SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
----------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 0-2315
EMCOR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
301 MERRITT SEVEN CORPORATE PARK 06851-1060
Norwalk, Connecticut (zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(203) 849-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of each class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in Part III of this Form 10-K to be filed as an
amendment hereto. [X]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant on December 31, 2002 was approximately
$790,000,000.
Number of shares of Common Stock outstanding as of the close of business on
February 19, 2003: 16,056,862 shares.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business
General ..................................................................................................... 1
The Business ................................................................................................ 1
Competition ................................................................................................. 4
Employees ................................................................................................... 4
Backlog ..................................................................................................... 4
Item 2. Properties ........................................................................................................ 5
Item 3. Legal Proceedings ................................................................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders ............................................................... 8
Executive Officers of the Registrant .............................................................................. 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ......................................... 10
Item 6. Selected Financial Data ........................................................................................... 11
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....................................................... 20
Item 8. Financial Statements and Supplementary Data ....................................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................................... 51
Item 11. Executive Compensation ........................................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................... 51
Item 13. Certain Relationships and Related Transactions ................................................................... 51
Item 14. Controls and Procedures .......................................................................................... 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................................. 52
PART I
ITEM 1. BUSINESS
The Internet website address of EMCOR Group, Inc. ("EMCOR") is
http://www.emcorgroup.com. The Company's annual reports on Form 10-K, quarterly
reports on Forms 10-Q and current reports on Forms 8-K (and any amendments to
those reports) will be made available free of charge on or through its Internet
website as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission.
GENERAL
EMCOR is one of the largest mechanical and electrical construction and
facilities services firms in the United States, Canada, the United Kingdom and
in the world. In 2002, EMCOR had revenues of approximately $3.97 billion. EMCOR
provides services to a broad range of commercial, industrial, utility, and
institutional customers through approximately 70 principal operating
subsidiaries, joint ventures and a majority-owned interest in a limited
liability company in the United States. EMCOR has offices in 37 states and the
District of Columbia in the United States, eight provinces in Canada and ten
primary locations in the United Kingdom. In the United Arab Emirates, Saudi
Arabia and South Africa, EMCOR carries on business through joint ventures.
EMCOR's executive offices are located at 301 Merritt Seven Corporate Park,
Norwalk, Connecticut 06851-1060, and its telephone number at those offices is
(203) 849-7800.
EMCOR specializes in the design, integration, installation, start-up,
operation and maintenance of:
o Systems for generation and distribution of electrical power;
o Lighting systems;
o Low-voltage systems, such as fire alarm, security, communications and
process control systems;
o Voice and data communications systems;
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems; and
o Plumbing, process and high-purity piping systems.
EMCOR also provides services needed to support the operation of customers'
facilities, which services are not related to customers' construction programs.
These services, frequently referred to as facilities services, include
site-based operations and maintenance, mobile maintenance and service,
facilities management, remote monitoring, installation and support for building
systems, technical consulting and diagnostic services, small modification and
retrofit projects, and program development and management for energy systems.
Facilities services are provided to a wide range of commercial, industrial,
utility and institutional facilities, including those at which EMCOR provided
construction services and others at which construction services were provided by
other contractors. EMCOR's varied facilities services are frequently combined to
provide integrated service packages which include mechanical, electrical and
other services.
EMCOR provides mechanical and electrical construction services and facilities
services directly to corporations, municipalities and other governmental
entities, owners/developers and tenants of buildings. It also provides these
services indirectly by acting as a subcontractor to general contractors, systems
suppliers and other subcontractors. Worldwide, EMCOR employs approximately
26,000 people.
EMCOR's revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of
EMCOR's 2002 revenues, approximately 79% were generated in the United States and
approximately 21% were generated internationally. In 2002, approximately 42% of
revenues were derived from new construction projects, while the remaining 58%
were derived from renovation and retrofit of customer's existing facilities
(41%) and facilities services operations (17%). For the period 1999 through
2002, revenues and EBITDA grew at compound annual growth rates of 11.3% and
21.9%, respectively. EBITDA is not a term recognized under accounting principles
generally accepted in the United States; however, it is a common measurement
used in EMCOR's industry. EBITDA is calculated as earnings before interest,
taxes, depreciation and amortization.
On December 19, 2002, EMCOR acquired Consolidated Engineering Services, Inc.
and its subsidiaries (collectively, "CES"). CES had 2002 revenues in excess of
$400.0 million, of which $8.4 million is reflected in EMCOR's 2002 revenues, and
employs approximately 3,400 technical and service employees in over 20 states in
the Northeast, Midwest, Mid-Atlantic and Southeast regions. CES provides a broad
array of facility services to a customer base that includes pharmaceutical,
industrial, financial services and commercial companies as well as federal
government agencies. CES provides its services to approximately 9,500 facilities
comprising approximately 265 million square feet of space.
THE BUSINESS
The broad scope of EMCOR's operations are more particularly described below.
1
MECHANICAL AND ELECTRICAL CONSTRUCTION SERVICES AND FACILITIES SERVICES
EMCOR believes that the mechanical and electrical construction services and
facilities services business is highly fragmented, consisting of thousands of
small companies across the United States and around the world. Because EMCOR has
total assets, annual revenues, net worth, access to bank credit and surety
bonding, and expertise significantly greater than most of its competitors, EMCOR
believes it has a significant competitive advantage. The mechanical and
electrical construction services industry has a higher growth rate than the
overall construction industry, due principally to the increase in content and
complexity of mechanical and electrical systems in all types of projects. This
increased content and complexity is, in part, a result of the expanded use of
computers and more technologically advanced voice and data communications,
lighting, and environmental control systems in all types of facilities. For
these reasons, buildings of all types consume more electricity per square foot
than in the past and thus need more extensive electrical distribution systems.
In addition, advanced voice and data communication systems require more
sophisticated power supplies and extensive low voltage and fiber-optic
communications cabling. Moreover, the need for greater environmental controls
within a building, such as the heightened need for climate control to maintain
extensive computer systems at optimal temperatures, and the growing demand for
environmental control in individual spaces, have created expanded opportunities
for the mechanical and electrical construction services and facilities services
business.
Mechanical and electrical construction services primarily involve the design,
integration, installation and start-up of: (1) systems for the generation and
distribution of electrical power, including power cables, conduits, distribution
panels, transformers, generators, uninterruptible power supply systems and
related switch gear and controls; (2) lighting systems, including fixtures and
controls; (3) low-voltage systems, including fire alarm, security, and process
control systems; (4) voice and data communications systems, including
fiber-optic and low voltage copper cabling; (5) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems and (6)
plumbing, process and high-purity piping systems.
Mechanical and electrical construction services generally fall into one of
two categories: (1) large installation projects with contracts often in the
multi-million dollar range that involve construction of industrial and
commercial buildings and institutional and public works facilities or the
fit-out of large blocks of space within commercial buildings and (2) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR's mechanical and electrical construction services operations accounted
for about 83% of its 2002 revenues, of which revenues approximately 51% was
related to new construction and approximately 49% was related to renovation and
retrofit projects. EMCOR provides mechanical and electrical construction
services for both large and small installation and renovation projects. Its
largest projects include those (1) for institutional use (such as water and
wastewater treatment facilities, hospitals, correctional facilities, schools and
research laboratories); (2) for industrial use (such as pharmaceutical plants,
steel, pulp and paper mills, chemical, automotive and semiconductor
manufacturing facilities, and oil refineries); (3) for transportation projects
(such as highways, airports and transit systems); (4) for commercial use (such
as office buildings, data centers, hotels, casinos, convention centers, sports
stadiums, shopping malls and resorts) and (5) for power generation and energy
management projects. EMCOR's largest projects, which typically range in size
from $10.0 million up to and occasionally exceeding $50.0 million and are
usually multi-year projects, represented about 27% of EMCOR's construction
services revenues in 2002.
EMCOR's projects of less than $10.0 million accounted for approximately 73%
of 2002 construction services revenues. These projects are typically completed
in less than a year. They usually involve mechanical and electrical construction
services when an end-user or owner undertakes construction or modification of a
facility to accommodate a specific use. These projects frequently require
mechanical and electrical systems to meet special needs such as redundant power
supply systems, special environmental controls and high-purity air systems,
sophisticated electrical and mechanical systems for data centers, including
those associated with internet service providers and electronic commerce,
trading floors in financial services businesses, new production lines in
manufacturing plants, and office arrangements in existing office buildings. They
are not usually dependent upon the new construction market. Demand for these
projects and types of services is often prompted by the expiration of leases,
changes in technology or changes in the customer's plant or office layout in the
normal course of a customer's business.
EMCOR performs its services pursuant to contracts with owners, such as
corporations, municipalities and other governmental entities, general
contractors, systems suppliers, construction managers, developers, other
subcontractors and tenants of commercial properties. Institutional and public
works projects are frequently long-term complex projects that require
significant technical and management skills and the financial strength to obtain
bid and performance bonds, which are often a condition to bidding for and
winning these projects.
EMCOR also installs and maintains street, highway, bridge and tunnel
lighting, traffic signals, computerized traffic control systems, and signal and
communication systems for mass transit systems in several metropolitan areas. In
addition, in the United States, EMCOR manufactures and installs sheet metal air
handling systems for both its own mechanical construction operations and for
unrelated mechanical contractors. EMCOR also maintains welding and pipe
fabrication shops in support of some of its own mechanical operations.
2
In the early 1990's, the market for facilities services grew rapidly in the
United Kingdom as a result of government initiatives. EMCOR's United Kingdom
subsidiary expanded its traditional technical service business in response to
these opportunities and established a dedicated unit to focus on the facilities
services business. This unit currently provides a full range of facilities
services to public and private sector customers under multi-year agreements,
including the maintenance of British Airways' facilities at Heathrow and Gatwick
Airports, GlaxoSmithKline Research Laboratories, and the Jubilee Line Extension
of the London Underground. In the United Kingdom, EMCOR also provides facilities
services at several BAE Systems manufacturing plants. In addition, the United
Kingdom operations provide on-call and mobile service support on a task-order or
contract basis, small renovation project work, and installation and maintenance
services for data communications and security systems.
EMCOR, by virtue of its construction and facilities services expertise, is
involved with private finance initiatives ("PFIs") sponsored by the British
government. The PFIs, which involve governmental bodies responsible, among other
things, for the national healthcare system, social security, air traffic
control, schools, and hospitals, seek to transfer ownership and management of
United Kingdom government facilities, including office buildings and
institutional buildings, to groups of financial institutions, consulting service
organizations, and others, which competitively bid for PFI contracts. EMCOR has
been awarded several contracts by such groups to provide mechanical and
electrical services, grounds maintenance and other ancillary services for
periods typically ranging from 5 to 35 years at buildings which were formerly
owned and managed by government bodies and privatized as part of the PFI
program. EMCOR has built on its United Kingdom experience to market its
facilities services business to international markets and currently provides
facilities services through a joint venture to several companies in South
Africa.
In 1997, EMCOR established a subsidiary to expand its facilities services
operations in North America patterned on its United Kingdom business. This unit
has built on EMCOR's traditional mechanical and electrical services operations,
facilities services activities at its mechanical and electrical contracting
subsidiaries, and EMCOR's client relationships , as well as acquisitions, to
expand the scope of services currently offered and to develop packages of
services for customers on a regional, national and global basis.
As a consequence, the Company's facility services unit presently offers a
broad range of facilities services, including maintenance and service of
mechanical and electric systems, which EMCOR has historically provided to
customers following completion of construction projects, and site-based
operations and maintenance, mobile maintenance and service, facilities
management, remote monitoring, installation and support for building systems,
technical consulting and diagnostic services, small modification and retrofit
projects, and program development and management for energy systems.
EMCOR's facilities services are provided to a wide range of commercial,
industrial and institutional facilities, including both those for which EMCOR
provided construction services and those for which construction services were
provided by others. The services are frequently bundled to provide integrated
service packages and may include services in addition to EMCOR's core mechanical
and electrical services. Services are provided from EMCOR's locations on a
mobile basis or from a customer's site by EMCOR employees assigned to the
customer premises.
These services, which generated approximately 17% of 2002 revenues, are
provided to owners, operators, tenants and managers of all types of facilities
both on a contract basis for a specified period of time and on an individual
task order basis.
EMCOR has experienced an expansion in the demand for its facilities services
which it believes is driven by customers' decisions to focus on their own core
competencies, the increasing technical complexity of their facilities and their
mechanical, electrical, voice and data and other systems, and the need for
increased reliability, especially in mechanical and electrical systems. These
trends have led to outsourcing and privatization programs whereby customers in
both the private and public sectors seek to contract out those activities that
support but are not directly associated with the customer's core business.
Illustrative of the outsourcing of companies' facilities services is a
three-year agreement, expiring June 2005, with Bank One under which EMCOR
provides comprehensive facilities management services for approximately 2,200
Bank One facilities encompassing 34 million square feet of space in 30 states;
its 4 1/2 year agreement with LAM Research, expiring December 2006 under which
EMCOR provides such services to approximately 1 million square feet of
laboratory and office space; and its three-year agreement with Mattson
Technology, Inc., expiring December 2005 under which EMCOR provides integrated
services to approximately 800,000 square feet of commercial space. In April
2000, EMCOR and CB Richard Ellis Inc., a nationwide real estate management
company, created a limited liability company, in which EMCOR has a majority
interest and principally provides operations and maintenance services to over
10,000 commercial facilities comprising approximately 30 million square feet of
space.
As noted earlier, in December 2002 EMCOR acquired CES, a facilities services
business, which generated in 2002 in excess of $400.0 million in revenues, of
which $8.4 million is reflected in EMCOR's 2002 revenues, and which provided its
services to approximately 9,500 facilities with an aggregate of approximately
265 million square feet of space. In Washington D.C., CES is the second largest
facilities services provider to the federal government behind the General
Services Administration and currently provides services to such preeminent
buildings as the National Archives and the Ronald Reagan Building, the second
largest government facility after the Pentagon. It currently provides its
services in 27 states throughout the Northeast, Midwest, Mid-Atlantic, and
Southeast. As part of its operation, CES is responsible for (i) the oversight of
all or most of a business' facility operations, including operation and
3
maintenance, (ii) the over sight of logistical processes, (iii) tenant services
and management, (iv) servicing upgrade and retrofit of HVAC, electrical,
plumbing, and industrial piping and sheet metal systems in existing facilities
and (v) diagnostic and solution engineering for building systems and their
components.
The deregulation of, and increased competition in, the utility industry,
along with government mandates calling for reduced energy consumption by
government entities, have led to renewed focus on energy costs and conservation
measures. These measures typically include energy assessments and engineering
studies, retrofit construction to implement energy savings measures, and the
implementation of energy savings measures to ensure continued performance.
Various subsidiaries of EMCOR participate in energy savings programs, such as an
energy conservation project for Washington Mutual, which evolved from the
facilities services provided by EMCOR to Washington Mutual. EMCOR believes it
has the ability to be a single source provider of construction and facilities
services required for energy assessment and for design, installation, and
operations and maintenance of energy savings measures.
The deregulation and expansion of the telecommunications industry has led to
a rapid expansion of installed infrastructure, including wireless communication
systems and long distance networks, much of which has been developed by
companies that do not have maintenance capabilities and which seek to contract
out such services. EMCOR has provided construction services for the
infrastructure of telecommunications companies and facilities services to
support their operations. In this industry, EMCOR has installed and maintained
equipment for suppliers such as Lucent, Nortel, and Siemens and has provided
construction and maintenance services to local service providers and to users
who maintain their own systems. While the construction of these facilities is at
the present time largely complete, they require on-going maintenance, and EMCOR
has agreements with several telecommunications companies to provide such
services.
EMCOR believes mechanical and electrical construction services and facilities
services activities are complementary, permitting it to offer customers a
comprehensive package of services. The ability to offer both construction and
facilities services should enhance EMCOR's competitive position with customers.
Furthermore, EMCOR's facilities services operations tend to be less cyclical
than its construction operations because facilities services are more responsive
to the needs of an industry's operational requirements rather than its
construction requirements.
COMPETITION
EMCOR believes that the mechanical and electrical construction services
business is highly fragmented and competitive. A majority of EMCOR's revenues
are derived from projects requiring competitive bids; however, an invitation to
bid is often conditioned upon prior experience, technical capability and
financial strength. EMCOR competes with national, regional and local companies,
many of which are small, owner-operated entities that operate in a limited
geographic area. However, there are a few public companies focused on providing
mechanical and electrical construction services. EMCOR is one of the largest
providers of mechanical and electrical construction services in the United
States, Canada, the United Kingdom and in the world. Competitive factors in the
mechanical and electrical construction services business include: (1) the
availability of qualified and/or licensed personnel; (2) reputation for
integrity and quality; (3) safety record; (4) cost structure; (5) relationships
with customers; (6) geographic diversity; (7) the ability to control project
costs; (8) experience in specialized markets; (9) the ability to obtain surety
bonding; (10) adequate working capital and (11) access to bank credit.
While the facilities services business is also highly fragmented, a number of
large corporations such as Johnson Controls, Inc., Fluor Corp., Siemens, Trammel
Crow and Jones Lang LaSalle are engaged in this field. EMCOR's facilities
services operations are being expanded both through organic growth and
acquisitions.
EMPLOYEES
EMCOR presently employs approximately 26,000 people, approximately 65% of
whom are represented by various unions pursuant to more than 450 collective
bargaining agreements between EMCOR's individual subsidiaries and local unions.
EMCOR believes that its employee relations are generally good. None of these
collective bargaining agreements are national or regional in scope.
BACKLOG
EMCOR had contract backlog as of December 31, 2002 of approximately $2.9
billion, compared with backlog of approximately $2.4 billion as of December 31,
2001. Backlog is not a term recognized under accounting principles generally
accepted in the United States; however, it is a common measurement used in
EMCOR's industry. Backlog includes the unrecognized revenue on construction
contracts plus facilities services revenues to be derived during the immediately
succeeding 12 months pursuant to then existing contracts. Backlog increased by
$0.5 billion as of December 31, 2002 compared to December 31, 2001. Backlog
attributable to United States construction and facilities services increased
approximately $0.4 billion as of December 31, 2002 (primarily attributable to
companies acquired during 2002), when compared to December 31, 2001, and backlog
attributable to Canada and United Kingdom construction and facilities services
increased approximately $0.1 billion as of December 31, 2002, when compared to
December 31, 2001. For the year ended December 31, 2002, EMCOR had approximately
$3.97 billion in revenues compared to approximately $3.42 billion in revenues
for the year ended December 31, 2001.
4
ITEM 2. PROPERTIES
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities, both leased and owned:
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
CORPORATE HEADQUARTERS
301 Merritt Seven Corporate Park
Norwalk, Connecticut .............................. 32,500 10/31/09
OPERATING FACILITIES
4050 Cotton Center Boulevard
Phoenix, Arizona .................................. 9,704 3/30/06
1200 North Sickles Drive
Tempe, Arizona .................................... 29,000 Owned
1000 N. Kraemer Place
Anaheim, California ............................... 24,384 8/14/12
3208 Landco Drive
Bakersfield, California ........................... 49,875 6/30/07
1166 Fesler Street
El Cajun, California .............................. 42,760 8/31/10
25601 Clawiter Road
Hayward, California ............................... 34,800 6/30/03
24041 Amador Street
Hayward, California ............................... 40,000 10/31/11
5 Vanderbilt
Irvine, California ................................ 18,000 7/31/04
4462 Corporate Center Drive
Los Alamitos, California .......................... 57,863 7/31/06
825 Howe Road
Martinez, California .............................. 109,800 12/31/07
4464 Alvarado Canyon Road
San Diego, California ............................. 40,000 10/31/07
9505 and 9525 Chesapeake Drive
San Diego, California ............................. 25,124 12/31/06
414 Brannan Street
San Francisco, California ......................... 10,283 3/31/03
4405 and 4420 Race Street
Denver, Colorado .................................. 17,704 9/30/11
345 Sheridan Boulevard
Lakewood, Colorado ................................ 63,000 Owned
367 and 377 Research Parkway
Meriden, Connecticut .............................. 27,700 7/31/04
1781 N.W. North River Drive
Miami, Florida .................................... 11,285 Owned
5801 Miami Lakes Drive
Miami Lakes, Florida .............................. 10,000 5/31/03
3145 Northwoods Parkway
Norcross, Georgia ................................. 25,808 1/31/06
400 Lake Ridge Drive
Smyrna, Georgia ................................... 30,000 9/30/12
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana ............................... 136,695 10/31/08
5
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
2655 Garfield Road
Highland, Indiana ................................ 45,816 6/30/06
5124-5128 W. 79th Street
Indianapolis, Indiana ............................ 12,600 9/30/06
2600 N. Ninth Street Road
Lafayette, Indiana ............................... 13,798 10/31/08
2160 North Asland Avenue
Chicago, Illinois ................................ 67,000 6/30/05
2100 South York Road
Oak Brook, Illinois .............................. 87,700 5/31/08
1406 Cardinal Court
Urbana, Illinois ................................. 33,750 10/01/07
3100 Brinkerhoff Road
Kansas City, Kansas .............................. 42,836 11/30/05
3125 Brinkerhoff Road
Kansas City, Kansas .............................. 22,676 Owned
631 Pecan Circle
Manhattan, Kansas ................................ 22,750 8/31/03
2118 Wittary
Wichita, Kansas .................................. 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky .............................. 20,600 1/07/04
4530 Hollins Ferry Road
Baltimore, Maryland .............................. 26,792 Owned
645 A-F & 647 A & B Lofstrand Lane
Rockville, Maryland .............................. 10,600 2/28/05
643 Lofstrand Lane
Rockville, Maryland .............................. 15,000 2/28/05
306 Northern Avenue
Boston, Massachusetts ............................ 47,456 6/30/05
200 Old Colony Way
Boston, Massachusetts ............................ 11,500 3/31/05
70-70D Hawes Way
Stoughton, Massachusetts ......................... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts ......................... 36,000 12/31/12
1743 Maplelawn
Troy, Michigan ................................... 22,000 4/30/06
6060 Hix Road
Westland, Michigan ............................... 23,000 12/31/03
3555 W. Oquendo Road
Las Vegas, Nevada ................................ 90,000 11/30/03
6325 South Valley Boulevard
Las Vegas, Nevada ................................ 23,190 12/31/04
6754 W. Washington Avenue
Pleasantville, New Jersey ........................ 45,400 1/14/04
348 New Country Road
Secaucus, New Jersey ............................. 37,905 12/31/07
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
26 West Street
Brooklyn, New York .............................. 15,000 Owned
24-37 46th Street
Brooklyn, New York .............................. 10,000 1/31/07
301 and 305 Suburban Avenue
Deer Park, New York ............................. 33,535 3/31/05
111-01 and 109-15 14th Avenue
Long Island City, New York ...................... 82,000 2/28/11
111 West 19th Street
New York, New York .............................. 26,885 5/31/03
Two Penn Plaza
New York, New York .............................. 57,200 2/01/06
704 Clinton Avenue South
Rochester, New York ............................. 25,000 7/31/04
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio ................................ 25,500 6/30/05
2300-2310 International Street
Columbus, Ohio .................................. 25,500 10/31/05
700 Gracern Road
Columbia, South Carolina ........................ 11,850 2/28/07
4067 New Getwell Road
Memphis, Tennessee .............................. 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas .................................. 18,028 1/31/07
5550 Airline Drive
Houston, Texas .................................. 78,483 12/31/09
515 Norwood Road
Houston, Texas .................................. 26,676 12/31/09
1574 South West Temple
Salt Lake City, Utah ............................ 64,170 12/31/06
320 23rd Street
Arlington, Virginia ............................. 45,284 3/6/10
22930 Shaw Road
Dulles, Virginia ................................ 32,600 7/31/06
2925-2941 Space Road
Richmond, Virginia .............................. 26,000 8/19/03
109-D Executive Drive
Dulles, Virginia ................................ 19,000 8/31/04
6950 Gisholt Drive
Madison, Wisconsin .............................. 32,000 5/30/09
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom ........... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom ........ 24,300 12/24/06
2116 Logan Avenue
Winnipeg, Manitoba, Canada ...................... 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada ..................... 16,100 Owned
7
EMCOR believes that all of its property, plant and equipment are well
maintained, in good operating condition and suitable for the purposes for which
they are used.
See Note K -- Commitments and Contingencies of the notes to consolidated
financial statements for additional information regarding lease costs. EMCOR
utilizes substantially all of its leased or owned facilities and believes there
will be no difficulty either in negotiating the renewal of its real property
leases as they expire or in finding alternative space, if necessary.
ITEM 3. LEGAL PROCEEDINGS
In February 1995, as part of an investigation by the New York County District
Attorney's office into the business affairs of a general contractor that did
business with EMCOR's subsidiary, Forest Electric Corp. ("Forest"), a search
warrant was executed at Forest's executive offices. On July 12, 2000, Forest was
served with a Subpoena Duces Tecum to produce certain documents as part of a
broader investigation by the New York County District Attorney's office into
illegal business practices in the New York City construction industry. Forest
has been informed by the New York County District Attorney's office that it and
certain of its officers are targets of the investigation. Forest has produced
documents in response to the subpoena and intends to cooperate fully with the
District Attorney's office investigation as it proceeds.
In December 2001, the Company's Canadian subsidiary Comstock Canada Limited
("Comstock") commenced an action against Atomic Energy of Canada Limited
("AECL") claiming approximately Cdn. $6.0 million in connection with Comstock's
work on two medical isotope nuclear reactors and associated works at AECL's
facility at Chalk River, Ontario. Comstock's claim is for holdback, unpaid
change requests, loss of productivity and extended duration costs. AECL has
filed an amended defense denying Comstock's claim and counterclaimed against
Comstock for Cdn. $47.0 million claiming fraud and substantial deficiencies in
Comstock's performance of work which are alleged to have resulted in the need to
replace much of Comstock's work and installed materials and the need to redesign
and reinstall various components of the reactor systems. These deficiencies are
alleged to have caused a significant delay in AECL's ability to obtain the
necessary certifications for operation of the systems. There has been no
document exchange or discoveries in this litigation. The Company believes it has
good and meritorious defenses to the AECL counterclaim.
In August 2002, the Company's subsidiary Heritage Air Systems, Inc,
("Heritage") was added as one of twenty-one defendants named in a civil action
pending in the United States District Court for the Eastern District of New York
by a competitor under the Sherman Act, 15 U.S.C. Sections 1 & 2, the Clayton
Act, 15 U.S.C. Section 15 & 26, The Labor Management Relations Act, 29 U.S.C.
Section 187 (a), and New York state law. Plaintiff, Cool Wind Ventilation Corp.,
alleges a conspiracy in restraint of trade and a monopoly in the sheet metal
duct industry in New York City and Long Island. Specifically, the plaintiff
alleges that the defendant Sheet Metal Workers International Association Local
No. 28 ("Local 28"), certain other trade unions, contractors, including
Heritage, building owners and building managers violated federal antitrust and
federal labor laws by entering into agreements whereby Local 28 would engage in,
and to threaten to engage in, localized and widespread picketing and work
stoppages at job sites where plaintiff or other non-Local 28 contractors were
working in order to compel mechanical contractors to stop or change the way they
did business with plaintiff and other non-Local 28 contractors. As a result of
the alleged conspiracy, plaintiff alleges that it and others were prevented from
competing in the most lucrative area of the sheet metal ductwork industry.
Plaintiff claims judgment for treble the damages it believes it sustained and
which it estimates to be no less than $50.0 million. Heritage answered the
amended complaint, denying all claims of wrongdoing. Discovery continued in the
matter until December 2002 when the action was stayed voluntarily to permit
settlement discussions. In January 2003, the District Court entered an order
dismissing the amended complaint, without prejudice, after it was advised an
agreement in principle settling the matter had been reached by the parties. That
agreement in principle does not require Heritage to pay any damages or desist
from engaging in any of the conduct alleged in the amended complaint.
EMCOR is involved in other proceedings in which damages and claims have been
asserted against it. EMCOR believes it has a number of valid defenses to such
proceedings and claims and intends to vigorously defend itself and does not
believe that a significant liability will result.
Inasmuch as the proceedings and claims in which EMCOR is involved range from
a few thousand dollars to $50.0 million, the outcome of which cannot be
predicted, adverse results could have a material adverse effect on EMCOR's
financial position and/or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 56; Chairman of the Board and Chief Executive Officer
of the Company since April 1994 and President of the Company from April 1994 to
April 1997. From April 1990 to April 1994, Mr. MacInnis served as President and
Chief Executive Officer, and from August 1990 to April 1994 as Chairman of the
Board, of Comstock Group, Inc., a nationwide electrical contracting company.
From 1986 to April 1990, Mr. MacInnis was Senior Vice President and Chief
Financial Officer of Comstock Group, Inc. In addition, from 1986 to April 1994,
Mr. MacInnis was also President of Spie Group Inc., which had interests in
Comstock Group, Inc., Spie Construction Inc., a Canadian pipeline construction
company, and Spie Horizontal Drilling Inc., a U.S. company engaged in
underground drilling for the installation of pipelines and communications cable.
JEFFREY M. LEVY, Age 50; President of the Company since April 1997 and Chief
Operating Officer of the Company since February 1994, Executive Vice President
of the Company from November 1994 to April 1997, Senior Vice President of the
Company from December 1993 to November 1994. From May 1992 to December 1993, Mr.
Levy was President and Chief Executive Officer of the Company's subsidiary EMCOR
Mechanical/Electrical Services (East) Inc. From January 1991 to May 1992, Mr.
Levy served as Executive Vice President and Chief Operating Officer of Lehrer
McGovern Bovis, Inc., a construction management and construction company.
SHELDON I. CAMMAKER, Age 63; Executive Vice President and General Counsel of
the Company since September 1987 and Secretary of the Company since May 1997.
Prior to September 1987, Mr. Cammaker was a senior partner of the New York City
law firm of Botein, Hays, & Sklar.
LEICLE E. CHESSER, Age 56; Executive Vice President and Chief Financial
Officer of the Company since May 1994. From April 1990 to May 1994, Mr. Chesser
served as Executive Vice President and Chief Financial Officer of Comstock
Group, Inc., and from 1986 to May 1994, Mr. Chesser was also Executive Vice
President and Chief Financial Officer of Spie Group, Inc.
R. KEVIN MATZ, Age 44; Vice President and Treasurer of the Company since
April 1996 and Staff Vice President - Financial Services of the Company from
March 1993 to April 1996. From March 1991 to March 1993, Mr. Matz was Treasurer
of Sprague Technologies Inc., a manufacturer of electronic components.
MARK A. POMPA, Age 38; Vice President and Controller of the Company since
September 1994.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. EMCOR's common stock trades on the New York Stock
Exchange under the symbol "EME".
The following table sets forth high and low sales prices for the common stock
for the periods indicated as reported by the New York Stock Exchange:
2002 HIGH LOW
---- ------ ------
First Quarter .............................. $59.71 $43.87
Second Quarter ............................. $64.35 $51.91
Third Quarter .............................. $60.80 $45.20
Fourth Quarter ............................. $58.15 $44.71
2001 HIGH LOW
---- ------ ------
First Quarter .............................. $31.42 $23.75
Second Quarter ............................. $45.98 $29.87
Third Quarter .............................. $45.20 $30.60
Fourth Quarter ............................. $49.14 $31.74
HOLDERS. As of February 19, 2003, there were 130 shareholders of record and,
as of that date, EMCOR estimates there were approximately 3,800 beneficial
owners holding stock in nominee or "street" name.
DIVIDENDS. EMCOR did not pay dividends on its common stock during 2002 or
2001, and it does not anticipate that it will pay dividends on its common stock
in the foreseeable future. EMCOR's working capital credit facility limits the
payment of dividends on its common stock.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from audited financial
statements and should be read in conjunction with the consolidated financial
statements, the related notes thereto and the report of independent auditors and
the report of independent public accountants thereon included elsewhere in this
and in previously filed annual reports on Form 10-K of EMCOR.
INCOME STATEMENT DATA
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Revenues ................................................. $3,968,051 $3,419,854 $3,460,204 $2,893,962 $2,210,374
Gross profit ............................................. 482,634 391,823 357,817 295,907 223,287
Operating income ......................................... 114,425 88,682 78,925 58,091 37,224
Income before extraordinary item ......................... 62,902 50,012 40,089 27,821 17,092
Extraordinary item -- loss on early
extinguishment of debt, net of income taxes ............ -- -- -- -- (4,777)
---------- ---------- ---------- ---------- ----------
Net income ............................................... $ 62,902 $ 50,012 $ 40,089 $ 27,821 $ 12,315
---------- ---------- ---------- ---------- ----------
Basic earnings per share:
Income before extraordinary item ......................... $ 4.23 $ 3.86 $ 3.84 $ 2.86 $ 1.67
Extraordinary item-- loss on early
extinguishment of debt, net of income taxes ............ -- -- -- -- (0.47)
---------- ---------- ---------- ---------- ----------
Basic earnings per share ................................. $ 4.23 $ 3.86 $ 3.84 $ 2.86 $ 1.20
========== ========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary item ......................... $ 4.07 $ 3.40 $ 2.95 $ 2.21 $ 1.46
Extraordinary item-- loss on early
extinguishment of debt, net of income taxes ............ -- -- -- -- (0.35)
---------- ---------- ---------- ---------- ----------
Diluted earnings per share ............................... $ 4.07 $ 3.40 $ 2.95 $ 2.21 $ 1.11
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ................................. $ 489,870 $ 421,933 $ 233,503 $ 170,249 $ 119,816
Total assets ............................................. $1,758,491 $1,349,664 $1,261,864 $1,052,246 $ 801,002
Goodwill ................................................. $ 290,412 $ 56,011 $ 67,625 $ 68,009 $ 22,745
Notes payable ............................................ $ 21,815 $ 573 $ -- $ 1,150 $ 8,314
Borrowings under working capital credit lines ............ $ 112,000 $ -- $ -- $ -- $ --
Other long-term debt, including current maturities ....... $ 1,015 $ 973 $ 116,056 $ 116,534 $ 116,086
Capital lease obligations ................................ $ 351 $ 249 $ 573 $ 554 $ 837
- -----------
(a) No cash dividends on EMCOR's common stock have been paid during the past
five years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
HIGHLIGHTS
Revenues for the year ended December 31, 2002 were $3.97 billion, compared to
$3.42 billion and $3.46 billion for the years ended December 31, 2001 and 2000,
respectively. Net income was $62.9 million for 2002, an increase of $12.9
million, or 25.8%, from $50.0 million for 2001. For 2000, net income was $40.1
million. Diluted earnings per share on net income were $4.07 per share for 2002,
compared to $3.40 per share for 2001 and $2.95 per share for 2000.
On March 1, 2002, EMCOR acquired from Comfort Systems USA, Inc. (the
"Seller") a group of companies (the "Acquired Comfort Companies"). Accordingly,
the Consolidated Results of Operations for EMCOR for the year ended December 31,
2002 include the results of operations for the Acquired Comfort Companies since
March 1, 2002. The purchase price paid for a 100% voting interest of the
Acquired Comfort Companies was $186.25 million and was comprised of $164.15
million in cash and $22.1 million by assumption of Seller's notes payable to
former owners of certain of the Acquired Comfort Companies. Pursuant to the
terms of the acquisition agreement, an addi-
11
tional $7.1 million of cash purchase price was paid by EMCOR to Seller
subsequent to the acquisition date due to an increase in net assets of the
Acquired Comfort Companies between the closing date and an agreed upon
preclosing date. The acquisition was funded with $121.25 million of EMCOR's
funds and $50.0 million from borrowings under EMCOR's revolving credit facility.
The Acquired Comfort Companies, which are based predominantly in the Midwest
United States and New Jersey, are active in the installation and maintenance of
mechanical system and the design and installation of process and fire protection
systems. Services are provided to a broad range of businesses, including food
processing, pharmaceutical and manufacturing/distribution.
On December 19, 2002, EMCOR acquired all the capital stock of Consolidated
Engineering Services, Inc. ("CES") from Archstone-Smith Operating Trust and
others. CES primarily provides a broad array of facility services including
comprehensive facilities management, site-based operations and maintenance,
mobile maintenance and services, remote monitoring, technical consulting and
diagnostic services, and the installation and support for building systems. The
purchase price paid for CES was $178.0 million, of which $156.0 million was paid
from borrowings under EMCOR's revolving credit facility and $22.0 million from
EMCOR's funds. The purchase price is subject to adjustment based on the
difference between the net assets of CES on the closing date and an agreed upon
preclosing date.
EMCOR acquired two additional companies during 2002 for which EMCOR paid an
aggregate of $3.4 million.
OPERATING SEGMENTS
EMCOR's business consists of the following operating segments: United States
electrical construction and facilities services, United States mechanical
construction and facilities services, United States other services, Canada
construction and facilities services, United Kingdom construction and facilities
services and Other international construction and facilities services. The
segment "United States other services" principally consists of those operations
which provide consulting and maintenance services, and "Other international
construction and facilities services" consists of EMCOR's operations outside of
the United States, Canada, and the United Kingdom (primarily South Africa, the
Middle East and Western Europe) performing electrical construction, mechanical
construction and facilities services.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The 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 this Form 10-K. There
was no initial adoption of any accounting policies during 2002 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 the financial condition and results of operations are: the impact of
changes in the 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 each contract at completion.
Certain of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date for
each contract to the estimated total labor costs for such contract. Provisions
for 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 its
consolidated balance sheets. Costs and estimated earnings in excess of billings
on uncompleted contracts reflected on the consolidated balance sheets arise when
revenues have been recognized but the amounts cannot be billed under the terms
of 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.
12
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 contracts: 1) fixed price services contracts which are signed in
advance for maintenance, repair and retrofit work over periods typically ranging
from one to three years (for which there may be EMCOR employees on the
customer's site full time) and 2) services contracts not signed in advance for
similar maintenance, repair and retrofit work 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 life of the
contract. Revenues derived from other services contracts are recognized when the
services are performed 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. The provisions for bad debts during 2002, 2001, and
2000 amounted to approximately $3.4 million, $2.9 million and $6.4 million,
respectively. At December 31, 2002 and 2001, accounts receivable of $965.0
million and $777.1 million, respectively, included allowances of $40.6 million
and $35.1 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 would be 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 December 31, 2002
and 2001, the total valuation allowance on net deferred tax assets was
approximately $2.1 million and $3.6 million, respectively.
INTANGIBLE ASSETS
As of December 31, 2002, EMCOR had goodwill and net identifiable intangible
assets of $290.4 million and $13.8 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 these
lives are determined to be indefinite. Changes in strategy and/or market
conditions may result in adjustments to recorded intangible asset balances. As
of December 31, 2002, no indicators of impairment of its goodwill or
identifiable intangible assets existed after EMCOR's initial and first annual
impairment review in accordance with the provisions of SFAS 142. See Note B --
Summary of Significant Accounting Policies of the notes to consolidated
financial statements for additional discussion of the provisions of SFAS 142.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
Revenues for the year ended December 31, 2002 increased 16.0% to $3.97
billion compared to $3.42 billion of revenues for 2001. The $548.2 million
increase in revenues for 2002 when compared to 2001 was primarily due to
revenues of $502.6 million from companies acquired in 2002 and to increased
revenues in the United States other services, Canada and the United Kingdom
segments of $27.0 million, $118.1 million and $70.3 million, respectively.
Partially offsetting this increase was a reduction, when compared to 2001, of
rev-
13
venues related to "fast-track" (projects with accelerated time tables earlier
than typical contracts for similar projects) telecom and other contracts, as
well as a shift to larger longer-term projects which typically result in revenue
being recognized over a longer period of time. Revenues for 2001 of $3.42
billion represented a 1.2% decrease over revenues of $3.46 billion for 2000. The
$40.3 million decrease in revenues for 2001 compared to 2000 was primarily due
to reduced fast-track data center construction in the New York, Chicago,
Washington D. C. and California markets, as well as a reduced level of activity
in the Las Vegas and Ohio markets and in Canada. The decrease was partially
offset by growth in revenues associated with energy generation projects and
transportation infrastructure construction on the United States west and east
coasts and revenue growth from various operations in the Boston area market.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages of total revenues for the years ended December 31, 2002,
2001 and 2000 (in millions, except for percentages):
% OF % OF % OF
2002 TOTAL 2001 TOTAL 2000 TOTAL
-------- ----- -------- ----- -------- -----
Revenues:
United States electrical construction and facilities services $1,152.4 29% $1,334.7 39% $1,350.7 39%
United States mechanical construction and facilities services 1,728.7 44% 1,202.1 35% 1,262.1 36%
United States other services 236.7 6% 209.7 6% 163.9 5%
-------- -------- --------
Total United States operations 3,117.8 79% 2,746.5 80% 2,776.7 80%
Canada construction and facilities services 316.3 8% 198.2 6% 237.0 7%
United Kingdom construction and facilities services 533.9 13% 463.6 14% 446.2 13%
Other international construction and facilities services -- -- 11.6 -- 0.3 --
-------- -------- --------
Total worldwide operations $3,968.0 100% $3,419.9 100% $3,460.2 100%
======== === ======== === ======== ===
Revenues for EMCOR's United States electrical construction and facilities
services segment for 2002 decreased by $182.3 million compared to 2001. The
decrease in revenues was primarily due to a reduction in fast-track telecom and
other contracts in 2002 compared to the prior year. During 2002, transportation
infrastructure work increased and energy generation work remained steady
compared to the prior year. The $16.0 million, or 1.2%, decrease in 2001
revenues attributable to this segment compared to 2000 was due to reduced levels
of fast-track data center and commercial construction in the New York, Chicago,
Washington D. C. and California markets, as well as reduced levels of activity
in the Las Vegas and Ohio markets. The decrease was partially offset by
increases in revenues associated with energy generation and transportation
infrastructure construction markets on the west and east coasts and increased
revenues from various activities in the Salt Lake City market.
United States mechanical construction and facilities services revenues
increased in 2002 by $526.6 million, or 43.8% when compared to 2001. This
increase in revenues was primarily attributable to $488.5 million of revenues
from the Acquired Comfort Companies and growth in revenues in the northern
California market. These increases were partially offset by decreased revenues
as a result of the performance of fewer fast-track contracts. A $60.0 million,
or 4.8%, decrease in revenues for 2001 compared to 2000 was due to reduced
fast-track data center construction, reduced levels of activity in the Las Vegas
and Denver markets and planned reductions in operations at EMCOR's Poole & Kent
subsidiary operations in the North and South Carolina markets. The decrease in
revenues was partially offset by increased revenues associated with energy
generation construction on the west and east coasts and increased revenues from
the Boston area market.
United States other services revenues, which include those operations that
principally provide consulting and maintenance services, increased by $27.0
million, or 12.9%, for 2002 compared to 2001. The increase in revenues was
attributable primarily to an increase in facilities services contracts and, to a
lesser extent, to revenues from the acquisition of CES, partially offset by a
decline in telecommunications related work. Revenues for 2001 increased by $45.8
million compared to 2000. The increase in revenues was primarily attributable to
an increase in maintenance services provided to customers.
Revenues of Canada construction and facilities services increased by $118.1
million, or 59.6%, for 2002 as compared to 2001 revenues. The increase in
revenues was primarily attributable to the performance of work on certain
long-term contracts. The $38.8 million, or 16.4%, decrease in revenues for 2001
compared with 2000 was attributable to project start date delays in Eastern
Canada and a reduction of revenues in Western Canada due to timing of
anticipated projects.
United Kingdom construction and facilities services revenues increased $70.3
million, or 15.2%, for 2002 compared to 2001 revenues principally due to growth
in the facilities services market, offsetting a decline in the overall
construction market. The decline in the overall construction market principally
resulted in fewer attractive bid opportunities, and thereby caused EMCOR to be
more selective in submitting project bids. Construction revenues for 2002 do not
include revenues from certain multi-year rail projects that were awarded in 2002
which will produce revenues in future periods. The $17.4 million, or 3.9%,
increase in 2001 revenues compared with 2000 revenues was principally due to
growth in construction and facilities markets in the United Kingdom during the
first half of 2001.
14
Other international construction and facilities services revenues primarily
consist of EMCOR's operations in the Middle East, South Africa and Europe.
Revenues from those operations were zero for 2002, $11.6 million for 2001 and
$0.3 million for 2000. All of the 2002 projects in these markets are being
performed by joint ventures. The results of these joint venture operations are
accounted for under the equity method of accounting because EMCOR has less than
majority ownership in foreign joint ventures, and, accordingly, revenues
attributable to such joint ventures are not reflected as revenues in the
consolidated financial statements. In 2001, certain European projects were
performed entirely by EMCOR subsidiaries and therefore, revenues were recorded.
EMCOR continues to pursue new business selectively in these markets; however,
the availability of opportunities has been significantly reduced as a result of
local economic factors, particularly in the Middle East.
COST OF SALES AND GROSS PROFIT
The following table presents EMCOR's cost of sales, gross profit, and gross
profit as a percentage of revenues, for the years ended December 31, 2002, 2001
and 2000 (in millions, except for percentages):
2002 2001 2000
-------- -------- --------
Cost of sales .............................. $3,485.4 $3,028.0 $3,102.4
Gross profit ............................... $ 482.6 $ 391.8 $ 357.8
Gross profit as a percentage of revenues ... 12.2% 11.5% 10.3%
Gross profit increased $90.8 million, or 23.2%, for 2002 compared to 2001.
Gross profit as a percentage of revenues was 12.2% for 2002 compared to 11.5%
for 2001. The increase in gross profit was primarily due to gross profit of
$81.2 million earned by companies acquired in 2002. The increase in gross profit
of $9.6 million attributable to EMCOR's other subsidiaries was due to the type
and location of construction and facilities services contracts performed,
efficient deployment of local labor, effective procurement of materials and
focus on risk management programs. The increase in gross profit as a percentage
of revenues was principally attributable to the Acquired Comfort Companies and
their higher gross profit as a percentage of sales in 2002 as compared to EMCOR
in 2001, as well as improvements for gross margin in EMCOR's other subsidiaries.
Gross profit increased $34.0 million, or 9.5%, for 2001 compared to 2000, and
gross profit as a percentage of revenues increased to 11.5% for 2001 compared
with 10.3% for 2000. The dollar increase in gross profit, as well as the
increase in gross profit as a percentage of revenues, were primarily due to an
increase in gross profits realized due to the type and location of construction
and facilities services contracts performed and continued improvement in project
management.
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, for the years ended December 31, 2002, 2001 and 2000 (in millions,
except for percentages):
2002 2001 2000
------ ------ ------
Selling, general and administrative expenses ................................... $368.2 $303.1 $278.9
Selling, general and administrative expenses as a percentage of revenues........ 9.3% 8.9% 8.1%
Selling, general and administrative expenses increased $65.1 million, or
21.5%, between 2002 and 2001. As a percentage of revenues, total selling,
general and administrative expenses increased to 9.3% in 2002 as compared to
8.9% in 2001. The dollar increase and increase in expenses as a percentage of
revenues during 2002 compared to 2001 was primarily attributable to $61.0
million of expenses of companies acquired in 2002 and increased variable
selling, general and administrative expenses in certain markets, which increased
expenses were partially offset by a $5.5 million reduction in goodwill
amortization expense as goodwill is no longer required to be amortized per SFAS
142. Selling, general and administrative expenses increased $24.2 million, or
8.7%, between 2001 and 2000. As a percentage of revenues, total selling, general
and administrative expenses increased to 8.9% in 2001 as compared to 8.1% in
2000. This dollar increase and increase in expenses as a percentage of revenues
during 2001 as compared to 2000 was primarily attributable to the type and
location of construction and facilities services contracts performed, increased
variable overhead costs associated with marketing and business development
efforts and expansion of information technology infrastructure support. Goodwill
amortization expense for the year ended December 31, 2002 and 2001 was zero and
$5.5 million, respectively. Amortization expense of certain identifiable
intangible assets associated with the Acquired Comfort Companies was $0.8
million for the year ended December 31, 2002.
15
OPERATING INCOME
The following table presents EMCOR's operating income, and operating income
as a percentage of segment revenues, for the years ended December 31, 2002, 2001
and 2000 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2002 REVENUES 2001 REVENUES 2000 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services $ 78.9 6.8% $ 75.3 5.6% $ 58.6 4.3%
United States mechanical construction and facilities services 60.3 3.5% 41.4 3.4% 35.9 2.8%
United States other services 3.3 1.4% (7.2) -- (5.5) --
------ ------ ------
Total United States operations 142.5 4.6% 109.5 4.0% 89.0 3.2%
Canada construction and facilities services 3.3 1.0% 2.3 1.2% 5.2 2.2%
United Kingdom construction and facilities services 0.0 -- 7.2 1.6% 6.0 1.3%
Other international construction and facilities services (0.1) -- (1.2) -- 0.5 --
Corporate administration (31.3) -- (29.1) -- (21.8) --
------ ------ ------
Total worldwide operations 114.4 2.9% 88.7 2.6% 78.9 2.3%
Other corporate items:
Interest expense (4.1) (4.8) (9.7)
Interest income 2.0 5.6 2.4
------ ------ ------
Income before taxes $112.3 $ 89.5 $ 71.6
====== ====== ======
Operating income increased for the United States electrical construction and
facilities services operations for 2002 compared to 2001. The dollar increase in
operating income for 2002 of $3.6 million, or 4.8%, as compared to 2001, and the
related increase as a percentage of revenues, was primarily attributable to the
increased activity from increased transportation infrastructure and continuing
energy generation construction projects on the west coast, the successful
completion and settlement of several contracts and increased operating income
attributable to various commercial and industrial projects in the San Diego, Las
Vegas, Washington D.C. and Denver markets offset, in part, by a reduction in
fast-track data center construction work across other markets. Operating income
for 2001 for the United States electrical construction and facilities services
operations increased $16.7 million, or 28.5%, from 2000 levels. The increase in
operating income, and operating income, as a percentage of revenues, for 2001
versus 2000 was attributable to an increase in operations associated with
transportation infrastructure and power plant construction contracts on the west
and east coasts, and increased levels of activity in the Salt Lake City market.
This increase in operating income was partially offset by reduced levels of
fast-track data center construction projects in the San Francisco, Washington
D.C. and Denver markets and the decrease in construction activity in the Las
Vegas market.
United States mechanical construction and facilities services operating
income increased $18.9 million for 2002, a 45.7% increase over 2001. This
increase in dollars and increase as a percentage of revenues was primarily due
to (i) operating income from the Acquired Comfort Companies of $19.7 million,
(ii) operating income associated with power plant construction contracts on the
west coast and (iii) improved results at the Poole & Kent subsidiary operations
which had losses in the prior year. The increases were partially offset by
reduced operating income attributable to fewer fast-track contracts in the 2002
than the prior year. Operating income for 2001 compared to 2000 increased $5.5
million, or 15.3%, and as a percentage of revenues increased to 3.4% from 2.8%,
primarily due to (i) increased energy generation construction projects on the
west and east coasts, partially offset by a reduction in construction projects
in the Las Vegas market and (ii) reduced losses at certain Poole & Kent
subsidiaries compared to the prior year.
United States other services operating income was $3.3 million for 2002
compared to operating losses of $7.2 million for 2001. The increase in operating
profit was primarily attributable to new facilities services contracts and a
decrease in selling, general and administrative expenses as the facilities
services operations became more established and thus required less overhead
spending relating to the development of new business. The contribution to 2002
operating income by CES, which was acquired on December 19, 2002, was not
material. Operating losses in this segment for 2001 compared to 2000 increased
by $1.7 million primarily due to costs associated with the continued development
of the consulting operations and maintenance services activities of EMCOR.
Canada construction and facilities services operating income increased by
$1.0 million for 2002 compared to 2001 principally due to increased work on
longer-term contracts that result in profit recognition over an extended time
period, partially offset by a reduction in the number of fast-track type
contracts. For 2001 compared to 2000, operating income decreased by $2.9 million
principally due to project start date delays in Eastern Canada for certain
projects in backlog and a reduction of revenues in Western Canada due to the
timing of anticipated projects.
16
United Kingdom construction and facilities services operating income
decreased by $7.2 million for 2002 compared to 2001. The decrease in operating
income was primarily attributable to unfavorable settlements and closeouts of
certain construction projects completed during the year. During 2002 the
facilities services business continued to realize increased revenues and
operating income while the construction activities have slowed since 2001. For
2001, operating income increased by $1.2 million as compared to 2000. This
increase was primarily attributable to growth in construction and facilities
markets in the United Kingdom during the first half of 2001.
Other international construction and facilities services operating losses
were $0.1 million for 2002 compared to operating losses of $1.2 million in 2001
and operating income of $0.5 million in 2000. EMCOR continues to pursue new
business selectively in the Middle Eastern, South African and European markets;
however, the availability of opportunities has been significantly reduced as a
result of local economic factors, particularly in the Middle East.
General corporate expenses for 2002 increased by $2.2 million from 2001
levels, and increased by $7.3 million between 2001 and 2000. The increase in
general corporate expenses was primarily due to the expansion of operations
support activities such as information technology infrastructure, human
resources and communications in order to meet the level of service expected by
clients and manage the increased number of operations due to acquisitions. Costs
associated with the integration of companies acquired during 2002 were
approximately $0.5 million of the $2.2 million increase from 2001 to 2002.
Interest expense decreased by $0.7 million in 2002 compared to 2001
principally due to the conversion of $115.0 million of EMCOR's 5.75% Convertible
Subordinated Notes into approximately 4.2 million shares of EMCOR common stock
in the second quarter of 2001. For the same reason, interest expense decreased
by $4.9 million in 2001 compared to 2000.
Interest income decreased by $3.6 million in 2002 compared with 2001.
Interest income increased by $3.2 million in 2001 compared to 2000. The decrease
in interest income for 2002 compared to 2001 was due to a reduction in cash on
hand in 2002 related to cash used for acquisitions and repayment of borrowings
related to the acquisitions, and to lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents EMCOR's net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2002 and 2001 (in millions):
2002 2001
------- ------
Net cash provided by operating activities ........... $ 154.7 $ 81.1
Net cash used in investing activities ............... $(364.8) $(31.2)
Net cash provided by financing activities ........... $ 113.4 $ 2.2
The Company's consolidated cash balance decreased by $96.7 million from
$189.8 million at December 31, 2001 to $93.1 million at December 31, 2002
primarily due to the use of cash for the acquisition of the Acquired Comfort
Companies and CES, partially offset by net cash provided by operating
activities. Net cash provided by operating activities for 2002 was $154.7
million, an increase of $73.6 million from $81.1 million for 2001. The cash
provided by operating activities in 2002 was primarily due to increased net
income, increased accounts payable, increased accrued expenses and decreased
accounts receivable, partially offset by increased contracts in progress, net.
Net cash used in investing activities in 2002 of $364.8 million consisted
primarily of payments of an aggregate of $334.7 million for acquisitions in 2002
and earn-out payments of $8.6 million for acquisitions in prior periods, net
disbursement for other investments of $7.7 million and $15.6 million for the
purchase of property, plant and equipment. This activity compares to net cash
used in investing activities for 2001 of $17.9 million for the purchase of
property, plant and equipment, $8.8 million for payments for acquisitions and
related earn-out agreements for prior year acquisitions and net disbursements
for other investments of $6.5 million. Net cash provided by financing activities
for 2002 of $113.4 million was primarily attributable to borrowings under
working capital credit lines used to finance the CES acquisition in December
2002 and proceeds from the exercise of stock options, offset by a reduction due
to net repayments of long-term debt and capital lease payments.
17
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
----------- ----- ------ ------ ------ -------
Notes payable ......................................... $ 21.8 $ 21.8 $ -- $ -- $ --
Other long-term debt .................................. 1.0 0.3 0.2 0.2 0.3
Capital lease obligations ............................. 0.4 0.2 0.2 -- --
Operating leases ...................................... 141.9 38.6 55.1 25.9 22.3
Open purchase obligations (1).......................... 340.4 293.1 35.3 12.0 --
Other long-term obligations (2) ....................... 87.8 -- 87.8 -- --
------ ------ ------ ------ ------
Total Contractual Obligations ......................... $593.3 $354.0 $178.6 $ 38.1 $ 22.6
====== ====== ====== ====== ======
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) ..................... $112.0 $ -- $ -- $112.0 $ --
Letters of credit ................................. 39.9 12.0 1.3 1.3 25.3
Guarantees ........................................ 25.0 -- -- -- 25.0
------ ------ ----- ------ ------
Total Commercial Commitments ...................... $176.9 $ 12.0 $ 1.3 $113.3 $ 50.3
====== ====== ===== ====== ======
- -----------
(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.
On September 26, 2002, EMCOR entered into a new $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). The Revolving
Credit Facility, which replaced a credit facility entered into on December 22,
1998 (the "1998 Credit Facility"), is guaranteed by certain direct and indirect
subsidiaries of EMCOR, is secured by substantially all of the assets of EMCOR
and most of its subsidiaries, and provides for borrowings in the form of
revolving loans and letters of credit. The Revolving Credit Facility contains
various covenants requiring, among other things, maintenance of certain
financial ratios and certain restrictions with respect to cumulative aggregate
payments for dividends, common stock repurchases, investments, acquisitions,
indebtedness and capital expenditures. A commitment fee is payable on the
average daily unused amount of the Revolving Credit Facility. The fee ranges
from 0.3% to 0.5% of the unused amount, based on certain financial tests. Loans
under the Revolving Credit Facility bear interest at (1) a rate which is the
prime commercial lending rate announced by Harris Trust and Savings Bank from
time to time (4.25% at December 31, 2002) plus 0% to 1.0%, based on certain
financial tests or (2) at a LIBOR rate (1.38% at December 31, 2002) plus 1.5% to
2.5% based on certain financial tests. The interest rates in effect at December
31, 2002 were 4.25% and 2.88%, respectively. Letter of credit fees issued under
this facility range from 0.75% to 2.5% and are charged based on the type of
letter of credit issued and certain financial tests. As of December 31, 2002 and
2001, EMCOR had approximately $39.9 million and $20.5 million of letters of
credit outstanding, respectively. EMCOR had borrowings of $112.0 million
outstanding under the Revolving Credit Facility at December 31, 2002. No
revolving loans were outstanding under the 1998 Credit Facility at December 31,
2001.
In August 2001, the Company's Canadian subsidiary, Comstock Canada Ltd.,
renewed 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 (4.0% at December 31, 2002).
There were no borrowings outstanding under this credit agreement at December 31,
2002 or 2001.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it
has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a
60% interest. The venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to customers for use in
cooling. These guarantees are not expected to have a material 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 $22.3 million in current maturities of EMCOR's long-term debt and
capital lease obligations as of December 31, 2002. $21.8 million of this amount
relates to notes payable to former owners of the Acquired Comfort Companies,
which were assumed in connection with the acquisition. These notes accrue
interest at an annual rate of 10% and are payable in April 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
unions representing EMCOR employees, bonds are provided to secure such
obligations for wages and benefits payable to or for such employees. As of
December 31, 2002, sureties had issued bonds for the account of EMCOR in the
18
aggregate amount of approximately $1.3 billion. To the extent such bonds were
for the benefit of customers (as opposed to unions), they related to over 675
construction projects. The bonds are issued by EMCOR's sureties in return for a
premium which varies depending on the size of the bonds. The individual amounts
for bonded projects range up to $170.0 million. EMCOR has agreed to indemnify
the sureties for any payments made by them in respect of bonds.
On March 18, 1998, EMCOR sold, pursuant to an underwritten public offering,
$115.0 million principal amount of 5.75% Convertible Subordinated Notes. During
the second quarter of 2001, EMCOR called its 5.75% Convertible Subordinated
Notes for redemption. As a consequence, all of the Convertible Subordinated
Notes were converted into approximately 4.2 million shares of EMCOR common
stock.
EMCOR does not have any other material financial guarantees or off-balance
sheet arrangements other than those discussed 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 effect, positively or negatively, on liquidity. In order to
manage through these uncertainties, EMCOR generally will not borrow funds to the
maximum amounts allowable and, therefore, should have 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 facilities services
market focused, is part of EMCOR's plan to grow its 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 2002
period, construction contracts trended away from short-cycle contracts toward
larger longer-term infrastructure and public sector contracts. Performance of
longer duration contracts usually requires higher upfront cash requirements
until billings can occur in accordance with contractual provisions. While EMCOR
strives to maintain a net over-billed position with its customers, there can be
no assurance that the net over-billed position can be maintained. EMCOR's net
over-billings, defined as the balance sheet accounts cost and estimated earnings
in excess of billings on uncompleted contracts less billings in excess of costs
and estimated earnings on uncompleted contracts, was $127.3 million and $97.9
million as of December 31, 2002 and 2001.
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. For example, in September 2002, EMCOR was able to
increase its capacity to borrow under credit facilities from $150.0 million to
$275.0 million. 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 several lawsuits and other proceedings in which other parties seek to
recover from it amounts ranging from a few thousand dollars to $50.0 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 December 31, 2002, EMCOR was utilizing approximately $24.5 million of
letters of credit obtained under its Revolving Credit Facility as collateral for
its insurance obligations.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" which is effective for fiscal years
beginning after May 15, 2002. This statement, among other matters, provides
guidance with respect to the accounting for gain or loss on capital leases that
were modified to become operating leases. The statement also eliminates the
requirement that gains or losses on the early extinguishment of debt be
classified as extraordinary items and provides guidance when the gain or loss on
the early retirement of debt should or should not be reflected as an
extraordinary item.
19
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires that costs associated with terminating employees or contracts
or closing or relocating facilities are to be recognized at fair value at the
time the liability is incurred. The Company does not anticipate that this
statement will have an effect on its financial statements when it becomes
effective for disposal activities initiated after December 31, 2002.
In November 2002, 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 No. 5, "Accounting for Contingencies," relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
entity (i.e., the guarantor) must recognize a liability for the fair value of
the obligation it assumes under that 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 guarantees that will be subject to
the accounting and disclosure provisions of the Interpretation, and therefore,
adoption of FIN 45 may impact disclosures in the first quarter of its next
fiscal year. EMCOR is currently evaluating the recognition and measurement
impacts of adoption.
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 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 therefore, adoption of SFAS 148 will impact only future disclosures, not the
financial results, of EMCOR.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EMCOR has not used derivative financial instruments for any purpose during
the years ended December 31, 2002 and 2001, including trading or speculating on
changes in interest rates, or commodity prices of materials used in its
business.
EMCOR is exposed to market risk for changes in interest rates for borrowings
under its Revolving Credit Facility. Borrowings under the credit facility bear
interest at variable rates, and the fair value of this borrowing is not
significantly affected by changes in market interest rates. As of December 31,
2002, there was $112.0 million of borrowings outstanding under the Revolving
Credit Facility, and these borrowings bear interest at (1) a rate which is the
prime commercial lending rate announced by Harris Trust and Savings Bank from
time to time (4.25% at December 31, 2002) plus 0% to 1.0%, based on certain
financial tests or (2) at a LIBOR rate (1.38% at December 31, 2002) plus 1.5% to
2.5% based on certain financial tests. Based on the borrowings outstanding of
$112.0 million, if interest rates were to increase by 1.0%, the net of tax
interest expense would increase $0.7 million in the next twelve months.
Conversely, if interest rates were to decrease by 1.0%, interest expense would
decrease by $0.7 million in the next 12 months. The Revolving Credit Facility
expires in September 2007. There is no guarantee that EMCOR will be able to
renew the agreement at its expiration.
EMCOR is also exposed to 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 customers' ability
to settle these obligations is negatively impacted by economic conditions. EMCOR
continually monitors the credit worthiness of its customers and maintains
on-going discussions with customers regarding contract status with respect to
change orders and billing terms. Therefore, EMCOR believes it takes appropriate
action to manage market and other risks, but there is no assurance that it will
be able to reasonably identify all risks with respect to collectibility of these
assets. Refer also to the previous discussion of Accounts Receivable under the
heading, "Application of Critical Accounting Policies."
20
Amounts invested in EMCOR's foreign operations are translated into U. S.
dollars at the exchange rates in effect at year end. The resulting translation
adjustments are recorded as accumulated other comprehensive income (loss), a
component of stockholders' equity, in the consolidated balance sheets. EMCOR
believes 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, the cost of revenues associated with
these transactions is generally contracted and paid for in their same local
currencies.
THIS ANNUAL REPORT ON FORM 10-K 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 RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO ADVERSE
CHANGES IN GENERAL ECONOMIC CONDITIONS, 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 AND RISK ASSOCIATED WITH FOREIGN
OPERATIONS AND OTHER FACTORS.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
---------------------------
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ...................................................................... $ 93,103 $ 189,766
Accounts receivable, less allowance for doubtful accounts of $40,611
and $35,091, respectively .................................................................... 964,968 777,102
Costs and estimated earnings in excess of billings on uncompleted contracts .................... 235,809 221,272
Inventories ....................................................................................