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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
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, 2004
| | 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, 2004, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$670,000,000 based on that day's closing price.
Number of shares of the registrant's common stock outstanding as of the
close of business on March 4, 2005: 15,294,118 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2005 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
Operations ...................................................................................................... 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 ............................................................... 10
Executive Officers of the Registrant .............................................................................. 11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .. 12
Item 6. Selected Financial Data ........................................................................................... 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................ 25
Item 8. Financial Statements and Supplementary Data ....................................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 54
Item 9A. Controls and Procedures ........................................................................................... 54
Item 9B. Other Information ................................................................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant ................................................................ 55
Item 11. Executive Compensation ............................................................................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................... 55
Item 13. Certain Relationships and Related Transactions .................................................................... 55
Item 14. Principal Accounting Fees and Services ............................................................................ 55
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................................................................ 56
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 2004, EMCOR had revenues of approximately $4.75 billion. The
Company provides services to a broad range of commercial, industrial, utility,
and institutional customers through approximately 70 principal operating
subsidiaries and joint venture entities. EMCOR has offices in 42 states and the
District of Columbia in the United States, eight provinces in Canada and 12
primary locations in the United Kingdom. In the United Arab Emirates, the
Company carries on business through two joint ventures. Its 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 mechanical and electrical systems, including:
o Heating, ventilation, air conditioning, refrigeration and clean-room
process ventilation systems;
o Plumbing, process and high-purity piping systems;
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; and
o Voice and data communications 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 has approximately 26,000 employees.
EMCOR's revenues are derived from many different customers in numerous
industries which have operations in several different geographical areas. Of
EMCOR's 2004 revenues, approximately 80% were generated in the United States and
approximately 20% were generated internationally. In 2004, approximately 49% of
revenues were derived from new construction projects, 21% were derived from
renovation and retrofit of customer's existing facilities and 30% were derived
from facilities services operations.
1
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.
OPERATIONS
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 businesses.
Mechanical and electrical construction services primarily involve the design,
integration, installation and start-up of: (a) heating, ventilation, air
conditioning, refrigeration and clean-room process ventilation systems; (b)
plumbing, process and high-purity piping systems; (c) 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; (d) lighting systems, including
fixtures and controls; (e) low-voltage systems, including fire alarm, security
and process control systems; and (f) voice and data communications systems,
including fiber-optic and low-voltage copper cabling.
Mechanical and electrical construction services generally fall into one of
two categories: (a) 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 (b) smaller
installation projects typically involving fit-out, renovation and retrofit work.
EMCOR's United States mechanical and electrical construction services
operations accounted for about 60% of its 2004 revenues, of which revenues
approximately 72% were related to new construction and approximately 28% were
related to renovation and retrofit projects. EMCOR's United Kingdom and Canada
mechanical and electrical construction services operations accounted for
approximately 10% of its 2004 revenues, of which revenues approximately 56% were
related to new construction and approximately 44% were 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 (a) for institutional use (such as water and
wastewater treatment facilities, hospitals, correctional facilities, schools and
research laboratories); (b) for industrial use (such as pharmaceutical plants,
steel, pulp and paper mills, chemical, automotive and semiconductor
manufacturing facilities and oil refineries); (c) for transportation projects
(such as highways, airports and transit systems); (d) for commercial use (such
as office buildings, data centers, hotels, casinos, convention centers, sports
stadiums, shopping malls and resorts); and (e) 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 33% of EMCOR's construction
services revenues in 2004.
EMCOR's projects of less than $10.0 million accounted for approximately 67%
of 2004 mechanical and electrical 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 mechanical and electrical 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.
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 30% of 2004
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.
In 1997, EMCOR established a subsidiary to expand its facilities services
operations in North America. This division has built on EMCOR's traditional
mechanical and electrical construction 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 division 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 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.
EMCOR clients requiring facilities services include utilities and major
corporations engaged in information technology, telecommunications,
pharmaceuticals, financial services, publishing and manufacturing.
Illustrative of the outsourcing of companies' facilities services are
multi-year agreements with (a) Bank One under which EMCOR provides facilities
services for approximately 2,200 Bank One locations encompassing 32.0 million
square feet of space in 30 states; (b) LAM Research under which EMCOR provides
such services to approximately 1.0 million square feet of production and
research and development facilities and office space; (c) Fifth Third Bank under
which EMCOR provides facilities services to over 1,200 Fifth Third locations
with over 9.5 million square feet in seven states; (d) Exelon Corp. under which
EMCOR provides comprehensive facilities services to substations, power
generation facilities and offices encompassing over 5.7 million square feet of
space in four states; (e) Mattson Technology, Inc. under which EMCOR provides
integrated services to approximately 800,000 square feet of production and
research and development facilities and office space; (f) Fidelity Investments
under which EMCOR provides integrated services to approximately 2.5 million
square feet of office and data center space; and (g) Hewlett-Packard Company
under which EMCOR provides integrated services to approximately 20.0 million
square feet of production, distribution and office space in seven states.
Through a limited liability Company owned by EMCOR and CB Richard Ellis Inc., a
nationwide real estate management company, operations and maintenance services
are provided to over 3,000 commercial facilities comprising approximately 135.0
million square feet of space.
In December 2002, EMCOR acquired Consolidated Engineering Services, Inc.
("CES"), a facilities services business. 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 Ronald Reagan Building, the second largest federal
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 (a) the oversight of all or most of a
business' facilities operations, including operation and maintenance; (b) the
oversight of logistical processes; (c) tenant services and management; (d)
servicing upgrade and retrofit of HVAC, electrical, plumbing, and industrial
piping and sheet metal systems in existing facilities; and (e) diagnostic and
solution engineering for building systems and their components. 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.
EMCOR's United Kingdom subsidiary also has a division dedicated to facilities
services. This division 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 Tubelines, a maintenance
operating company of the London Underground. In the United Kingdom, EMCOR also
provides facilities services at several manufacturing facilities, including 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 and alteration project work, and installation and maintenance
services for data communications and security systems.
3
EMCOR's Energy & Technologies business designs and constructs customers'
energy-related projects and for certain of these projects also provides plant
staffing. This business' recent projects include the design and construction of
a $15.6 million 14 megawatt control utility plant and a combined heat and power
facility to supply all HVAC and hot water and electrical requirements for the
Morongo Native American Hotel/Casino complex in Cabazon, California and the
design and construction of a $27.0 million cogeneration facility and chiller
plant to provide cooling, heat and power at the University of New Hampshire main
campus in Durham, New Hampshire. EMCOR will also provide plant staffing to these
projects under long-term contracts. Over the past five years, EMCOR has
completed more than 80 energy-related projects ranging from basic life safety
standby systems to complete utility grade power plants and cogeneration/central
utility plants supplying thermal and power requirements completely separated
from utilities' electrical grids. This business is reported within the United
States facilities services segment.
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 enhances 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 consisting of thousands of small
companies across the United States and around the world. 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, such as Integrated Electrical Services, Inc. and Comfort Systems USA,
Inc. 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. 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 over its competitors. Competitive
factors in the mechanical and electrical construction services business include:
(a) the availability of qualified and/or licensed personnel; (b) reputation for
integrity and quality; (c) safety record; (d) cost structure; (e) relationships
with customers; (f) geographic diversity; (g) the ability to control project
costs; (h) experience in specialized markets; (i) the ability to obtain surety
bonding; (j) adequate working capital; and (k) 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.
EMPLOYEES
EMCOR presently employs approximately 26,000 people, approximately 71% of
whom are represented by various unions pursuant to more than 460 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, 2004 of approximately $2.8
billion, compared with backlog of approximately $3.0 billion as of December 31,
2003. 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 unrecognized revenues to be realized from
uncompleted construction contracts plus unrecognized revenues expected to be
realized over the remaining term of the facilities services contracts, except if
the remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues. Backlog increased by $0.1 billion as of
December 31, 2003 compared to December 31, 2002. For the year ended December 31,
2004, EMCOR had approximately $4.75 billion in revenues compared to
approximately $4.53 billion in revenues for the year ended December 31, 2003.
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) ............................................... 30,603 3/31/08
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 3/31/09
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 6/30/14
5 Vanderbilt
Irvine, California (a) ............................................. 18,000 7/31/08
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) ......................................... 54,135 1/13/12
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) ........................................... 23,500 7/31/11
1781 N.W. North River Drive
Miami, Florida (b) ................................................. 11,285 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
5
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
400 Lake Ridge Drive
Smyrna, Georgia (a) ................................................ 30,000 9/30/12
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
643 Lofstrand Lane
Rockville, Maryland (a) ............................................ 15,000 2/28/10
306 Northern Avenue
Boston, Massachusetts (a) .......................................... 15,275 6/30/05
200 Old Colony Way
Boston, Massachusetts (b) .......................................... 11,500 3/31/08
70-70D Hawes Way
Stoughton, Massachusetts (b) ....................................... 24,400 12/31/05
80 Hawes Way
Stoughton, Massachusetts (a) (b) ................................... 36,000 6/10/13
1743 Maplelawn
Troy, Michigan (c) ................................................. 22,000 4/30/06
6060 Hix Road
Westland, Michigan (b) ............................................. 23,000 Month to Month
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
6
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
6754 W. Washington Avenue
Pleasantville, New Jersey (b) ...................................... 25,000 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
College Point, 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 (c) ............................................. 55,891 1/31/16
704 Clinton Avenue South
Rochester, New York (a) ............................................ 25,000 7/31/06
8740 Reading Road and
10-15 West Vorhees Street
Cincinnati, Ohio (a) ............................................... 25,600 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 3/31/05
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) ................................................. 25,780 12/31/09
1574 South West Temple
Salt Lake City, Utah (c) ........................................... 120,904 12/31/06
320 23rd Street
Arlington, Virginia (a) ............................................ 43,028 3/05/10
109-D Executive Drive
Dulles, Virginia (c) ............................................... 19,000 8/31/09
22930 Shaw Road
Dulles, Virginia (c) ............................................... 32,616 2/28/15
7
LEASE EXPIRATION
APPROXIMATE DATE, UNLESS
SQUARE FEET OWNED
----------------- ----------------
3280 Formex Road
Richmond, Virginia (b) ............................................. 30,640 7/31/08
8657 South 190th Street
Kent, Washington (b) ............................................... 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.
EMCOR and three of its officers (Chairman of the Board and Chief Executive
Officer Frank T. MacInnis, Executive Vice President and Chief Financial Officer
Leicle E. Chesser, and Senior Vice President-Chief Accounting Officer and
Treasurer Mark A. Pompa) have been named as defendants in a purported
consolidated class action filed in the United States District Court of
Connecticut entitled IN RE EMCOR GROUP, INC SECURITIES LITIGATION. Plaintiff
purports to represent a class composed of all persons who purchased or otherwise
acquired EMCOR common stock and/or other securities between April 9, 2003 and
October 2, 2003, inclusive. The complaint alleges violations of Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder and of Section 20(A) of
the Securities Exchange Act, relating to alleged misstatements and omissions in
certain of the Company's filings with the Securities and Exchange Commission,
press releases and other public statements between April 9 and October 2, 2003,
and seeks damages on behalf of the purported class in unspecified amounts. A
motion to dismiss the Complaint filed by EMCOR and the individual defendants is
currently under submission. As set forth in the motion, EMCOR and the individual
defendants believe that the plaintiff's allegations are without merit and are
vigorously defending against them.
In July 2003, EMCOR's subsidiary, Poole & Kent Corporation ("Poole & Kent"),
was served with a Subpoena Duces Tecum by a grand jury empaneled by the United
States District Court for the District of Maryland which is investigating, among
other things, Poole & Kent's use of minority and woman-owned business
enterprises. Poole & Kent has produced documents in response to the subpoena and
to subsequent subpoenas directed to it requesting certain business records. On
April 26, 2004, Poole & Kent was advised that it is a target of the grand jury
investigation. Poole & Kent is cooperating with the investigation.
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 39.5 million British pounds
sterling (approximately $75.8 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 11.6 million
British pounds sterling (approximately $22.3 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 various lawsuits and arbitrations in which EMCOR or its
subsidiaries are involved range from a few thousand dollars to over $75.0
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. These proceedings include the following: (a) a civil action brought
against EMCOR's subsidiary Forest Electric Corp. ("Forest") and seven other
defendants in the United States District Court for the Southern District of New
York under the Sherman Act and New York common law by competitors whose
employees are not members of International Brotherhood of Electrical Workers,
Local #3 (the "IBEW"). The action alleges, among other things, that Forest, six
other electrical contractors and the IBEW conspired to prevent competition and
to monopolize the market for communications wiring services in the New York City
area thereby excluding plaintiffs from wiring jobs in that market. Plaintiffs
allege they have lost profits as a result of this concerted activity and seek
damages in the amount of $50 million after trebling plus attorney's fees.
However, plaintiffs' damages expert has stated in his pre-trial deposition that
he estimates plaintiffs' damages at $8.7 million before trebling. Forest has
denied the allegations of wrongdoing set forth in the complaint and pre-trail
discovery has been completed. No trial date has been set by the Court. Forest
believes that the suit is without merit. (b) A civil action brought by a joint
venture (the "JV") between EMCOR's subsidiary Poole & Kent Corporation ("Poole &
Kent") and an unrelated company in the Fairfax, Virginia Circuit Court in which
the JV seeks damages from the Upper Occoquan Sewage Authority ("UOSA") resulting
from material breaches of a construction contract (the "Contract") entered into
between the JV and UOSA for construction of a wastewater treatment facility.
Poole & Kent incurred unrecovered costs in completing this project, which are
included in the balance sheet account "costs and estimated earnings in excess of
billings on uncompleted contracts" in EMCOR's consolidated balance sheets as of
December 31, 2004 and 2003. A jury has returned a verdict finding that UOSA
committed material
9
breaches of the Contract and a jury trial to establish the JV's damages is
currently in process. The JV claims total damages, based upon alternative
measures of damages, in excess of $75.0 million (exclusive of interest), and in
a jury trial to be subsequently held the JV intends to claim damages in excess
of $18.0 million (exclusive of interest). In accordance with the joint venture
agreement establishing the JV, Poole & Kent would be entitled to approximately
one-half of any damage award received by the JV.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK T. MACINNIS, Age 58; 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 and served as such until October 25,
2004. He also 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.
ANTHONY J. GUZZI, Age 40; President and Chief Operating Officer since October
25, 2004. From August 2001, until he joined the Company, Mr. Guzzi served as
President of the North American Distribution and Aftermarket Division of Carrier
Corporation ("Carrier"). Carrier is a manufacturer and distributor of commercial
and residential HVAC and refrigeration systems and equipment and a provider of
aftermarket services and components of its own products and those of other
manufacturers in both the HVAC and refrigeration industries. From January 2001
to August 2001, Mr. Guzzi was President of Carrier's Commercial Systems and
Services Division, and from June 1998 to December 2000, he was Vice President
and General Manager of Carrier's Commercial Sales and Services Division.
SHELDON I. CAMMAKER, Age 65; 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 58; 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 46; 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 40; 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.
11
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:
2004 HIGH LOW
---- ---- ---
First Quarter .......................... $45.12 $34.06
Second Quarter ......................... $46.01 $35.80
Third Quarter .......................... $44.00 $37.52
Fourth Quarter ......................... $47.38 $37.41
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
HOLDERS. As of March 4, 2005, there were 127 stockholders of record and, as
of that date, EMCOR estimates there were approximately 7,600 beneficial owners
holding stock in nominee or "street" name.
DIVIDENDS. EMCOR did not pay dividends on its common stock during 2004 or
2003, 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, 2004:
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 624,288 $16.85 469,214(2)
Equity Compensation
Plans Not Approved
by Security Holders 1,440,403(1) $34.43 103,463(3)
--------- -------
Total 2,064,691 $32.56 572,677
========= =======
- --------------
(1) 50,468 shares relate to options to purchase shares of Company common stock
which are held by employees (other than executive officers) of the Company
(the "Employee Options"), 1,259,398 shares relate to options to purchase
shares of Company common stock which are held by executive officers of the
Company (the "Executive Options"), 14,000 shares relate to options to
purchase shares of Company common stock which are held by Directors of the
Company (the "Director Options"), and 116,537 shares relate to restricted
common stock units ("RSUs") described below under "Restricted Share Units."
(2) Includes 89,214 shares of Company common stock reserved for issuance under
the 1997 Non-Employee Directors' Non-Qualified Stock Option Plan, 60,000
shares of Company common stock reserved for issuance under the 2003
Non-Employee Directors' Stock Option Plan, and 320,000 shares of Company
common stock reserved for issuance under the 2003 Management Stock
Incentive Plan. Subsequent to December 31, 2004, options to purchase
290,200 shares of Company common stock were granted under the 2003
Management Stock Incentive Plan.
(3) Represents shares relating to the grant of RSU's.
12
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 Company common stock on their
respective grant dates and have a term of ten years from the grant date.
EXECUTIVE OPTIONS
140,000 of the Executive Options referred to in note (1) to the Table were
granted to six executive officers in connection with employment agreements with
the Company as of January 1, 1998, as amended (the "1998 Employment
Agreements"). Pursuant to the terms of the 1998 Employment Agreements, each such
executive officer received a fixed number of Executive Options on the first
business day of 2000 and 2001 with respective exercise prices of $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 1998
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 Company's
common stock reaching target stock prices of $25, $30, $35 and $40.
488,135 of the Executive Options referred to in note (1) to the Table were
granted to six executive officers in connection with employment agreements with
the Company dated January 1, 2002 (the "2002 Employment Agreements") and 30,000
of the Executive Options were granted to Mr. Anthony Guzzi, President and Chief
Operating Officer of the Company when he joined the Company in October 2004. Of
these Executive Options, (a) an aggregate amount of 171,100 of such Executive
Options were granted on December 14, 2001 with an exercise price of $41.70 per
share, (b) an aggregate amount of 145,700 of such Executive Options were granted
on January 2, 2002 with an exercise price of $46.35 per share, (c) an aggregate
amount of 141,335 of such Executive Options were granted on January 2, 2003 with
an exercise price of $54.73 and (d) 30,000 of such Executive Options were
granted on October 25, 2004 with an exercise price of $38.68. The Executive
Options referred to above in clause (a) were exercisable in full on the grant
date. The Executive Options referred to above in clauses (b) and (c) were
originally exercisable as follows; 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. However, on June
10, 2004, the Executive Options referred to in classes (b) and (c) were amended
so that they became exercisable in full on that date in anticipation of a change
in accounting rules requiring the expensing of stock options beginning in July
2005. The options granted to Mr. Guzzi vest in three equal annual installments,
commencing with the first anniversary of the date of grant.
On the first business day of 2005, the Company's executive officers were
granted options under the Company's stockholder-approved 2003 Management Stock
Incentive Plan to purchase an aggregate of 262,500 shares of Company common
stock with an exercise price of $45.08 per share. These options are not included
in the Table.
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.
RESTRICTED SHARE UNITS
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 (a) 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"), (b) the executive
officer's termination of employment for any reason or (c) 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
13
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 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 (a) the date elected
by the executive officer, but in no event earlier than the Release Date, (b) the
executive officer's termination of employment or (c) immediately prior to a
"change of control." In addition, on October 25, 2004, when he joined the
Company, Mr. Guzzi was granted 25,000 restricted stock units, and 12,500 of
these units will be converted into an equal number of shares of the Company's
common stock on the first business day immediately following the day upon which
the Company releases to the public its results for the fourth quarter of each of
2004 and 2005, respectively.
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 Registered
Public Accounting Firm 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,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues ................................. $4,747,880 $4,534,646 $3,968,051 $3,419,854 $3,460,204
Gross profit ............................. 446,902 482,454 482,634 391,823 357,817
Operating income ......................... 42,129 47,057 115,539 88,682 78,925
Net income ............................... $ 33,207 $ 20,621 $ 62,902 $ 50,012 $ 40,089
========== ========== ========== ========== ==========
Basic earnings per share ................. $ 2.18 $ 1.38 $ 4.23 $ 3.86 $ 3.84
========== ========== ========== ========== ==========
Diluted earnings per share ............... $ 2.13 $ 1.33 $ 4.07 $ 3.40 $ 2.95
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(In thousands)
AS OF DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Stockholders' equity (a) ..................................... $ 562,361 $ 521,356 $ 489,870 $ 421,933 $ 233,503
Total assets ................................................. $1,817,969 $1,795,247 $1,758,491 $1,349,664 $1,261,864
Goodwill ..................................................... $ 279,432 $ 277,994 $ 290,412 $ 56,011 $ 67,625
Notes payable ................................................ $ -- $ -- $ 21,815 $ 573 $ --
Borrowings under working capital credit lines ................ $ 80,000 $ 139,400 $ 112,000 $ -- $ --
Other long-term debt, including current maturities ........... $ 476 $ 589 $ 1,015 $ 973 $ 116,056
Capital lease obligations .................................... $ 1,662 $ 339 $ 351 $ 249 $ 573
- ---------------
(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
Revenues for the year ended December 31, 2004 were $4.75 billion compared to
$4.53 billion and $3.97 billion for the years ended December 31, 2003 and 2002,
respectively. Net income was $33.2 million for 2004 compared to $20.6 million
for 2003 and $62.9 million for 2002. Diluted earnings per share on net income
were $2.13 per share for 2004 compared to $1.33 per share for 2003 and $4.07 per
share for 2002.
Positively impacting 2004 net income and diluted earnings per share were
increased operating income from the United Kingdom construction and facilities
segment which reported breakeven results for 2004 compared to an operating loss
of $22.4 million for 2003, increased gross profits from transportation
infrastructure, financial services, healthcare and hospitality work for the
United States electrical construction and facilities services segment and a
reduction in the provision for income taxes of approximately $16.3 million in
2004 and 2003. This was offset by decreased gross profits due to: (a) poor
contract performance on certain work in the United States mechanical and the
Canada construction and facilities services segments; (b) continued decreased
availability of higher margin discretionary small project spending and repair
and maintenance work in certain geographical markets in the United States; (c)
continued heightened price competition for commercial, industrial and public
sector work in the United States; and (d) increased prices for certain fixed
price construction project materials, particularly in Canada.
14
The 2004 results were also positively affected by the implementation of
significant strategic decisions and management changes initiated by EMCOR Group,
Inc. senior management in late 2003 and during 2004. These actions included a
curtailment in bidding for public sector work, replacement of senior management
at certain business units and reductions in selling, general and administrative
expenses in all segments. Related to these actions were $8.3 million of
restructuring expenses in 2004, principally employee severance obligations.
EMCOR will continue to focus during 2005 on controlling selling, general and
administrative expenses, increasing revenues from multi-year facilities services
contracts and selective estimating and bidding of work. At the same time, a
continued gradual improvement in commercial construction is anticipated.
Management believes it has positioned EMCOR to benefit from the strategic
decisions and management changes initiated in late 2003 and during 2004;
however, there is no assurance that there will be significantly improved future
results if economic conditions, with respect to the availability of more
profitable private sector work affecting EMCOR and the construction industry
generally, do not continue to improve and competitive pressures do not ease.
Results of operations for 2003 compared to 2002 were positively impacted by
the acquisition of the capital stock of Consolidated Engineering Services, Inc.
("CES") in December 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: (a) poor performance in the United Kingdom construction operations;
(b) increased competition for, and a related decrease in gross profit margin on,
commercial and industrial work in the United States due to a continuing decline
in commercial and industrial work in the United States resulting from the
economic recession; (c) reduced private sector spending on small and
discretionary projects and repairs and maintenance work resulting from the
economic recession; (d) an increase in the percentage of work relating to public
sector construction that typically has lower gross profit margins than private
sector work; (e) lower than historical gross profit margins on several United
States projects as a result of poor contract performance; and (f) 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 consolidated results of operations for EMCOR for the year ended December
31, 2002 include the results of operations of (a) a group of companies (the
"Acquired Comfort Companies") acquired from Comfort Systems USA, Inc. and (b)
CES from their respective dates of acquisition in 2002. EMCOR acquired one
additional company during each of 2003 and 2002, and their results of operations
are also included from their respective dates of acquisition. See Note C -
Acquisitions of Businesses and Disposition of Assets 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,
energy management programs and the design and construction of energy-related
projects) 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. The "Other
international construction and facilities services" segment 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).
EMCOR's interest in its South African joint venture was sold in July 2004.
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 2004. 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.
15
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
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 based 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 (unapproved change orders and
claims). Such amounts are recorded at estimated net realizable value and take
into account factors that may affect the ability to bill unbilled revenues and
collect amounts after billing. No profit is recognized on the construction costs
incurred in connection with claim amounts. As of December 31, 2004 and 2003,
costs and estimated earnings in excess of billings on uncompleted contracts
included unbilled revenues for unapproved change orders of approximately $65.4
million and $43.0 million, respectively, and claims of approximately $53.5
million and $51.4 million, respectively. In addition, accounts receivable as of
December 31, 2004 and 2003 include claims of approximately $5.4 million and $9.4
million, respectively, and contractually billed amounts related to such
contracts of approximately $75.5 million and $53.1 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: (a)
fixed price services contracts which are signed in advance for maintenance,
repair and retrofit work over periods typically ranging from one to three years
(pursuant to which there may be EMCOR employees on a customer's site full time)
and (b) services contracts which may or may not be signed in advance for similar
maintenance, repair and retrofit work on an as needed basis (frequently referred
to as time and material work). Fixed price services contracts are generally
performed over the contract period, and accordingly, revenue is recognized on a
pro-rata basis over the life of the contract. Revenues derived from other
services contracts are recognized when the services are performed in accordance
with SAB 104. Expenses related to all services contracts are recognized as
incurred.
ACCOUNTS RECEIVABLE
EMCOR is required to estimate the collectibility of accounts receivable. A
considerable amount of judgment is required in assessing the realization of
receivables. Relevant assessment factors include the creditworthiness of the
customer, EMCOR's prior collection history with the customer and related aging
of past due balances. The provisions for bad debts during 2004, 2003, and 2002
amounted to approximately $7.0 million, $11.2 million and $3.4 million,
respectively. The increase of $7.9 million in this provision for 2003 compared
to 2002 primarily related to the potential non-payment of an account receivable
of approximately $5.8 million due to the publicly reported financial
difficulties of the customer which owed that amount. This receivable was
written-off against the allowance for doubtful accounts in 2004. At December 31,
2004 and 2003, accounts receivable of $1,073.5 million and $1,009.2 million,
respectively, included allowances for doubtful accounts of $36.2 million and
$43.7 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 its credit ratings. The
allowance requirements are based on the best facts available and are
re-evaluated and adjusted on a regular basis and as additional information is
received.
INSURANCE LIABILITIES
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
16
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 had net deferred tax assets primarily resulting from deductible
temporary differences of $2.5 million and $18.8 million at December 31, 2004 and
2003, respectively, 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, 2004
and 2003, the total valuation allowance on net deferred tax assets was
approximately $10.9 million and $2.0 million, respectively. The increase in the
valuation allowance was recorded to reduce net deferred tax assets related to
net operating losses and other temporary differences of the United Kingdom
construction and facilities services segment inasmuch as there is uncertainty of
sufficient future income to realize the benefit of such deferred tax assets.
INTANGIBLE ASSETS
As of December 31, 2004, EMCOR had goodwill and net identifiable intangible
assets (primarily the market value of its backlog, customer relationships and
trademarks and tradenames) of $279.4 million and $18.8 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 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 that identifiable
intangible assets other than goodwill 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, 2004, 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 and
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The review under SFAS
144 also included long-term assets related to the United Kingdom that were
determined not to be impaired. See Note B - Summary of Significant Accounting
Policies of the notes to consolidated financial statements for additional
discussion of the provisions of SFAS 142 and SFAS 144.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The reportable segments reflect, in all years presented, reclassifications of
certain expenses within the income statement for the prior years and
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 2004 increased 4.7% to $4.75
billion compared to $4.53 billion for 2003. This revenue growth was principally
due to: (a) increased work on United States transportation infrastructure,
financial services, healthcare, and hospitality construction projects; (b) the
impact of favorable foreign exchange rate changes on revenues amounting to $19.7
million in the Canada construction and facilities services segment (despite
reduced revenues as a consequence of certain power generation and healthcare
projects having been completed in 2003) and amounting to $72.6 million in the
United Kingdom construction and facilities services segment; and (c) an increase
in the number of United States site-based facilities services contracts. This
growth in revenues was partially offset by reduced revenues from power
generation projects, office and manufacturing construction projects, and repair
and maintenance work in the United States.
Contract backlog as of December 31, 2004 was approximately $2.8 billion, a
$0.2 billion decrease compared with backlog of approximately $3.0 billion as of
December 31, 2003. 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 unrecognized revenues to be realized
from uncompleted construction contracts plus unrecognized revenues expected to
be realized over the remaining term of the facilities services contracts, except
if the remaining term of a facilities services contract exceeds 12 months, the
unrecognized revenues attributable to such contract included in backlog are
limited to only 12 months of revenues. The decrease was primarily related to
completion of the prior year's backlog, combined with the curtailment in bidding
for public sector and other long-term contracts. The 2004 decrease in backlog
can be expected to result in lower revenues in 2005 than in 2004. Factors such
as availability of additional work and the timing thereof, in 2005, may also
impact total 2005 revenues. The impact of these factors, however, is not
possible to predict with certainty.
17
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
companies acquired in 2003 and 2002) of $85.1 million and $19.7 million,
respectively. Excluding companies acquired in 2003 and 2002, revenues for the
United States mechanical construction and facilities services segment were lower
for 2003 than for 2002.
The following table presents EMCOR's revenues by operating segment and the
approximate percentages that each segment's revenues was of total revenues for
the years ended December 31, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
2004 TOTAL 2003 TOTAL 2002 TOTAL
---------- ----- ---------- ----- ---------- -----
Revenues from unrelated entities:
United States electrical construction and facilities services ........ $ 1,235.3 26% $ 1,239.5 27% $ 1,152.4 29%
United States mechanical construction and facilities services ........ 1,825.7 38% 1,715.8 38% 1,715.4 43%
United States facilities services .................................... 727.6 15% 661.2 15% 250.0 6%
---------- ---------- ----------
Total United States operations ....................................... 3,788.6 80% 3,616.5 80% 3,117.8 79%
Canada construction and facilities services .......................... 280.8 6% 346.8 8% 316.3 8%
United Kingdom construction and facilities services .................. 678.5 14% 571.3 13% 533.9 13%
Other international construction and facilities services ............. -- -- -- -- -- --
---------- ---------- ----------
Total worldwide operations ............................................. $ 4,747.9 100% $ 4,534.6 100% $ 3,968.0 100%
========== ========== ==========
Revenues of the United States electrical construction and facilities services
segment for 2004 decreased $4.2 million compared to 2003. The decrease in
revenues was primarily due to fewer power generation and manufacturing
construction projects available, partially offset by an increase in the
availability of transportation infrastructure, financial services and
hospitality work. Revenues for 2003 increased by $87.1 million compared to 2002.
This increase in revenues was primarily due to an increase in transportation
infrastructure and power generation work, partially offset by a significant
decline in private sector commercial work, which includes offices, manufacturing
facilities and hotels. Of all of the major urban centers served by EMCOR, the
New York City area market in 2003 experienced the largest reduction in revenues
from private sector commercial work compared to 2002. This 2003 decline in
revenues from private sector commercial work (when compared to 2002) 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.
Revenues of the United States mechanical construction and facilities services
segment for 2004 increased $109.9 million compared to 2003. The increase in
revenues was primarily attributable to increased work on healthcare, hospitality
and financial services construction projects, partially offset by decreased
power generation work and commercial work, including discretionary small
projects and repair and maintenance work. Revenues for 2003 increased $0.4
million compared to 2002 principally due to increases in the education and
institutional sectors related to increased public sector spending, partially
offset by significantly decreased commercial office, manufacturing and power
generation work due to a fall off in availability of such work. In 2003, EMCOR's
mid-western markets were particularly negatively impacted by a fall off in
available outage upgrade and replacement work at manufacturing facilities. In
addition, revenues in 2003 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.
United States facilities services segment revenues increased $66.4 million
for 2004 compared to 2003. The increase in revenues was primarily attributable
to increased site-based facilities services contracts as a result of increased
sales efforts. Revenues increased by $411.2 million for 2003 compared to 2002.
The increase in revenues for 2003 was primarily due to revenues of $387.5
million attributable to the CES acquisition and increased 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 2003 summer weather
conditions in parts of the United States, contributed to a decrease in 2003
revenues.
Revenues of Canada construction and facilities services decreased by $66.0
million for 2004 compared to 2003. This decrease was primarily due to the
completion in 2003 of certain long-term power generation and healthcare projects
active in 2003, partially offset by increased revenues from power transmission
projects. The decrease was also partially offset by $19.7 million of increased
revenues resulting from the impact of changes in the rates of exchange for
Canadian dollars to United States dollars due to the strengthening of the
Canadian dollar. Revenues 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 resulting from the impact of changes in the rates of
exchange for Canadian dollars to United States dollars due to strengthening of
the Canadian dollar. But for the exchange rates, Canada's construction and
facilities services revenues for 2003 when compared to 2002 would have decreased
due to a temporary scale-back in work on certain long-term power generation
projects attributable to a customer's project scheduling.
18
United Kingdom construction and facilities services revenues increased $107.2
million for the year ended December 31, 2004 compared to the year ended December
31, 2003. This increase in revenues was principally due to an increase of $72.6
million resulting from the impact of changes in the rates of exchange for
British pounds to United States dollars because of strengthening of the British
pound and to increases in transportation infrastructure work. Revenues increased
$37.4 million for 2003 compared to 2002, due to an increase of $47.5 million
related to changes in the rates of exchange for British pounds to United States
dollars because of strengthening of the British pound. But for exchange rates,
revenues for 2003 would have declined because of implementation of a planned
reduction in bidding for certain types of institutional and government-sponsored
construction projects.
Other international construction and facilities services activities consist
of operations primarily in South Africa (until the sale of EMCOR's interest in a
South African joint venture in July 2004) and in the Middle East. During 2004,
2003 and 2002, all of the projects in these markets were performed by joint
ventures, and accordingly, the results of these joint venture operations were
accounted for under the equity method of accounting because either EMCOR had
less than majority ownership or was not subject to a majority of the risk of
loss from the joint venture activities and was not entitled to receive a
majority of the joint venture's residual returns. Accordingly, revenues
attributable to such joint ventures were not reflected as revenues in the
consolidated financial statements. EMCOR continues to pursue new business
selectively in the Middle Eastern and European markets; however, the
availability of opportunities there 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, 2004, 2003
and 2002 (in millions, except for percentages):
2004 2003 2002
---------- ---------- ----------
Cost of sales .................................................... $ 4,301.0 $ 4,052.2 $ 3,485.4
Gross profit ..................................................... $ 446.9 $ 482.5 $ 482.6
Gross profit as a percentage of revenues ......................... 9.4% 10.6% 12.2%
2004 gross profit (revenues less cost of sales) decreased $35.6 million for
2004 compared to 2003. Gross profit as a percentage of revenues was 9.4% for
2004 compared to 10.6% for 2003. Gross profit for 2004 was lower than in the
prior year, despite greater revenues than in 2003, primarily due to: (a) greater
than originally estimated labor requirements to perform work as well as
continued reduced labor productivity due to the uncertain construction job
market; (b) reduced availability of higher margin discretionary small project
spending and repair and maintenance work; (c) increased competition for, and a
related decrease in gross profit margin on, commercial, industrial and public
sector work in the United States; and (d) increased prices for material required
for certain construction projects, which price increases particularly negatively
impacted the Canada construction and facilities services segment gross profit.
Positively impacting 2004 gross profit was improved United Kingdom construction
and facilities services segment project performance and increased gross profit
from United States transportation infrastructure, financial services, healthcare
and hospitality projects due to the increased availability and successful
performance of these types of projects. Additionally, total gross profit
increased $5.7 million in 2004 compared to 2003, primarily resulting from the
impact of changes in the rates of exchange for British pounds to United States
dollars amounting to $5.8 million, partially offset by a $0.1 million decrease
resulting from the impact of changes in the rates of exchange for Canadian
dollars to United States dollars.
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 for 2003 compared to 2002 decreased
primarily due to poor performance in the United Kingdom construction and
facilities services segment 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
in 2003 and 2002.
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, 2004, 2003 and 2002 (in millions,
except for percentages):
2004 2003 2002
-------- -------- --------
Selling, general and administrative expenses .......................................... $ 399.3 $ 435.4 $ 367.1
Selling, general and administrative expenses as a percentage of revenues .............. 8.4% 9.6% 9.3%
Selling, general and administrative expenses for 2004 decreased $36.1 million
compared to 2003. Selling, general and administrative expenses as a percentage
of revenues were 8.4% for 2004 compared to 9.6% for 2003. This decline in
selling, general and administrative expenses both in dollars and as a percentage
of revenues was primarily attributable to lower salary costs and other variable
costs associated with reductions in personnel. The decrease was offset by an
increase of $6.8 million for 2004 compared to 2003 resulting from the impact of
changes in the rates of exchange for United Kingdom and Canadian currencies to
United States dollars, and an increase of $0.6 million in expense for the
amortization of identifiable intangible assets.
19
Selling, general and administrative expenses for 2003 increased $68.3 million
compared to 2002. As a percentage of revenues, total selling, general and
administrative expenses increased from 9.3% in 2002 to 9.6% in 2003. 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) for 2003 were approximately $302.8 million (8.4%
of revenues) compared to $307.5 million (8.9% of revenues) for 2002. This
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).
RESTRUCTURING EXPENSES
Restructuring expenses, primarily relating to employee severance obligations,
were $8.3 million for 2004. Approximately $7.0 million of the restructuring
obligations were paid prior to December 31, 2004. EMCOR anticipates paying
substantially all of the remaining obligations in 2005. There were no
restructuring expenses for the year ended December 31, 2003 or 2002.
GAIN ON SALE OF ASSETS AND EQUITY INVESTMENT
The gain on sale of assets of $2.8 million for the year ended December 31,
2004 was related to the September 2004 sale of assets of EMCOR's United Kingdom
Delcommerce equipment rental services division. Contemporaneously with the sale,
EMCOR entered into a long-term agreement to utilize the equipment rental
services of the purchaser, a publicly traded United Kingdom company. The $1.8
million gain on sale of an equity investment of 2004 was attributable to the
August 2004 sale of EMCOR's interest in a South African joint venture, the
operating results of which had been reported previously in the Other
international segment. There were no sales of assets or equity investments in
either 2003 or 2002 other than the disposal of property, plant and equipment in
the normal course of business.
OPERATING INCOME
The following table presents EMCOR's operating income by segment, and each
segment's operating income as a percentage of its segment's revenues, for the
years ended December 31, 2004, 2003 and 2002 (in millions, except for
percentages):
% OF % OF % OF
SEGMENT SEGMENT SEGMENT
2004 REVENUES 2003 REVENUES 2002 REVENUES
------ -------- ------ -------- ------ --------
Operating income (loss):
United States electrical construction and facilities services ...... $ 81.2 6.6% $ 57.8 4.7% $ 79.3 6.9%
United States mechanical construction and facilities services ...... (1.4) -- 25.6 1.5% 59.9 3.5%
United States facilities services .................................. 14.2 2.0% 18.4 2.8% 4.4 1.8%
------ ------ ------
Total United States operations ..................................... 94.0 2.5% 101.8 2.8% 143.6 4.6%
Canada construction and facilities services ........................ (11.9) -- 2.0 0.6% 3.3 1.0%
United Kingdom construction and facilities services ................ 0.0 -- (22.4) -- 0.0 --
Other international construction and facilities services ........... 0.5 -- 0.3 -- (0.1) --
Corporate administration ........................................... (35.0) -- (34.7) -- (31.3) --
Restructuring expense .............................................. (8.3) -- -- -- -- --
Gain on sale of assets ............................................. 2.8 -- -- -- -- --
------ ------ ------
Total worldwide operations ......................................... 42.1 0.9% 47.0 1.0% 115.5 2.9%
Other corporate items:
Interest expense ................................................... (8.9) (8.9) (4.1)
Interest income .................................................... 1.9 0.7 2.0
Gain on sale of equity investment .................................. 1.8 -- --
Minority interest .................................................. (3.8) (1.9) (1.1)
Income before taxes ................................................ $ 33.2 $ 36.9 $112.3
As described in more detail below, operating income was $42.1 million for
2004, $47.0 million for 2003 and $115.5 million for 2002. 2004 operating income
decreased $4.9 million compared to 2003, primarily due to restructuring expenses
of $8.3 million. Excluding 2004 restructuring expenses of $8.3 million and a
gain on the sale of assets of $2.8 million, operating income increased $0.5
million compared to 2003. Operating income for 2004 was also impacted by other
factors previously discussed in the Overview above. The decrease in 2003
operating income compared to 2002 operating income 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 $9.8
million, $4.5 million and $2.3 million in reduction of insurance liabilities
previously established for insurance exposures as a consequence of effective
risk management and safety programs for 2004, 2003 and 2002, respectively.
20
United States electrical construction and facilities services operating
income for 2004 increased $23.4 million compared to 2003. This segment's
increased operating income in 2004 was attributable principally to increased
gross profit on transportation infrastructure, financial services, and
hospitality construction projects due to the increased availability and
successful performance of these types of projects. Selling, general and
administrative expenses decreased in 2004 due to lower salary costs and other
variable costs associated with reductions in personnel. The decrease in
operating income for 2003 of $21.5 million as compared to 2002, and the related
decrease in operating income as a percentage of revenues, was primarily
attributable to the 2003 Unfavorable United States Market Conditions (previously
discussed in the Overview above). 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. The overall 2003 decrease
was partially offset by profitable performance of transportation infrastructure,
certain power generation work and project close-outs. In addition, 2003 selling,
general and administrative expenses (excluding that attributable to companies
acquired in 2002) compared to 2002 decreased by approximately $19.1 million.
This decrease was mostly related to a reduction in incentive compensation, which
was attributable to less favorable financial performance, a reduction in
personnel and a reduction in other variable expenses.
The United States mechanical construction and facilities services operating
loss for 2004 was $1.4 million compared to operating income of $25.6 million for
2003. The segment's 2004 operating loss was primarily attributable to: (a)
decreases in the expected recovery of estimated costs upon completion of certain
projects, principally in the Western United States; (b) poor contract
performance on certain construction work related to greater labor requirements
than originally estimated to perform the work and continued reduced labor
productivity due to the uncertain construction job market; (c) a continued
decrease in the availability of generally more profitable discretionary small
projects and repair and maintenance work due to general economic conditions
negatively impacting commercial construction spending; and (d) increased
competition for, and a related decrease in gross profit margin on, commercial,
industrial and public sector work. Partially offsetting these operating results
were decreased selling, general and administrative expenses attributable to
lower salary costs and other variable costs associated with reductions in
personnel and to reduced incentive compensation due to less favorable financial
performance. This segment's operating income decreased by $34.3 million for 2003
compared to 2002. This decrease in operating income and decrease as a percentage
of revenues for 2003 was primarily due to the 2003 Unfavorable United States
Market Conditions (previously discussed in the Overview abov