provide protection against
demand cycles in private sector construction services, EMCOR has increased its
participation, and its backlog of contracts, in the public sector and in the
facilities services market.
EMCOR believes that current cash balances and borrowing capacity available under
existing lines of credit or other forms of financing available through debt or
equity offerings, combined with cash expected to be generated from operations,
will be sufficient to provide short-term and foreseeable long-term liquidity and
meet expected capital expenditure requirements. However, EMCOR is a party to
lawsuits and other proceedings in which other parties seek to recover from it
amounts ranging from a few thousand dollars to over $60.0 million. If EMCOR was
required to pay damages in one or more such proceedings, such payments could
have a material adverse effect on its cash flow and/or earnings.
Certain Insurance Matters
As of June 30, 2003 and December 31, 2002, EMCOR utilized approximately $31.2
million and $24.5 million, respectively, of letters of credit issued pursuant to
its revolving credit facility as collateral for its insurance obligations.
Application of Critical Accounting Policies
The condensed consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. EMCOR's significant accounting policies are described
in Note B - Summary of Significant Accounting Policies of the notes to
consolidated financial statements included in Item 8 of its annual report on
Form 10-K for the year ended December 31, 2002. There was no initial adoption of
any accounting policies during the three and six months ended June 30, 2003
other than those listed under "New Accounting Pronouncements" below. EMCOR
believes that some of the more critical judgment areas in the application of
accounting policies that affect its financial condition and results of
operations are estimates and judgments pertaining to (a) revenue recognition
from (i) long term construction contracts for which the percentage of completion
method of accounting is used and (ii) services contracts, (b) collectibility or
valuation of accounts receivable, (c) insurance liabilities, (d) income taxes
and (e) intangible assets.
Revenue Recognition for Long-term Construction Contracts and Services Contracts
EMCOR believes its most critical accounting policy is revenue recognition from
long-term construction contracts for which EMCOR uses the
percentage-of-completion method of accounting. Percentage-of-completion
accounting is the prescribed method of accounting for long-term contracts in
accordance with accounting principles generally accepted in the United States,
Statement of Position No. 81-1, "Accounting for Performance of Construction -
Type and Certain Production - Type Contracts" and, accordingly, the method used
for revenue recognition within EMCOR's industry. Percentage-of-completion for
each contract is measured principally by the ratio of costs incurred to date for
each contract to the estimated total costs for such contract at completion.
Certain of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date for
each contract to the estimated total labor costs for such contract. Provisions
for the entirety of estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Application of
percentage-of-completion accounting results in the recognition of costs and
estimated earnings in excess of billings on uncompleted contracts in EMCOR's
consolidated balance sheets. Costs and estimated earnings in excess of billings
on uncompleted contracts reflected in the consolidated balance sheets arise when
revenues have been recognized but the amounts cannot be billed under the terms
of contracts. Such amounts are recoverable from customers upon various measures
of performance, including achievement of certain milestones, completion of
specified units or completion of a contract. Costs and estimated earnings in
excess of billings on uncompleted contracts also include amounts EMCOR seeks or
will seek to collect from customers or others for errors or changes in contract
specifications or design, contract change orders in dispute or unapproved as to
both scope and price, or other customer-related causes of unanticipated
additional contract costs. Such amounts are recorded at estimated net realizable
value and take into account factors that may affect the ability to bill and
collect amounts billed. Due to uncertainties inherent within estimates employed
to apply percentage-of-completion accounting, estimates may be revised as
project work progresses. Application of percentage-of-completion accounting
requires that the impact of those revised estimates be reported in the
consolidated financial statements prospectively.
In addition to revenue recognition for long-term construction contracts, EMCOR
recognizes revenues from services contracts as these services are performed in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). There are two basic types of services: (1)
those provided pursuant to fixed price services contracts which are signed in
advance for operation and maintenance services work over periods typically
ranging from one to three years (for which EMCOR employees may be assigned to
the customer's site full time) and (2) services for similar operation and
maintenance services work performed on an as needed basis. Fixed price services
contracts are generally performed evenly over the contract period, and
accordingly, revenue is recognized on a pro-rata basis over the term of the
contract. Revenues derived from other services are recognized when the services
are rendered in accordance with SAB 101. Expenses related to all service
contracts are recognized as services are provided.
Accounts Receivable
EMCOR is required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the realization of
receivables, which assessment factors include the creditworthiness of the
customer, EMCOR's prior collection history with the customer and related aging
of the past due balances. At June 30, 2003 and December 31, 2002, accounts
receivable of $986.3 million and $965.0 million, respectively, included
allowances of $40.3 million and $40.6 million, respectively. Specific accounts
receivable are evaluated when EMCOR believes a customer may not be able to meet
its financial obligations due to a deterioration of its financial condition,
credit ratings or bankruptcy. The allowance requirements are based on the best
facts available and are re-evaluated and adjusted as additional information is
received.
Insurance Liabilities
EMCOR has deductibles for certain workers' compensation, auto liability, general
liability and property claims, has self-insured retentions for certain other
casualty claims, and is self-insured for employee-related health care claims.
Losses are recorded based upon estimates of the liability for claims incurred
and an estimate of claims incurred but not reported. The liabilities are derived
from known facts, historical trends and industry averages utilizing the
assistance of an actuary to determine the best estimate of these obligations.
EMCOR believes its liabilities for these obligations are adequate. However, such
obligations are difficult to assess and estimate due to numerous factors,
including severity of injury, determination of liability in proportion to other
parties, timely reporting of occurrences and effectiveness of safety and risk
management programs. Therefore, if actual experience differs from the
assumptions and estimates used for recording the liabilities, adjustments may be
required and recorded in the period that the experience becomes known.
Income Taxes
EMCOR has net deferred tax assets primarily resulting from deductible temporary
differences, which will reduce taxable income in future periods. A valuation
allowance is required when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. As of June 30, 2003 and December 31,
2002, the total valuation allowance on net deferred tax assets was approximately
$2.1 million.
Intangible Assets
As of June 30, 2003, EMCOR had goodwill and net identifiable intangible assets
of $293.9 million and $12.1 million, respectively, in connection with the
acquisition of certain companies. The determination of related estimated useful
lives for identifiable intangible assets and whether those assets are impaired
involves significant judgments based upon short and long-term projections of
future performance. Certain of these forecasts reflect assumptions regarding the
ability to successfully integrate acquired companies. Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142") requires goodwill to be tested for impairment under certain circumstances,
and written down when impaired, rather than being amortized as previous
standards required. Furthermore, SFAS 142 requires identifiable intangible
assets other than goodwill to be amortized over their useful lives unless their
lives are determined to be indefinite. Changes in strategy and/or market
conditions may result in adjustments to identifiable intangible asset balances.
As of June 30, 2003, no indicators of impairment of EMCOR's goodwill or
identifiable intangible assets existed in accordance with the provisions of SFAS
142.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (the "FASB") issued
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45" or the
"Interpretation"). FIN 45 clarifies the requirements of FASB Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 may require, that upon issuance of a guarantee, the
guarantor to recognize a liability for the fair value of the obligation it
assumes under the guarantee. The disclosure provisions of the Interpretations
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The Interpretation's provisions for initial recognition
and measurement should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The guarantor's previous accounting for guarantees that were issued
before the date of FIN 45's initial application may not be revised or restated
to reflect the effect of the recognition and measurement provisions of the
Interpretation. EMCOR has determined that the adoption of FIN 45 will only
impact its disclosures and that its accounting for guarantees is not impacted as
of June 30, 2003.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). SFAS 148 amends FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 was effective for fiscal years beginning
after December 15, 2002 and was adopted by EMCOR for all periods presented.
EMCOR did not change to the fair value based method of accounting for
stock-based employee compensation, and accordingly, adoption of SFAS 148 impacts
only disclosures, not the financial results, of EMCOR.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. EMCOR is currently evaluating the effect that adoption of FIN 46 will have
on EMCOR's consolidated financial condition or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. The new guidance
amends SFAS 133 for decisions made: (a) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
(b) in connection with other Board projects dealing with financial instruments,
and (c) regarding implementation issues raised in relation to the application of
the definition of a derivative. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. It is not expected that the provisions of SFAS
149 will have a material impact on EMCOR's consolidated financial position,
results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June 15, 2003. EMCOR
does not have any financial instruments that meet the provisions of SFAS 150;
therefore, adopting the provisions of SFAS 150 is not expected to have a
material impact on EMCOR's consolidated financial position, results of
operations or cash flows.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995, particularly
statements regarding market opportunities, market share growth, competitive
growth, gross profit, and selling, general and administrative expenses. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in any such forward-looking
statements. Such risk and uncertainties include, but are not limited to adverse
changes in general economic conditions, including changes in the specific
markets for EMCOR's services, adverse business conditions, decreased or lack of
growth in the mechanical and electrical construction and facilities services
industries, increased competition, pricing pressures, risks associated with
foreign operations and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKE