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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the
FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-2315
EMCOR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2125338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any as an amendment
to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's voting common equity held by
non-affiliates of the registrant on June 30, 2003, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$741,000,000 based on that day's closing price.
Number of shares of the registrant's common stock outstanding as of the
close of business on February 19, 2004: 15,035,193 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which document will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year to which this Form 10-K relates, are incorporated by
reference into Items 10 through 14 of Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business
General ....................................................................................... 1
The Business .................................................................................. 2
Mechanical and Electrical Construction Services and Facilities Services ....................... 2
Competition ................................................................................... 4
Employees ..................................................................................... 4
Backlog ....................................................................................... 4
Item 2. Properties .................................................................................... 5
Item 3. Legal Proceedings. ............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 9
Executive Officers of the Registrant .......................................................... 10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................................................ 11
Item 6. Selected Financial Data ....................................................................... 13
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ......... 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................................... 23
Item 8. Financial Statements and Supplementary Data ................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 53
Item 9A. Controls and Procedures ....................................................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 54
Item 11. Executive Compensation ........................................................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions ................................................ 54
Item 14. Principal Accounting Fees and Services ........................................................ 54
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 55
PART I
ITEM 1. BUSINESS
The Internet website address of EMCOR Group, Inc. ("EMCOR" or the "Company")
is http://www.emcorgroup.com. The Company's annual report on Form 10-K,
quarterly reports on Forms 10-Q and current reports on Forms 8-K (and any
amendments to those reports) are 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 2003, EMCOR had revenues of approximately $4.53 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 38 states and the
District of Columbia in the United States, eight provinces in Canada and 15
primary locations in the United Kingdom. In the United Arab Emirates 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 providing construction services relating to mechanical
and electrical systems in facilities of all types and in providing comprehensive
services for the operation, maintenance and management of substantially all
aspects of such facilities, commonly referred to as "facilities services."
EMCOR designs, integrates, installs, starts up, operates and maintains
various electrical and mechanical systems, including:
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's facilities services businesses, which support the operation of a
customer's facilities, include:
o Site-based operations and maintenance;
o Mobile maintenance and services;
o Facilities management;
o Remote monitoring;
o Installation and support for building systems;
o Technical consulting and diagnostic services;
o Small modification and retrofit projects; and
o Program development and management for energy systems.
These 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 services were provided by
others. EMCOR's varied facilities services are frequently combined to provide
integrated service packages which include operations and maintenance, mobile
services and facility improvement programs.
EMCOR provides 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 2003 revenues, approximately 80% were generated in the United States and
approximately 20% were generated internationally. In 2003, approximately 50% of
revenues were derived from new construction projects, 28% were derived from
renovation and retrofit of customer's existing facilities and 22% were derived
from facilities services operations.
1
THE BUSINESS
The broad scope of EMCOR's operations are more particularly described below.
For information regarding the revenues, operating income and total assets of
each of EMCOR's segments with respect to each of the last three fiscal years,
and EMCOR's revenues and assets attributable to the United States, Canada, the
United Kingdom and all other foreign countries, see Note M to EMCOR's financial
statements included herein.
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 non-residential construction industry, due principally to the ever
increasing content and complexity of mechanical and electrical systems in all
types of projects. This increasing 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 United States mechanical and electrical construction services
operations accounted for about 61% of its 2003 revenues, of which revenues
approximately 67% was related to new construction and approximately 33% 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 30% of
EMCOR's construction services revenues in 2003.
EMCOR's projects of less than $10.0 million accounted for approximately 70%
of 2003 construction services revenues. These projects are typically completed
in less than one 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 critical systems power supply, 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.
2
EMCOR also installs and maintains lighting for streets, highways, bridges and
tunnels, 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.
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.
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, EMCOR's United States facilities services unit ("EFS")
offers a broad range of facilities services, including maintenance and service
of mechanical and electrical 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. Facilities services are frequently bundled to provide
integrated service packages and are provided on a mobile basis or by customer
site-based EMCOR employees.
These facilities services, which generated approximately 22% of 2003
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. EFS
clients include Fortune 100 companies in information technology,
telecommunications, pharmaceuticals, financial services, publishing and
manufacturing.
Illustrative of the outsourcing of companies' facilities services is a
three-year agreement, expiring June 2005, with Bank One under which EMCOR
provides facilities services for approximately 2,200 Bank One facilities
encompassing 34.0 million square feet of space in 30 states; its four and
one-half 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; 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; its three and one-half
year agreement with Fidelity Investments expiring June 2004 under which EMCOR
provides integrated services to approximately 2.5 million square feet of data
center space; and its agreements with Hewlett-Packard Company expiring in March
and July 2006 under which EMCOR provides integrated services to approximately
20.0 million 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 30.0 million square feet of
space. In November 2003, EMCOR acquired the Facility Management Services
division of Siemens Building Technologies, Inc., including contracts to provide
facilities services to several operating units of Siemens Corporation
encompassing 5.0 million square feet of corporate, manufacturing and research
space.
In December 2002, EMCOR acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business, which generated in 2003 revenues in
excess of $422.2 million, and which provided services to approximately 9,800
facilities with an aggregate of approximately 277.0 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 28 states throughout
the Northeast, Midwest, Mid-Atlantic and Southeast. As part of its operations,
CES is responsible for (i) the oversight of all or most of a business'
facilities operations, including operation and maintenance, (ii) the oversight
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.
3
The deregulation of, and increased competition in, the utility industry,
along with government mandates calling for reduced energy consumption by
governmental 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, Inc.,
which evolved from the facilities services provided by EMCOR to Washington
Mutual, Inc. 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.
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., Unicco Service
Company, Trammel Crow and Jones Lang LaSalle are engaged in this field. EMCOR's
facilities services operations were expanded both through organic growth and
acquisitions.
EMPLOYEES
EMCOR presently employs approximately 26,000 people, approximately 71% of
whom are represented by various unions pursuant to more than 430 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, 2003 of approximately $3.0
billion, compared with backlog of approximately $2.9 billion as of December 31,
2002. 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 to completion on the
total value of existing construction contracts plus unrecognized revenue on
existing facilities services contracts to be derived during the immediately
succeeding 12 months. Backlog increased by $0.1 billion as of December 31, 2003
compared to December 31, 2002. Backlog attributable to United States
construction and facilities services and backlog attributable to Canada and
United Kingdom construction and facilities services each increased by
approximately $0.05 billion as of December 31, 2003 when compared to December
31, 2002. For the year ended December 31, 2003, EMCOR had approximately $4.53
billion in revenues compared to approximately $3.97 billion in revenues for the
year ended December 31, 2002.
4
ITEM 2. PROPERTIES
The operations of EMCOR are conducted primarily in leased properties. The
following table lists major facilities, both leased and owned, and identifies
the business segment that is the principal user of each such facility.
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 (a) ..................... 9,704 3/30/06
1200 North Sickles Drive
Tempe, Arizona (b) ....................... 29,000 Owned
1000 N. Kraemer Place
Anaheim, California (b) .................. 24,384 8/14/12
4540 Easton Drive
Bakersfield, California (c) .............. 11,368 3/31/04
3208 Landco Drive
Bakersfield, California (c) .............. 49,875 6/30/07
555 Anton Boulevard
Costa Mesa, California (a) ............... 17,058 5/31/08
1168 Fesler Street
El Cajun, California (b) ................. 48,360 8/31/10
24041 Amador Street
Hayward, California (b) .................. 40,000 10/31/11
25601 Clawiter Road
Hayward, California (b) .................. 34,800 6/30/04
5 Vanderbilt
Irvine, California (a) ................... 18,000 7/31/04
4462 Corporate Center Drive
Los Alamitos, California (c) ............. 57,863 7/31/06
825 Howe Road
Martinez, California (c) ................. 109,800 12/31/07
8670 Younger Creek Drive
Sacramento, California (a) ............... 51,984 6/15/08
4464 Alvarado Canyon Road
San Diego, California (b) ................ 40,000 10/31/07
9505 and 9525 Chesapeake Drive
San Diego, California (c) ................ 25,124 12/31/06
414 Brannan Street
San Francisco, California (c) ............ 18,964 3/31/05
4405 and 4420 Race Street
Denver, Colorado (b) ..................... 17,704 9/30/11
345 Sheridan Boulevard
Lakewood, Colorado (c) ................... 63,000 Owned
367 and 377 Research Parkway
Meriden, Connecticut (b) ................. 27,700 7/31/04
1781 N.W. North River Drive
Miami, Florida (b) ....................... 11,285 Owned
5
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
2501 S.W. 160th Street
Miramar, Florida (c) ....................... 15,877 7/31/08
3145 Northwoods Parkway
Norcross, Georgia (c) ...................... 25,808 1/31/06
400 Lake Ridge Drive
Smyrna, Georgia (a) ........................ 30,000 9/30/12
801 Asbury Drive
Buffalo Grove, Illinois (a) ................ 10,650 11/09/04
2160 North Asland Avenue
Chicago, Illinois (b) ...................... 67,000 6/30/05
2100 South York Road
Oak Brook, Illinois (c) .................... 87,700 5/31/08
3090 Colt Road
Springfield, Illinois (b) .................. 40,000 6/09/05
1406 Cardinal Court
Urbana, Illinois (b) ....................... 33,750 10/01/07
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b) .................... 136,695 10/31/08
2655 Garfield Road
Highland, Indiana (c) ...................... 45,816 6/30/06
5124-5128 W. 79th Street
Indianapolis, Indiana (b) .................. 12,600 9/30/06
2600 N. Ninth Street Road
Lafayette, Indiana (b) ..................... 13,798 10/31/08
3100 Brinkerhoff Road
Kansas City, Kansas (b) .................... 42,836 11/30/05
3125 Brinkerhoff Road
Kansas City, Kansas (b) .................... 22,676 Owned
631 Pecan Circle
Manhattan, Kansas (b) ...................... 22,750 8/31/08
2118 W. Harry
Wichita, Kansas (b) ........................ 25,600 8/31/07
300 Walnut Street
Owensboro, Kentucky (c) .................... 20,600 1/07/09
4530 Hollins Ferry Road
Baltimore, Maryland (b) .................... 26,792 Owned
645 A-F & 647 A & B Lofstrand Lane
Rockville, Maryland (a) .................... 10,600 2/28/05
643 Lofstrand Lane
Rockville, Maryland (a) .................... 15,000 2/28/05
306 Northern Avenue
Boston, Massachusetts (a) .................. 15,275 6/30/05
200 Old Colony Way
Boston, Massachusetts (b) .................. 11,500 3/31/05
70-70D Hawes Way
Stoughton, Massachusetts (b) ............... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts (a) (b) ........... 36,000 6/10/13
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
1743 Maplelawn
Troy, Michigan (c) .......................... 22,000 4/30/06
6060 Hix Road
Westland, Michigan (b) ...................... 23,000 12/31/08
6325 South Valley Boulevard
Las Vegas, Nevada (b) ....................... 23,190 12/31/08
3555 W. Oquendo Road
Las Vegas, Nevada (c) ....................... 90,000 11/30/08
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ............... 45,400 1/14/06
348 New Country Road
Secaucus, New Jersey (b) .................... 37,905 12/31/07
26 West Street
Brooklyn, New York (b) ...................... 15,000 Owned
301 and 305 Suburban Avenue
Deer Park, New York (b) ..................... 33,535 3/31/05
24-37 46th Street
Long Island City, New York (a) .............. 10,000 1/31/07
111-01 and 109-15 14th Avenue
Long Island City, New York (c) .............. 82,000 2/28/11
516 West 34th Street
New York, New York (c) ...................... 25,000 6/30/12
253 West 35th Street
New York, New York (c) ...................... 7,000 8/31/09
Two Penn Plaza
New York, New York (a) ...................... 57,200 2/01/06
704 Clinton Avenue South
Rochester, New York (a) ..................... 25,000 7/31/04
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio (a) ........................ 25,500 9/27/06
3976 Southern Avenue
Cincinnati, Ohio (a) ........................ 44,815 12/31/08
2300-2310 International Street
Columbus, Ohio (c) .......................... 25,500 10/31/07
2904 S.W. 1st Avenue
Portland, Oregon (c) ........................ 12,500 3/31/04
700 Gracern Road
Columbia, South Carolina (a) ................ 11,850 2/28/07
7520 Bartlett Corp. Avenue, East
Bartlett, Tennessee (c) ..................... 9,000 12/31/05
4067 New Getwell Road
Memphis, Tennessee (b) ...................... 36,000 8/28/07
6936 Commerce Avenue
El Paso, Texas (c) .......................... 18,028 1/31/07
5550 Airline Drive
Houston, Texas (b) .......................... 78,483 12/31/09
515 Norwood Road
Houston, Texas (b) .......................... 26,676 12/31/09
7
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------- ----------------
1574 South West Temple
Salt Lake City, Utah (c) ...................... 120,904 12/31/06
320 23rd Street
Arlington, Virginia (a) ....................... 43,058 3/05/10
109-D Executive Drive
Dulles, Virginia (c) .......................... 19,000 8/31/04
22930 Shaw Road
Dulles, Virginia (c) .......................... 32,616 7/31/06
3280 Formex Road
Richmond, Virginia (a) ........................ 30,640 7/31/08
8657 South 190th Street
Kent, Washington (a) .......................... 46,125 6/30/08
6950 Gisholt Drive
Madison, Wisconsin (b) ........................ 32,000 5/30/09
1 Thameside Centre
Kew Bridge Road
Kew Bridge, Middlesex, United Kingdom (d) ..... 14,000 12/22/12
86 Talbot Road
Old Trafford, Manchester, United Kingdom (d)... 24,300 12/24/06
2116 Logan Avenue
Winnipeg, Manitoba, Canada (e) ................ 19,800 Owned
3455 Landmark Boulevard
Burlington, Ontario, Canada (e) ............... 16,100 Owned
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.
- ----------------
(a) Principally used by a company engaged in the "United States facilities
services" segment.
(b) Principally used by a company engaged in the "United States mechanical
construction and facilities services" segment.
(c) Principally used by a company engaged in the "United States electrical
construction and facilities services" segment.
(d) Principally used by a company engaged in the "United Kingdom construction
and facilities services" segment.
(e) Principally used by a company engaged in the "Canada construction and
facilities services" segment.
8
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") in the Ontario Superior Court of Justice claiming approximately Cdn.
$6.0 million (approximately $4.6 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 was for holdback, unpaid change requests,
loss of productivity and extended duration costs. AECL filed an amended defense
denying Comstock's claim and counterclaimed against Comstock for Cdn. $47.0
million (approximately $36.3 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. In December 2003, the matter was settled. The settlement provided for a
payment of a portion of Comstock's claim by AECL and did not require payment of
any damages by Comstock.
On March 14, 2003, John Mowlem Construction plc ("Mowlem") presented a claim
in arbitration against EMCOR's United Kingdom subsidiary, EMCOR Drake & Scull
Group plc ("D&S"), in connection with a subcontract D&S entered into with Mowlem
with respect to a project for the United Kingdom Ministry of Defence at Abbey
Wood in Bristol, U.K. Mowlem seeks damages arising out of alleged defects in the
D&S design and construction of the mechanical and electrical engineering
services for the project. Mowlem's claim is for (pound)39.5 million
(approximately $70.5 million), which includes costs allegedly incurred by Mowlem
in connection with rectification of the alleged defects, overhead, legal fees,
delay and disruption costs related to such defects, and interest on such
amounts. The claim also includes amounts in respect of liabilities that Mowlem
accepted in connection with a settlement agreement it entered into with the
Ministry of Defence and which it claims are attributable to D&S. D&S believes it
has good and meritorious defenses to the Mowlem claim. D&S has denied liability
and has asserted a counterclaim for approximately (pound)11.6 million
(approximately $20.7 million) for certain design, labor and delay and disruption
costs incurred by D&S in connection with its subcontract with Mowlem.
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 over $70.0 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
Not applicable.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 57; Chairman of the Board and Chief Executive Officer
of the Company since April 1994. Mr. MacInnis was elected to the additional
position of President on February 26, 2004. He served as 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.
SHELDON I. CAMMAKER, Age 64; 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 57; 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 45; Senior Vice President - Shared Services of the Company
since June 2003. From April 1996 to June 2003 Mr. Matz served as Vice President
and Treasurer of the Company 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 39; Senior Vice President - Chief Accounting Officer and
Treasurer of the Company since June 2003. From September 1994 to June 2003 Mr.
Pompa was Vice President and Controller of the Company.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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:
2003 HIGH LOW
--- ---- ---
First Quarter ....................... $55.20 $43.40
Second Quarter ...................... $54.30 $45.61
Third Quarter ....................... $50.40 $39.79
Fourth Quarter ...................... $45.14 $33.00
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
HOLDERS.As of February 19, 2004, there were 126 stockholders of record and,
as of that date, EMCOR estimates there were approximately 10,400 beneficial
owners holding stock in nominee or "street" name.
DIVIDENDS.EMCOR did not pay dividends on its common stock during 2003 or
2002, 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The
following table summarizes equity compensation plans that were approved by
stockholders and equity compensation plans that were not approved by
stockholders as of December 31, 2003:
Equity Compensation Plan Information
A B C
-------------------------- -------------------------- --------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN A)
- -------------------------- -------------------------- -------------------------- --------------------------
Equity Compensation
Plans Approved by
Stockholders 725,129 $17.57 581,866(2)
Equity Compensation
Plans Not Approved
by Stockholders 1,055,074(1) $34.21 89,394(3)
--------- -------
Total 1,780,203 $27.43 671,260
========= =======
- --------------
(1) 54,167 shares relate to options which are held by employees (other than
executive officers) of the Company (the "Employee Options"), 868,135 shares
relate to options which are held by executive officers of the Company (the
"Executive Options"), 14,000 shares relate to options which are held by
Directors of the Company (the "Director Options"), and 130,606 shares relate
to restricted common stock units ("RSUs") outstanding under the Executive
Stock Bonus Plan described below under the "Executive Stock Bonus Plan."
(2) Includes 118,191 shares reserved for issuance under the 1997 Non-Employee
Directors' Non-Qualified Stock Option Plan, 11,000 shares reserved for
issuance under the 1995 Non-Employee Directors' Non-Qualified Stock Option
Plan, 90,000 shares reserved for issuance under the 2003 Non-Employee
Directors' Stock Option Plan, and 320,000 shares reserved for issuance under
the 2003 Management Stock Incentive Plan.
(3) Represent shares reserved for issuance under the Executive Stock Bonus Plan.
Does not include options to purchase 192,398 shares of common stock granted
in January 2004 to executive officers pursuant to their respective
employment agreements described below under "Executive Options."
11
EMPLOYEE OPTIONS
The Employee Options referred to in note (1) to the immediately preceding
table under Equity Compensation Plan Information (the "Table") vest over three
years in equal annual installments, commencing with the first anniversary of the
date of grant of the Employee Options. The Board of Directors granted such
Employee Options to certain key employees of the Company based upon the
performance of such employees. Such Employee Options have an exercise price per
share equal to the fair market value of a share of common stock on their
respective grant dates and have a term of ten years from the grant date.
EXECUTIVE OPTIONS
410,000 of the Executive Options referred to in note (1) to the Table were
granted to six executive officers in connection with their respective prior
employment agreements with the Company dated as of January 1, 1998, as amended
(the "Prior Employment Agreements"). Pursuant to the terms of such Prior
Employment Agreements, each such executive officer received a fixed number of
Executive Options on the first business day of 1999, 2000 and 2001 with
respective exercise prices of $16.19, $17.56 and $25.44 per share; in addition,
Mr. MacInnis, Chairman of the Board and Chief Executive Officer of the Company,
received an additional grant under his Prior Employment Agreement of an option
to purchase 200,000 shares with an exercise price of $19.75 per share. Such
Executive Options vested on the first anniversary of the grant date, other than
the option granted to Mr. MacInnis for 200,000 shares which vested in four equal
installments based upon the common stock reaching target stock prices of $25,
$30, $35 and $40.
An additional 458,135 Executive Options referred to in note (1) to the Table
were granted to six executive officers in connection with their respective
current employment agreements with the Company dated January 1, 2002 (the
"Current Employment Agreements"). Of these options, executive officers were
granted (i) an aggregate amount of 171,100 of such Executive Options on December
14, 2001 (exercisable in full upon grant) with an exercise price of $41.70 per
share, (ii) an aggregate amount of 145,700 of such Executive Options on January
2, 2002 with an exercise price of $46.35 per share and (iii) an aggregate amount
of 141,335 of such Executive Options on January 2, 2003 with an exercise price
of $54.73.
Pursuant to the terms of the Current Employment Agreements, on the first
business day of 2004, the executive officers were granted options to purchase an
aggregate of 192,398 shares of Company common stock with an exercise price of
$43.83 per share. These options are not included in the Table.
Other than those Executive Options granted on December 14, 2001, referred to
above, the Executive Options granted vest one-fourth on the grant date,
one-fourth on the first anniversary of the grant date, one-fourth on the second
anniversary of the grant date and one-fourth on the last business day of the
calendar year immediately preceding the third anniversary of the grant date.
Each of the Executive Options granted have a term of ten years from their
respective grant dates and an exercise price per share equal to the fair market
value of a share of common stock on their respective grant dates.
DIRECTOR OPTIONS
During 2002, each non-employee director of the Company received 2,000
Director Options and in 2003 Mr. Larry J. Bump, upon his election to the Board,
received 2,000 Director Options. These options were in addition to the 3,000
options to purchase common stock granted to each non-employee director under the
Company's 1995 Non-Employee Directors' Non-Qualified Stock Option Plan, which
plan has been approved by the Company's stockholders. The price at which such
Director Options are exercisable is equal to the fair market value per share of
common stock on the grant date. The exercise price per share of the Director
Options is $55.49 per share, except those granted to Mr. Yonker, upon his
election to the Board on October 25, 2002, which have an exercise price of
$51.75 per share, and those granted to Mr. Bump, upon his election to the Board
on February 27, 2003, which have an exercise price of $48.15 per share. All of
these options vested in full on the grant date and have a term of ten years from
the grant date.
EXECUTIVE STOCK BONUS PLAN
An Executive Stock Bonus Plan (the "Stock Bonus Plan") was adopted by the
Board of Directors in October 2000 and amended December 11, 2003. Pursuant to
the Stock Bonus Plan, as amended, 25% of the annual bonus earned by each
executive officer is automatically credited to him in the form of units ("RSUs")
that will subsequently be converted into common stock at a 15% discount from the
fair market value of common stock as of the date the annual bonus is determined.
The units are to be converted into shares of common stock and delivered to the
executive officer on the earliest of (i) the first business day following the
day upon which the Company releases to the public generally its results in
respect of the fourth quarter of the third calendar year following the year in
respect of which the RSUs were granted ("Release Date"), (ii) the executive
officer's termination of employment for any reason or (iii) immediately prior to
a "change of control" (as defined in the Stock Bonus Plan). In addition,
pursuant to the Stock Bonus Plan, each executive officer is permitted at his
election to cause all or part of his annual bonus not automatically credited to
him in the form of RSUs under the Stock Bonus Plan to be credited to him in the
form of units ("Voluntary Units") that will subsequently be converted into
common stock at a 15% discount from the fair market value of common stock as of
the date the annual bonus is determined. An election to accept Voluntary Units
under the Stock Bonus Plan must be made at least six months prior to the end of
the calendar year in respect of which the bonus will be payable. These Voluntary
Units are to be converted into shares of common stock and delivered to the
executive officer on the earliest of (i) the date elected by the executive
officer but in no event earlier than the Release Date, (ii) the executive
officer's termination of employment or (iii) immediately prior to a "change of
control."
12
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,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Revenues ............................................ $4,534,646 $3,968,051 $3,419,854 $3,460,204 $2,893,962
Gross profit ........................................ 482,454 482,634 391,823 357,817 295,907
Operating income .................................... 45,152 114,425 88,682 78,925 58,091
Net income .......................................... $ 20,621 $ 62,902 $ 50,012 $ 40,089 $ 27,821
========== ========== ========== ========== ==========
Basic earnings per share ............................ $ 1.38 $ 4.23 $ 3.86 $ 3.84 $ 2.86
========== ========== ========== ========== ==========
Diluted earnings per share .......................... $ 1.33 $ 4.07 $ 3.40 $ 2.95 $ 2.21
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ............................ $ 521,356 $ 489,870 $ 421,933 $ 233,503 $ 170,249
Total assets ........................................ $1,795,247 $1,758,491 $1,349,664 $1,261,864 $1,052,246
Goodwill ............................................ $ 277,994 $ 290,412 $ 56,011 $ 67,625 $ 68,009
Notes payable ....................................... $ -- $ 21,815 $ 573 $ -- $ 1,150
Borrowings under working capital credit lines ....... $ 139,400 $ 112,000 $ -- $ -- $ --
Other long-term debt, including current maturities .. $ 589 $ 1,015 $ 973 $ 116,056 $ 116,534
Capital lease obligations ........................... $ 339 $ 351 $ 249 $ 573 $ 554
- ---------------
(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
OVERVIEW
The results of operations for each of the three years ended December 31,
2003, 2002 and 2001 have been impacted by a number of significant trends and
events. Results of operations for 2003 compared to 2002 have been positively
impacted by the acquisition of the capital stock of Consolidated Engineering
Services, Inc. ("CES") from Archstone-Smith operating trust and others on
December 19, 2002, and an increase in revenues and income generated by United
States facilities services operations and United States transportation
infrastructure work. However, the 2003 results compared to 2002 were negatively
impacted by: (1) poor performance in the United Kingdom construction operations;
(2) increased competition for, and a related decrease in gross profit margin on,
commercial and industrial work in the United States inasmuch as there has been a
continuing decline in commercial and industrial work in the United States
resulting from the economic recession; (3) reduced private sector spending on
small and discretionary projects and repairs and maintenance work resulting from
the economic recession; (4) an increase in the percentage of work relating to
public sector construction that typically has lower gross profit margins than
private sector work; (5) lower than historical gross profit margins on several
United States projects as a result of poor contract performance; and (6) reduced
labor productivity due to the uncertain job market. (The foregoing factors
affecting the United States subsidiaries are hereafter referred to collectively
as the "2003 Unfavorable United States Market Conditions").
The 2002 results of operations compared to 2001 were positively impacted by
the acquisition on March 1, 2002 of a group of companies (the "Acquired Comfort
Companies") from Comfort Systems USA, Inc. ("Comfort") and increased revenues
and income from transportation infrastructure work and facilities services
contracts. The results of operations for 2002 compared to 2001 were negatively
impacted, as described above with respect to 2003, by (1) the economic
recession; (2) the beginning of a negative trend in the performance on EMCOR's
United Kingdom construction projects; (3) a reduction in "fast-track" projects
(i.e. those projects with timetables more accelerated than typical contracts for
similar projects) for telecom work and other work in the United States; and (4)
a shift to public sector work in the United States which typically results in
revenues being recognized over a longer period of time.
13
EMCOR's management recognizes that some of the business challenges it faces
are endemic to the construction and facilities services industry. However, EMCOR
has made or has under consideration certain strategic changes with respect to
its geographic markets and sectors served, including a shift in focus toward
more private sector commercial work even if that causes a temporary reduction in
revenues until such construction spending increases significantly. Actions
already taken include the replacement of the senior management of the United
Kingdom operations and reductions in selling, general and administrative
expenses in all segments. Such selling, general and administrative expense
reductions are expected to continue in 2004. EMCOR expects the demand for HVAC
repair and maintenance services to increase starting in the second quarter of
2004, and EMCOR will continue to follow its long-term strategy of increasing
revenues from multi-year facilities services contracts. EMCOR's management
believes it has positioned the company to benefit from its strategy; however,
there is no guarantee that these strategies will result in significantly
improved results if economic conditions affecting EMCOR and the construction
industry generally do not improve.
HIGHLIGHTS
Revenues for the year ended December 31, 2003 were $4.53 billion, compared to
$3.97 billion and $3.42 billion for the years ended December 31, 2002 and 2001,
respectively. Net income was $20.6 million for 2003 compared to $62.9 million
for 2002 and $50.0 million for 2001. Diluted earnings per share on net income
were $1.33 per share for 2003 compared to $4.07 per share for 2002 and $3.40 per
share for 2001.
The Consolidated Results of Operations for EMCOR for the year ended December
31, 2002 include the results of operations of the Acquired Comfort Companies and
CES from their respective dates of acquisition. EMCOR acquired two additional
companies during each of the years 2003 and 2002. See Note C - Acquisitions of
Businesses of the notes to consolidated financial statements for additional
discussion of these transactions.
OPERATING SEGMENTS
EMCOR has the following reportable segments which provide services associated
with the design, integration, installation, startup, operation and maintenance
of various systems: (a) United States electrical construction and facilities
services (involving systems for generation and distribution of electrical power,
lighting systems, low-voltage systems such as fire alarm, security,
communications and process control systems and voice and data systems); (b)
United States mechanical construction and facilities services (involving systems
for heating, ventilation, air conditioning, refrigeration, and clean-room
ventilation systems, and plumbing, process and high-purity piping systems); (c)
United States facilities services; (d) Canada construction and facilities
services; (e) United Kingdom construction and facilities services; and (f) Other
international construction and facilities services. The segment "United States
facilities services" principally consists of those operations which provide a
portfolio of services needed to support the operation and maintenance of
customers' facilities (mobile operation and maintenance services, site-based
operation and maintenance services, facility planning and consulting services
and energy management programs) which services are not related to customers'
construction programs. The Canada, United Kingdom and Other international
segments perform electrical construction, mechanical construction and facilities
services. "Other international construction and facilities services" represents
EMCOR's operations outside of the United States, Canada and the United Kingdom
(primarily in South Africa and the Middle East during the periods presented).
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 2003 other than those
listed under "New Accounting Pronouncements" below. EMCOR believes that some of
the more critical judgment areas in the application of accounting policies that
affect 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 FROM 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 to
perform each contract to the estimated total costs to perform such contract at
completion. Certain of EMCOR's electrical contracting business units measure
percentage-of-completion by the percentage of labor costs incurred to date to
perform each contract to the estimated total labor costs to perform such
contract at completion. Provisions for the entirety of estimated losses on
14
uncompleted contracts are made in the period in which such losses are
determined. Application of percentage-of-completion accounting results in the
recognition of costs and estimated earnings in excess of billings on uncompleted
contracts in EMCOR's consolidated balance sheets. Costs and estimated earnings
in excess of billings on uncompleted contracts reflected in the consolidated
balance sheets arise when revenues have been recognized but the amounts cannot
be billed under the terms of contracts. Such amounts are recoverable from
customers upon various measures of performance, including achievement of certain
milestones, completion of specified units or completion of a contract. Costs and
estimated earnings in excess of billings on uncompleted contracts also include
amounts EMCOR seeks or will seek to collect from customers or others for errors
or changes in contract specifications or design, contract change orders in
dispute or unapproved as to both scope and price, or other customer-related
causes of unanticipated additional contract costs. Such amounts are recorded at
estimated net realizable value and take into account factors that may affect the
ability to bill and collect amounts billed. As of December 31, 2003 and 2002,
costs and estimated earnings in excess of billings on uncompleted contracts
included unbilled revenues for unapproved change orders of approximately $43.0
million and $35.9 million, respectively, and for claims of approximately $56.4
million and $53.3 million, respectively. In addition, accounts receivable as of
December 31, 2003 and 2002 include claims and contractually billed amounts
related to such contracts of approximately $63.1 million and $45.1 million,
respectively. Generally, contractually billed amounts will not be paid by the
customer to EMCOR until final resolution of related claims. Due to uncertainties
inherent in estimates employed in applying percentage-of-completion accounting,
estimates may be revised as project work progresses. Application of
percentage-of-completion accounting requires that the impact of revised
estimates be reported prospectively in the consolidated financial statements.
In addition to revenue recognition for long-term construction contracts,
EMCOR recognizes revenues from services contracts as such contracts are
performed in accordance with Staff Accounting Bulletin No. 104, "Revenue
Recognition, revised and updated" ("SAB 104"). There are two basic types of
services contracts: (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 a customer's
site full time) and (2) services contracts which may or may not be signed in
advance for similar maintenance, repair and retrofit work on an as needed basis
(frequently referred to as time and material work). Fixed price 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 104. Expenses related to all
services contracts are recognized as incurred.
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 2003, 2002, and
2001 amounted to approximately $11.2 million, $3.4 million and $2.9 million,
respectively. The increased provision of $7.8 million for 2003 compared to 2002
primarily relates to the potential non-payment of a customer account receivable
of approximately $5.8 million due to the publicly reported financial
difficulties of the customer. At December 31, 2003 and 2002, accounts receivable
of $1,009.2 million and $965.0 million, respectively, included allowances of
$43.7 million and $40.6 million, respectively. Specific accounts receivable are
evaluated when EMCOR believes a customer may not be able to meet its financial
obligations due to a deterioration of its financial condition or credit ratings
or its bankruptcy. The allowance requirements are based on the best facts
available and are re-evaluated and adjusted on a regular basis and as additional
information is received.
INSURANCE LIABILITIES
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, 2003
and 2002, the total valuation allowance on net deferred tax assets was
approximately $2.0 million and $2.1 million, respectively.
INTANGIBLE ASSETS
As of December 31, 2003, EMCOR had goodwill and net identifiable intangible
assets (primarily the market value of its backlog, customer relationships and
trademarks and tradenames) of $278.0 million and $22.2 million, respectively,
arising out of the acquisition of 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. These forecasts reflect assumptions
regarding the ability to successfully integrate acquired companies. Statement of
Financial Accounting Standards No. 142, "Goodwill and
15
Other Intangible Assets" ("SFAS 142") requires goodwill to be tested for
impairment, on at least an annual basis, and be written down when impaired,
rather than 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, 2003, no indicators of impairment
of its goodwill or identifiable intangible assets resulted from EMCOR's annual
impairment review, which was performed 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
The reportable segments reflect, in all years presented, reclassifications of
certain business units among the segments due to changes in EMCOR's internal
reporting structure.
REVENUES
As described below in more detail, revenues for the year ended December 31,
2003 increased 14.3% to $4.53 billion compared to $3.97 billion for 2002. The
$566.6 million increase in revenues for 2003 when compared to 2002 was primarily
due to revenues of $508.4 million from companies acquired in 2003 and 2002 and
to increased revenues in the United States electrical construction and
facilities services and United States facilities services segments (excluding
acquisitions) of $85.1 million and $19.7 million, respectively. The increases in
revenues were partially offset by decreased revenues for the United States
mechanical construction and facilities services segment (excluding
acquisitions). Revenues for 2002 of $3.97 billion represented a 16.0% increase
over revenues of $3.42 billion for 2001. This $548.2 million increase in
revenues for 2002 compared to 2001 was primarily due to revenues of $502.6
million from companies acquired in 2002 and to increased revenues related to
site-based facilities services contracts and power generation projects.
Partially offsetting these increases was a reduction, when compared to 2001, of
revenues related to fast-track telecom and other commercial contracts, as well
as a shift to longer-term projects which typically result in revenue being
recognized over a longer period of time.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages of total revenues for the years ended December 31, 2003,
2002 and 2001 (in millions, except for percentages):
% OF % OF % OF
2003 TOTAL 2002 TOTAL 2001 TOTAL
-------- ----- -------- ----- -------- -----
Revenues:
United States electrical construction and facilities services ...... $1,239.5 27% $1,152.4 29% $1,334.7 39%
United States mechanical construction and facilities services ...... 1,715.8 38% 1,715.4 43% 1,202.1 35%
United States facilities services .................................. 661.2 15% 250.0 6% 209.7 6%
-------- -------- --------
Total United States operations ..................................... 3,616.5 80% 3,117.8 79% 2,746.5 80%
Canada construction and facilities services ........................ 346.8 8% 316.3 8% 198.2 6%
United Kingdom construction and facilities services ................ 571.3 12% 533.9 13% 463.6 14%
Other international construction and facilities services ........... -- -- -- -- 11.6 --
-------- -------- --------
Total worldwide operations ......................................... $4,534.6 100% $3,968.0 100% $3,419.9 100%
======== ======== ========
Revenues for EMCOR's United States electrical construction and facilities
services segment for 2003 increased by $87.1 million compared to 2002. The
increase in revenues was primarily due to an increase in transportation
infrastructure and energy generation work, partially offset by a significant
decline in private sector commercial work, which include offices, manufacturing
facilities and hotels. Compared to 2002, the New York City area market in 2003
experienced the largest reduction in revenues from commercial work; however,
this decline in revenues was offset by increased public sector work in the
Washington D.C area market, increased transportation infrastructure work in the
Denver area and increased power generation and transportation infrastructure
work in California. The $182.3 million decrease in 2002 revenues attributable to
this segment compared to 2001 was primarily due to a reduction during 2002 in
fast-track telecom and other commercial work. During 2002, transportation
infrastructure work increased and power generation work remained steady compared
to the prior year.
United States mechanical construction and facilities services revenues
increased $0.4 million for 2003 compared to 2002. Revenues for 2003 compared to
2002 increased in the education and institutional sectors, partially offset by
significantly decreased commercial office, manufacturing and power generation
work. In 2003, EMCOR's mid-western markets were particularly negatively impacted
by a reduction in outage upgrade and replacement work at manufacturing
facilities. In addition, revenues were negatively impacted by declines in small
and discretionary projects and repairs and maintenance work caused largely by
the cooler than normal summer weather conditions in parts of the United States.
The $513.3 million increase in revenues for 2002 compared to 2001 was primarily
attributable to $475.2 million of revenues from the Acquired Comfort Companies
and increased revenues from power generation work in the northern California
market. These increases were partially offset by decreased revenues as a result
of the performance of fewer fast-track contracts, particularly in the telecom
sector.
16
United States facilities services revenues, which include those operations
that principally provide consulting and maintenance services, increased by
$411.2 million for 2003 compared to 2002. The increase in revenues was primarily
due to revenues of $387.5 million attributable to the CES acquisition and an
increase in site-based facilities services contracts, partially offset by a
decline in certain small and discretionary projects due to increased competition
resulting in fewer projects awarded to EMCOR. Additionally, a reduction in
demand for mobile services, which services had been adversely affected by cooler
than normal summer weather conditions in parts of the United States, contributed
to a decrease in 2003 revenues. Revenues for 2002 increased by $40.3 million
compared to 2001. This increase in revenues was primarily attributable to
business development activities resulting in an increase in the number of
site-based facilities services contracts and, to a lesser extent, to the
acquisition of CES, partially offset by a decline in telecommunications related
work.
Revenues of Canada construction and facilities services increased by $30.5
million for 2003 as compared to 2002. The increase in revenues for 2003 was
primarily attributable to an increase of $36.7 million caused by a change in the
rate of exchange for Canadian dollars to United States dollars due to
strengthening of the Canadian dollar. But for the exchange rates, revenues would
have decreased due to a temporary scale-back in work on certain long-term power
generation projects attributable to customer's project scheduling. The $118.1
million increase in revenues for 2002 compared to 2001 was primarily
attributable to the performance of work on certain long-term contracts.
United Kingdom construction and facilities services revenues increased $37.4
million for 2003 compared to 2002 principally due to an increase of $47.5
million caused by a change in the rate of exchange for British pounds to United
States dollars due to strengthening of the British pound. As was the case in
Canada, but for exchange rates, revenues would have declined because of
execution of a planned reduction in bidding for certain types of institutional
and government-sponsored construction projects. The $70.3 million increase in
2002 revenues compared to 2001 revenues was 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 in 2002, which caused EMCOR to be more
selective in submitting project bids.
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 2003, zero for 2002 and $11.6
million for 2001. All of the 2003 and 2002 projects in these markets were
performed by joint ventures. The results of these joint venture operations are
accounted for under the equity method of accounting because EMCOR has less than
majority ownership in these joint ventures, is not subject to a majority of the
risk of loss from the joint venture's activities and is not entitled to receive
a majority of the joint venture's residual returns or both. 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, 2003, 2002
and 2001 (in millions, except for percentages):
2003 2002 2001
-------- -------- --------
Cost of sales ................................. $4,052.2 $3,485.4 $3,028.0
Gross profit .................................. $ 482.5 $ 482.6 $ 391.8
Gross profit as a percentage of revenues ...... 10.6% 12.2% 11.5%
Gross profit decreased $0.1 million for 2003 compared to 2002. Gross profit
as a percentage of revenues was 10.6% for 2003 compared with 12.2% for 2002.
Gross profit as a percentage of revenues decreased primarily due to poor
performance in the United Kingdom construction market and the 2003 Unfavorable
United States Market Conditions previously discussed in the Overview above; this
decline was offset in part by $93.7 million of gross profit attributable to the
companies acquired and their generally higher gross profit as a percentage of
revenues than other EMCOR subsidiaries. Gross profit increased $90.8 million for
2002 compared with 2001, and gross profit as a percentage of revenues increased
to 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. An increase in gross profit of $9.6 million in 2002 compared to 2001,
which was 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 2002 when compared to 2001 in gross profit
as a percentage of revenues was principally attributable to the Acquired Comfort
Companies and their generally higher gross profit as a percentage of revenues
than other EMCOR subsidiaries and, to a lesser extent, improvements in gross
profit in EMCOR's other subsidiaries due to favorable job close-outs.
17
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, 2003, 2002 and 2001 (in millions,
except for percentages):
2003 2002 2001
------ ------ ------
Selling, general and administrative expenses ................................... $437.3 $368.2 $303.1
Selling, general and administrative expenses as a percentage of revenues ....... 9.6% 9.3% 8.9%
Selling, general and administrative expenses increased $69.1 million between
2003 and 2002. As a percentage of revenues, total selling, general and
administrative expenses increased to 9.6% in 2003 as compared to 9.3% in 2002.
For 2003, selling, general and administrative expenses included amortization
expense of $2.8 million attributable to identifiable intangible assets
associated with acquisitions compared to $0.8 million for 2002. Selling, general
and administrative expenses (excluding companies acquired in 2003 and 2002 and
related amortization expense) were approximately $302.8 million (8.4% of
revenues) for 2003 compared to $307.5 million (8.9% of revenues) for 2002, which
decrease in selling, general and administrative expenses was attributable to a
managed reduction of both variable expenses (including reduced incentive
compensation related to less favorable financial performance and reduction in
personnel) and fixed expenses (such as building occupancy costs). Selling,
general and administrative expenses increased $65.1 million in 2002 compared to
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 increase in
expenses and increase in expenses as a percentage of revenues during 2002 as
compared to 2001 was primarily due to $61.0 million of expenses attributable to
companies acquired in 2002 and increased variable selling, general and
administrative expenses of certain other EMCOR subsidiaries (primarily incentive
compensation related to more favorable financial performance), 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. Goodwill amortization expense for the year ended December 31, 2003, 2002
and 2001 was zero, zero and $5.5 million, respectively.
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, 2003, 2002
and 2001 (in millions, except for percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2003 REVENUES 2002 REVENUES 2001 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services .. $ 57.8 4.7% $ 78.9 6.8% $ 75.3 5.6%
United States mechanical construction and facilities services .. 25.1 1.5% 59.3 3.5% 41.4 3.4%
United States facilities services .............................. 17.0 2.6% 4.3 1.7% (7.2) --
------ ------ ------
Total United States operations ................................. 99.9 2.8% 142.5 4.6% 109.5 4.0%
Canada construction and facilities services .................... 2.0 0.6% 3.3 1.0% 2.3 1.2%
United Kingdom construction and facilities services ............ (22.4) -- 0.0 -- 7.2 1.6%
Other international construction and facilities services ....... 0.3 -- (0.1) -- (1.2) --
Corporate administration ....................................... (34.7) -- (31.3) -- (29.1) --
------ ------ ------
Total worldwide operations ..................................... 45.1 1.0% 114.4 2.9% 88.7 2.6%
Other corporate items:
Interest expense ............................................... (8.9) (4.1) (4.8)
Interest income ................................................ 0.7 2.0 5.6
------ ------ ------
Income before taxes .............................................. $ 36.9 $112.3 $ 89.5
====== ====== ======
As described below in more detail, operating income decreased by $69.3
million to $45.1 million for 2003 compared to $114.4 million for 2002. This
decrease in 2003 was primarily attributable to the 2003 Unfavorable United
States Market Conditions previously discussed in the Overview above, and
operating losses from the United Kingdom construction and facilities services
segment. Operating income was favorably impacted by $4.5 million, $2.3 million
and $0.5 million reductions of insurance liabilities previously established for
insurance exposures as a consequence of effective risk management and safety
programs. Operating income increased by $25.7 million to $114.4 million for 2002
compared to $88.7 million for 2001. This increase in 2002 was primarily
attributable to $19.7 million of operating income from acquisitions, increased
transportation infrastructure and power generation construction work and the
successful completion and settlement of several contracts.
Operating income decreased for the United States electrical construction and
facilities services operations for 2003 compared to 2002. The decrease in
operating income for 2003 of $21.1 million as compared to 2002, and the related
decrease as a percentage of revenues, was primarily attributable to the 2003
Unfavorable United States Market Conditions previously discussed in the Overview
above. This decrease was partially offset by profitable performance of
transportation infrastructure and certain power generation work. In 2003, the
New York City area market was particularly adversely impacted by a significant
decline in commercial work and by unprofitable performance of power generation
work. Conversely, the Washington, D.C. area market provided a consistent
profitable revenue base, the
18
Denver area benefited from increased income from transportation infrastructure
work and operations in California benefited from increased income from power
generation, transportation infrastructure work and project close-outs. In
addition, selling, general and administrative expenses (excluding companies
acquired) decreased by approximately $19.1 million in this segment for 2003
compared to 2002. This decrease was mostly related to a reduction in incentive
compensation, which related to less favorable financial performance and
reduction in personnel, and a reduction in other variable expenses. Operating
income for 2002 for the United States electrical construction and facilities
services operations increased $3.6 million, or 4.8%, from 2001 levels. The
increase in operating income, and operating income as a percentage of revenues,
for 2002 versus 2001 was primarily attributable to increased transportation
infrastructure work and continuing power generation construction work 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.
United States mechanical construction and facilities services operating
income decreased $34.2 million for 2003 compared to 2002. This decrease in
operating income and decrease as a percentage of revenues was primarily due to
the 2003 Unfavorable United States Market Conditions previously discussed in the
Overview above. The mid-western markets were negatively impacted by a
significant reduction in work on manufacturing facilities, the western markets
were negatively impacted by reduced income from power generation work and parts
of the United States markets were negatively impacted by reduced repairs and
maintenance work caused largely by the cooler than normal summer weather
conditions. This decrease in operating income was partially offset by increased
income from water and wastewater treatment facilities projects for 2003 compared
to 2002. In addition, selling, general and administrative expenses decreased by
approximately $11.5 million in this segment for 2003 compared to 2002. This
decrease was mostly related to a reduction in incentive compensation related to
less favorable financial performance and reduction in personnel and reduction in
other variable expenses. Operating income for 2002 compared to 2001 increased
$17.9 million, and as a percentage of revenues increased to 3.5% from 3.4%,
primarily due to (i) operating income of $ 18.7 million from the Acquired
Comfort Companies, (ii) operating income associated with power generation
construction work in the northern California market and (iii) improved results
at the Poole & Kent subsidiary operations which had losses in 2001. The
increases were partially offset by reduced operating income attributable to
fewer fast-track projects in the 2002 than 2001.
United States facilities services operating income increased by $12.7 million
for 2003 compared with 2002. The increase in operating income was primarily
attributable to income of $13.5 million from the CES acquisition and an increase
in the number of site-based facilities services contracts resulting from
business development activities. The increase was partially offset by reduced
income from certain small and discretionary projects due to increased
competition and from mobile services, which services were adversely affected by
cooler than normal summer weather conditions in parts of the United States.
Operating income of $4.3 million in this segment for 2002 compared to operating
losses of $7.2 million for 2001 increased by $11.5 million primarily due to new
facilities services contracts and a decrease in selling, general and
administrative expenses as the facilities services operations became more
established and required less spending related to the development of new
business.
Canada construction and facilities services operating income decreased by
$1.3 million in 2003 compared to 2002. This decrease was principally due to (a)
increased hospital and school construction projects and less manufacturing
outage work, since hospital and school construction projects generally had lower
gross profits than the manufacturing outage work performed in 2002, (b)
decreased profit from several longer-term power generation projects compared
with the prior year and (c) $0.2 million of an increase in operating income
relating to the change in exchange rates due to strengthening of the Canadian
dollar. For 2002 compared to 2001, operating income increased by $1.0 million
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.
United Kingdom construction and facilities services operating income
decreased by $22.4 million to a reported operating loss in 2003 compared to
2002. The operating loss was primarily attributable to: (1) net unfavorable
settlements and closeouts of certain construction projects completed during the
year, (2) increased bad debt expense of $5.8 million in 2003 primarily related
to the potential non-payment of a large customer account receivable due to
publicly reported financial difficulties, (3) reorganization expenses of
approximately $2.0 million related to employee severance expenses and the
closing of several offices and (4) $1.5 million relating to the change in
exchange rates due to strengthening of the British pound. For 2002, operating
income decreased by $7.2 million as compared to 2001. This decrease was
primarily attributable to unfavorable settlements and closeouts of certain
construction projects completed during the year.
Other international construction and facilities services operating income was
$0.3 million for 2003 compared to operating losses of $0.1 million and $1.2
million in 2002 and 2001, respectively. 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 2003 increased by $3.4 million from 2002
levels, and increased in 2002 by $2.2 million from 2001 levels. The increase in
general corporate expenses for 2003 compared with 2002 was primarily related to
an increase in personnel required to support the business growth related to
acquisitions and increased marketing expenses associated with EMCOR's brand
awareness campaign, which promotes the EMCOR brand on the national and local
level in the United States and targets non-traditional buyers of EMCOR services
such as chief executive and chief financial officers of companies. The increase
for 2002 compared with 2001 was due to the expansion of operations support
activities such as information technology infrastructure, human resources and
marketing.
19
Interest expense increased by $4.8 million for 2003 compared to 2002 due to
increased borrowing under EMCOR's revolving credit facility. 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.
Interest income decreased by $1.3 million in 2003 compared to 2002 due to
repayment of increased borrowings for working capital under the revolving credit
facility. Interest income decreased by $3.6 million in 2002 compared with 2001,
which decrease 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 earned.
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, 2003 and 2002 (in millions):
2003 2002
------ -------
Net cash provided by operating activities ............ $ 1.3 $ 154.7
Net cash used in investing activities ................ $(23.3) $(364.8)
Net cash provided by financing activities ............ $ 7.1 $ 113.4
The Company's consolidated cash balance decreased by $14.8 million from $93.1
million at December 31, 2002 to $78.3 million at December 31, 2003. Net cash
provided by operating activities for 2003 was $1.3 million, a decrease of $153.4
million from net cash provided by operating activities of $154.7 million for
2002. The decrease in cash provided by operating activities in 2003 compared to
2002 was due to decreased net income, decreased accrued expenses, increased
accounts receivable and increased contracts in progress, net, offset by
increased accounts payable. The changes in these accounts in 2003, and the
related decrease in net cash provided by operating activities, are a result of
EMCOR's shift in work toward more public sector work and less small and
discretionary projects. The increase in public sector work, which typically
involves larger projects, lower gross profit margins and more capital than
private sector work, was the primary reason for the decrease; the decrease was
also due to reduced higher margin small and discretionary projects that requires
much less upfront cash than large construction projects. Net cash used in
investing activities in 2003 of $23.3 million consisted primarily of payments of
an aggregate of $8.9 million for acquisitions in 2003 and earn-out payments of
$2.0 million for acquisitions in prior periods, net disbursements for other
investments of $1.8 million and $17.9 million for purchases of property, plant
and equipment, offset by $5.2 million of payments received pursuant to indemnity
provisions of acquisition agreements. This activity compares to net cash used in
investing activities for 2002, which consists primarily of aggregate payments of
$334.7 million for acquisitions in 2002 and earn-out payments of $8.7 million
for acquisitions from prior periods, net disbursements for other investments of
$7.7 million and $15.6 million for the purchase of property, plant and
equipment. Net cash provided by financing activities for 2003 of $7.1 million
was primarily attributable to net borrowings under working capital credit lines
of $27.4 million and proceeds from the exercise of stock options of $2.0
million, offset by repayments of long-term debt of $22.2 million.
The following is a summary of EMCOR's material contractual obligations and
other commercial commitments (in millions):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------
LESS
CONTRACTUAL THAN 1-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- -----------------------------------------------------------------
Other long-term debt ................................. $ 0.6 $ 0.1 $ 0.2 $ 0.2 $ 0.1
Capital lease obligations ............................ 0.3 0.2 0.1 -- --
Operating leases ..................................... 145.3 37.8 55.4 30.5 21.6
Minimum funding requirement for pension plan ......... 9.7 9.7 -- -- --
Open purchase obligations (1) ........................ 655.7 545.7 110.0 -- --
Other long-term obligations (2) ...................... 96.3 -- 96.3 -- --
------ ------ ------ ----- -----
Total Contractual Obligations ........................ $907.9 $593.5 $262.0 $30.7 $21.7
====== ====== ====== ===== =====
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) ........................ $139.4 $ -- $ -- $139.4 $ --
Letters of credit .................................... 49.2 -- -- 49.2 --
Guarantees ........................................... 25.0 -- -- -- 25.0
------ ------ ------ ------ -----
Total Commercial Commitments ......................... $213.6 $ -- $ -- $188.6 $25.0
====== ====== ====== ====== =====
- -------------
(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.
20
On September 26, 2002, EMCOR entered into a $275.0 million five year
revolving credit agreement (the "Revolving Credit Facility"). Effective July 9,
2003, EMCOR increased its borrowing capacity under the Revolving Credit Facility
to $350.0 million. The Revolving Credit Facility, which replaced a credit
facility entered into on December 22, 1998, 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 payment of 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 Nesbitt from time to time (4.0% at December 31, 2003) plus
0% to 1.0%, based on certain financial tests, (2) United States dollar LIBOR (at
December 31, 2003 the rate was 1.16%) plus 1.5% to 2.5%, based on certain
financial tests or (3) British pound LIBOR (at December 31, 2003 the rate was
3.91%) plus 1.5% to 2.5%, based on certain financial tests. The interest rates
in effect at December 31, 2003 were 4.25%, 2.91% and 5.66% for the prime
commercial lending rate, United States dollar LIBOR and British pound LIBOR,
respectively. Letter of credit fees issued under this facility range from 0.75%
to 2.5% of the respective face amounts of the letters of credit issued and are
charged based on the type of letter of credit issued and certain financial
tests. As of December 31, 2003 and 2002, EMCOR had approximately $49.2 million
and $39.9 million of letters of credit outstanding, respectively. EMCOR had
borrowings of $139.4 million and $112.0 million outstanding under the Revolving
Credit Facility at December 31, 2003 and 2002, respectively.
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 (4.5% at December 31, 2003).
There were no borrowings outstanding under this credit agreement at December 31,
2003 or 2002.
A subsidiary of EMCOR has guaranteed indebtedness of a venture in which it
has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a
60% interest. The venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to customers for use in
air conditioning commercial properties. These guarantees are not expected to
have a material effect on EMCOR's financial position or results of operations.
Each of the venturers is jointly and severally liable, in the event of default,
for the venture's $25.0 million borrowing due December 2031. During September
2002, each venture partner contributed equity to the venture, of which EMCOR's
contribution was $14.0 million.
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 o