EME-2012.12.31-10K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 1-8267
EMCOR Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
11-2125338
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
301 Merritt Seven
Norwalk, Connecticut
 
06851-1092
(Address of principal executive offices)
 
(Zip Code)
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes  ¨    No  x
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) 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 amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1,258,000,000 as of the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing sale price on the New York Stock Exchange reported for such date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock (based solely on filings of such 5% holders) have been excluded from such calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of the registrant's common stock outstanding as of the close of business on February 21, 2013: 66,983,211 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2013 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 of this Form 10-K.
 
 
 
 
 
 
 
 
 
 


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FORWARD-LOOKING STATEMENTS
Certain information included in this report, or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are being made pursuant to the 1995 Act and with the intention of obtaining the benefit of the “Safe Harbor” provisions of the 1995 Act. Forward-looking statements are based on information available to us and our perception of such information as of the date of this report and our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” variations of such wording and other words or phrases of similar meaning in connection with a discussion of our future operating or financial performance, and other aspects of our business, including market share growth, gross profit, project mix, projects with varying profit margins, selling, general and administrative expenses, and trends in our business and other characterizations of future events or circumstances. From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-Q and 8-K, in press releases, in our presentations, on our web site and in other material released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are only predictions and are subject to risks, uncertainties and assumptions, including those identified below in the “Risk Factors” section, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section, and other sections of this report, and in our Forms 10-Q for the three months ended March 31, 2012, June 30, 2012 and September 30, 2012 and in other reports filed by us from time to time with the SEC as well as in press releases, in our presentations, on our web site and in other material released to the public. Such risks, uncertainties and assumptions are difficult to predict, beyond our control and may turn out to be inaccurate causing actual results to differ materially from those that might be anticipated from our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.


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PART I

ITEM 1. BUSINESS
References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise.
General
We are one of the largest electrical and mechanical construction and facilities services firms in the United States, the United Kingdom and in the world. In 2012, we had revenues of approximately $6.3 billion. We provide services to a broad range of commercial, industrial, utility and institutional customers through approximately 70 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom. Our executive offices are located at 301 Merritt Seven, Norwalk, Connecticut 06851-1092, and our telephone number at those offices is (203) 849-7800.
We specialize principally in providing construction services relating to electrical and mechanical 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.”
We design, integrate, install, start-up, operate and maintain various electrical and mechanical systems, including:
Electric power transmission and distribution systems;
Premises electrical and lighting systems;
Low-voltage systems, such as fire alarm, security and process control systems;
Voice and data communications systems;
Roadway and transit lighting and fiber optic lines;
Heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems;
Fire protection systems;
Plumbing, process and high-purity piping systems;
Controls and filtration systems;
Water and wastewater treatment systems;
Central plant heating and cooling systems;
Crane and rigging services;
Millwright services; and
Steel fabrication, erection, and welding services.
Our facilities services operations, many of which support the operation of a customer's facilities, include:
Industrial maintenance and services, including those for refineries and petrochemical plants;
Outage services to utilities and industrial plants;
Commercial and government site-based operations and maintenance;
Military base operations support services;
Mobile mechanical maintenance and services;
Floor care and janitorial services;
Landscaping, lot sweeping and snow removal;

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Facilities management;
Vendor management;
Call center services;
Installation and support for building systems;
Program development, management and maintenance for energy systems;
Technical consulting and diagnostic services;
Small modification and retrofit projects; and
Retrofit projects to comply with clean air laws.
Facilities services are provided to a wide range of commercial, industrial, utility, institutional and governmental facilities.
We provide construction services and facilities services directly to corporations, municipalities and federal and state governmental entities, owners/developers, and tenants of buildings. We also provide these services indirectly by acting as a subcontractor to general contractors, systems suppliers, property managers and other subcontractors. Worldwide, as of December 31, 2012, we had over 26,000 employees.
Our revenues are derived from many different customers in numerous industries, which have operations in several different geographical areas. Of our 2012 revenues, approximately 92% were generated in the United States and approximately 8% were generated in the United Kingdom. In 2012, approximately 39% of revenues were derived from new construction projects, 17% were derived from renovation and retrofit of customer's existing facilities, and 44% were derived from facilities services operations.
The broad scope of our operations is more particularly described below. For information regarding the revenues, operating income and total assets of each of our segments with respect to each of the last three years, and our revenues and assets attributable to the United States, the United Kingdom and all other foreign countries for the last three years, see Note 18 - Segment Information of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.
Operations
The electrical and mechanical construction services industry has grown over the years due principally to the increased content, complexity and sophistication of electrical and mechanical systems, as well as the installation of more technologically advanced voice and data communications, lighting and environmental control systems in all types of facilities in large part due to the integration of digital processing and information technology. For these reasons, buildings need extensive electrical distribution systems. In addition, advanced voice and data communication systems require sophisticated power supplies and extensive low-voltage and fiber-optic communications cabling. Moreover, the need for substantial environmental controls within a building, due to the heightened need for climate control to maintain extensive computer systems at optimal temperatures, and the demand for energy savings and environmental control in individual spaces have over the years expanded opportunities for our electrical and mechanical services businesses. The demand for these services is typically driven by non-residential construction and renovation activity.
Electrical and mechanical construction services primarily involve the design, integration, installation and start-up and provision of services relating to: (a) electric power transmission and distribution systems, including power cables, conduits, distribution panels, transformers, generators, uninterruptible power supply systems and related switch gear and controls; (b) premises electrical and lighting systems, including fixtures and controls; (c) low-voltage systems, such as fire alarm, security and process control systems; (d) voice and data communications systems, including fiber-optic and low-voltage cabling; (e) roadway and transit lighting and fiber-optic lines; (f) heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems; (g) fire protection systems; (h) plumbing, process and high-purity piping systems; (i) controls and filtration systems; (j) water and wastewater treatment systems; (k) central plant heating and cooling systems; (l) cranes and rigging; (m) millwrighting; and (n) steel fabrication, erection and welding.
Electrical and mechanical 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 projects 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.
Our United States electrical and mechanical construction services operations accounted for about 53% of our 2012 revenues, approximately 71% of which were related to new construction and approximately 29% of which were related to renovation and

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retrofit projects. Our United Kingdom electrical and mechanical construction services operations accounted for approximately 3% of our 2012 revenues, approximately 53% of which were related to new construction and approximately 47% of which were related to renovation and retrofit projects. We provide electrical and mechanical construction services for both large and small installation and renovation projects. Our largest projects have included those: (a) for institutional use (such as water and wastewater treatment facilities, hospitals, correctional facilities and research laboratories); (b) for industrial use (such as pharmaceutical plants, steel, pulp and paper mills, chemical, food, 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. Our largest projects, which typically range in size from $10.0 million up to and occasionally exceeding $150.0 million and are frequently multi-year projects, represented approximately 33% of our worldwide construction services revenues in 2012.
Our projects of less than $10.0 million accounted for approximately 67% of our worldwide construction services revenues in 2012. These projects are typically completed in less than one year. They usually involve electrical and mechanical construction services when an end-user or owner undertakes construction or modification of a facility to accommodate a specific use. These projects frequently require electrical and mechanical systems to meet special needs such as critical systems power supply, fire protection systems, special environmental controls and high-purity air systems, sophisticated electrical and mechanical systems for data centers, 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.
We have a broad customer base with many long-standing relationships. We perform 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.
We also install and maintain 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, we manufacture and install sheet metal air handling systems for both our own mechanical construction operations and for unrelated mechanical contractors. We also maintain welding and pipe fabrication shops in support of some of our mechanical operations.
Our United States facilities services operations provide facilities services to a wide range of commercial, industrial, utility, institutional and governmental facilities.
These facilities services, which generated approximately 44% of our 2012 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. Of our 2012 facilities services revenues, approximately 88% were generated in the United States and approximately 12% were generated in the United Kingdom.
Our facilities services operations have built upon our traditional electrical and mechanical services operations, facilities services activities of our electrical and mechanical contracting subsidiaries, and our client relationships, as well as acquisitions, to expand the scope of services being offered and to develop packages of services for customers on a regional and national basis.
Our United States facilities services segment offers a broad range of facilities services, including operation, maintenance and service of electrical and mechanical systems; industrial maintenance and services, including outage services to utilities and industrial plants; commercial and government site-based operations and maintenance; military base operations support services; mobile mechanical maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; vendor management; call center services; installation and support for building systems; program development, management and maintenance with respect to energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; small modification and retrofit projects; and retrofit projects to comply with clean air laws.
Demand for our facilities services is often driven by customers' decisions to focus on their core competencies, customers' programs to reduce costs, 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 electrical and mechanical 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. Clients of our facilities services business include federal and state governments, utilities, independent power producers, refineries, pulp and paper producers and major

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corporations engaged in information technology, telecommunications, pharmaceuticals, petrochemicals, financial services, publishing and other manufacturing, and large retailers and other businesses with multiple locations throughout the United States.
We currently provide facilities services in a majority of the states in the United States to commercial, industrial, institutional and governmental customers and as part of our operations are responsible for: (a) the oversight of all or most of the facilities operations of a business, including operation and maintenance; (b) servicing, upgrade and retrofit of HVAC, electrical, plumbing and industrial piping and sheet metal systems in existing facilities; (c) interior and exterior services, including floor care and janitorial services, landscaping, lot sweeping and snow removal; (d) diagnostic and solution engineering for building systems and their components; (e) maintenance and support services to manufacturers and power producers; and (f) services for refineries and petrochemical plants.
In the Washington D.C. metropolitan area, we provide facilities services at a number of preeminent buildings, including those that house the Secret Service, the Federal Deposit Insurance Corporation, the National Affairs Training Center, and the Department of Health and Human Services, as well as other government facilities including the NASA Jet Propulsion Laboratory in Pasadena, California. We also provide facilities services to a number of military bases, including base operations support services to the Navy Capital Region and Fort Huachuca, Arizona, and are also involved in joint ventures providing facilities services to the Naval Base Kitsap in the State of Washington. The agreements pursuant to which this division provides services to the federal government are frequently for a term of five to ten years, are subject to renegotiation of terms and prices by the government, and are subject to termination by the government prior to the expiration of the term.
As part of our facilities services operations, we also provide aftermarket maintenance, repair and cleaning services for highly engineered shell and tube heat exchangers for refineries and the petrochemical industry both at our facilities and in the field. These services are tailored to meet customer needs for scheduled turnarounds or specialty callout service.
Our United Kingdom subsidiary also has a division that focuses on facilities services. This division currently provides a broad range of facilities services under multi-year agreements to public and private sector customers, including airlines, airports, real estate property managers, manufacturers and governmental agencies.
Competition
In both our construction services and facilities services businesses, we compete with national, regional and local companies, many of which are small, owner-operated entities that carry on their businesses in a limited geographic area.
We believe that the electrical and mechanical construction services business is highly fragmented and our competition includes thousands of small companies across the United States and in the United Kingdom. In the United States, there are a few public companies focused on providing either electrical and/or mechanical construction services, such as Integrated Electrical Services, Inc., Comfort Systems USA, Inc. and Tutor Perini Corporation. Our principal competitors in the United Kingdom include Carillion plc and MITIE Group plc. A majority of our 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 we have total assets, annual revenues, net worth, access to bank credit and surety bonding and expertise significantly greater than most of our competitors, we believe we have a significant competitive advantage over our competitors in providing electrical and mechanical construction services. Competitive factors in the electrical and mechanical 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; (k) access to bank credit; and (l) price. However, there are relatively few significant barriers to entry to several types of our construction services business.
While the facilities services business is also highly fragmented with most competitors operating in a specific geographic region, a number of large United States based corporations such as AECOM Technology Corporation, Johnson Controls, Inc., Fluor Corp., J&J Worldwide Services, UNICCO Service Company, the Washington Division of URS Corporation, CB Richard Ellis, Inc., Jones Lang LaSalle and ABM Facility Services are engaged in this field, as are large original equipment manufacturers such as Carrier Corp. and Trane Air Conditioning. In addition, we compete with several regional firms serving all or portions of the markets we target, such as FM Facility Maintenance, Bergensons Property Services, Inc., SMS Assist, LLC and Ferandino & Sons, Inc. With respect to our industrial services operations, we are a leading North American provider of aftermarket maintenance and repair services for highly engineered shell and tube heat exchangers. The key competitive factors in the facilities services business include price, service, quality, technical expertise, geographic scope and the availability of qualified personnel and managers. Due to our size, both financial and geographic, and our technical capability and management experience, we believe we are in a strong competitive position in the facilities services business. However, there are relatively few barriers to entry to most of our facilities services businesses.

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Employees
At December 31, 2012, we employed over 26,000 people, approximately 58% of whom are represented by various unions pursuant to more than 375 collective bargaining agreements between our individual subsidiaries and local unions. We believe that our employee relations are generally good. Only two of these collective bargaining agreements are national or regional in scope.
Backlog
Our backlog at December 31, 2012 was $3.37 billion compared to $3.33 billion of backlog at December 31, 2011. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of the facilities services contracts. 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 the next 12 months of revenues.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, which we refer to as the “SEC”. These filings are available to the public over the internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
Our Internet address is www.emcorgroup.com. We make available free of charge through www.emcorgroup.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Our Board of Directors has an audit committee, a compensation and personnel committee, and a nominating and corporate governance committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines, which include guidelines regarding related party transactions, a Code of Ethics for our Chief Executive Officer and Senior Financial Officers, and a Code of Ethics and Business Conduct for Directors, Officers and Employees. Copies of these charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, can be obtained free of charge from our web site, www.emcorgroup.com.
You may request a copy of the foregoing filings (excluding exhibits), charters, guidelines and codes and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, at no cost by writing to us at EMCOR Group, Inc., 301 Merritt Seven, Norwalk, CT 06851-1092, Attention: Corporate Secretary, or by telephoning us at (203) 849-7800.
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks, including the risks described below as well as adverse business and market conditions and risks associated with foreign operations. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to be material may also impair our business operations. You should carefully consider the risks described below, together with all other information in this report, including information contained in the “Business,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” sections. If any of the following risks actually occur, our business, financial position, results of operations and/or cash flows could be adversely affected, and we may not be able to achieve our goals. Such events may cause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.
The economic downturn has led to a reduction in demand for our services. Negative conditions in the credit markets may continue to adversely impact our ability to operate our business. The level of demand from our clients for our services has been, and will likely continue to be, adversely impacted by the slowdown in the industries we service, as well as in the economy in general. As the general level of economic activity has been reduced from historical levels, certain of our ultimate customers have delayed or cancelled, and may continue to delay or cancel, projects or capital spending, especially with respect to more profitable private sector work, and this slowdown has adversely affected our ability to continue to grow and has resulted in a reduction in our revenues and profitability from historical heights, and is likely to continue to adversely affect our revenues and profitability. A number of economic factors, including financing conditions for the industries we serve, have adversely affected, and may continue to adversely affect, our ultimate customers and their ability or willingness to fund expenditures in the future or pay for past services. General concerns about the fundamental soundness of domestic and foreign economies have caused and may continue to cause ultimate

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customers to defer projects even if they have credit available to them. Continuation or further worsening of financial and macroeconomic conditions could have a significant adverse effect on our revenues and profitability.
Many of our clients depend on the availability of credit to help finance their capital and maintenance projects. At times, tightened availability of credit has negatively impacted the ability of existing and prospective ultimate customers to fund projects we might otherwise perform, particularly those in the more profitable private sector. As a result, certain ultimate customers have deferred and others may defer such projects for an unknown, and perhaps lengthy, period. Such deferrals have inhibited our growth and adversely affected our results of operations and are likely to continue to have an adverse impact on our results of operations.
In a weak economic environment, particularly in a period of restrictive credit markets, we may experience greater difficulties in collecting payments from, and negotiating change orders and/or claims with, our clients due to, among other reasons, a diminution in our ultimate customers' access to the credit markets. If clients delay in paying or fail to pay a significant amount of our outstanding receivables, or we fail to successfully negotiate a significant portion of our change orders and/or claims with clients, it could have an adverse effect on our liquidity, results of operations and financial position.
Our business is vulnerable to the cyclical nature of the markets in which our clients operate and is dependent upon the timing and funding of new awards. We provide construction and maintenance services to ultimate customers operating in a number of markets which have been, and we expect will continue to be, cyclical and subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions and changes in client spending.
Regardless of economic or market conditions, investment decisions by our ultimate customers may vary by location or as a result of other factors like the availability of labor, relative construction costs or competitive conditions in their industry. Because we are dependent on the timing and funding of new awards, we are therefore vulnerable to changes in our clients' markets and investment decisions. Our business has traditionally lagged recoveries in the general economy and, therefore, may not recover as quickly as the economy at large.
Our business may be adversely affected by significant delays and reductions in government appropriations. Recent federal legislation aimed at curtailing spending by federal agencies and departments and reducing the federal budget deficit may result in federal governmental agencies or departments deferring or canceling projects that we might otherwise seek to perform or terminating existing contracts that we have with such agencies or departments. In particular, U.S. government expenditures are subject to the potential for automatic reductions, generally referred to as "sequestration." Sequestration may occur during 2013, resulting in reductions to spending by the U.S. government on both existing and new contracts. Even if sequestration does not occur, we expect that budgetary constraints and ongoing concerns regarding the U.S. national debt will continue to place downward pressure on spending levels of the U.S. government. In addition, significant budget deficits faced by state and local governments as a result of declining tax and other revenues may result in curtailment of future spending on their government infrastructure projects and/or expenditures. Some of our businesses derive a significant portion of their revenues from federal, state and local governmental bodies.
An increase in the prices of certain materials used in our businesses could adversely affect our businesses. We are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in both our construction and facilities services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 8,500 vehicles. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.
Our industry is highly competitive. Our industry is served by numerous small, owner-operated private companies, a few public companies and several large regional companies. In addition, relatively few barriers prevent entry into most of our businesses. As a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors. Competition in our industry depends on numerous factors, including price. Certain of our competitors have lower overhead cost structures and, therefore, are able to provide their services at lower rates than we are currently able to provide. In addition, some of our competitors have greater resources than we do. We cannot be certain that our competitors will not develop the expertise, experience and resources necessary to provide services that are superior in quality and lower in price to ours. Similarly, we cannot be certain that we will be able to maintain or enhance our competitive position within the industry or maintain a customer base at current levels. We may also face competition from the in-house service organizations of existing or prospective customers, particularly with respect to facilities services. Many of our customers employ personnel who perform some of the same types of facilities services that we do. We cannot be certain that our existing or prospective customers will continue to outsource facilities services in the future.
We are a decentralized company, which presents certain risks. While we believe decentralization has enhanced our growth and enabled us to remain responsive to opportunities and to our customers' needs, it necessarily places significant control and decision-

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making powers in the hands of local management. This presents various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized environment.
Our business may also be affected by adverse weather conditions. Adverse weather conditions, particularly during the winter season, could impact our construction services operations as those conditions affect our ability to perform efficient work outdoors in certain regions of the United States and the United Kingdom. However, the absence of snow in the United States during the winter could cause us to experience reduced revenues in our United States facilities services segment, which has meaningful snow removal operations. In addition, cooler than normal temperatures during the summer months could reduce the need for our services, particularly in our businesses that provide or service air conditioning units, and result in reduced revenues and profitability during the period such unseasonal weather conditions persist.
Our business may be affected by the work environment. We perform our work under a variety of conditions, including but not limited to, difficult terrain, difficult site conditions and busy urban centers where delivery of materials and availability of labor may be impacted, clean-room environments where strict procedures must be followed, and sites which may have been exposed to environmental hazards. Performing work under these conditions can negatively affect efficiency and, therefore, our profitability.
Our dependence upon fixed price contracts could adversely affect our business. We currently generate, and expect to continue to generate, a significant portion of our revenues from fixed price contracts. We must estimate the total costs of a particular project to bid for fixed price contracts. The actual cost of labor and materials, however, may vary from the costs we originally estimated. These variations, along with other risks, inherent in performing fixed price contracts, may cause actual gross profits from projects to differ from those we originally estimated and could result in reduced profitability or losses on projects. Depending upon the size of a particular project, variations from the estimated contract costs can have a significant impact on our operating results for any fiscal quarter or year.
We could incur additional costs to cover guarantees. In some instances, we guarantee completion of a project by a specific date or price, cost savings, achievement of certain performance standards or performance of our services at a certain standard of quality. If we subsequently fail to meet such guarantees, we may be held responsible for costs resulting from such failures. Such a failure could result in our payment of liquidated or other damages. To the extent that any of these events occur, the total costs of a project could exceed the original estimated costs, and we would experience reduced profits or, in some cases, a loss.
Many of our contracts, especially our facilities services contracts for governmental and non-governmental entities, may be canceled on short notice, and we may be unsuccessful in replacing such contracts if they are canceled or as they are completed or expire. We could experience a decrease in revenues, net income and liquidity if any of the following occur:
customers cancel a significant number of contracts;
we fail to win a significant number of our existing contracts upon re-bid;
we complete a significant number of non-recurring projects and cannot replace them with similar projects; or
we fail to reduce operating and overhead expenses consistent with any decrease in our revenues.
We may be unsuccessful in generating internal growth. Our ability to generate internal growth will be affected by, among other factors, our ability to:
expand the range of services offered to customers to address their evolving needs;
attract new customers; and
increase the number of projects performed for existing customers.
In addition, existing and potential customers have reduced, and may continue to reduce, the number or size of projects available to us due to their inability to obtain capital or pay for services provided or because of general economic conditions. Many of the factors affecting our ability to generate internal growth are beyond our control, and we cannot be certain that our strategies will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we are not successful, we may not be able to achieve internal growth, expand operations or grow our business.
The departure of key personnel could disrupt our business. We depend on the continued efforts of our senior management. The loss of key personnel, or the inability to hire and retain qualified executives, could negatively impact our ability to manage our business. However, we have executive development and management succession plans in place in order to minimize any such negative impact.
We may be unable to attract and retain skilled employees. Our ability to grow and maintain productivity and profitability will be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We are dependent upon

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our project managers and field supervisors who are responsible for managing our projects; and there can be no assurance that any individual will continue in his or her capacity for any particular period of time, and the loss of such qualified employees could have an adverse effect on our business. We cannot be certain that we will be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our business strategy or that labor expenses will not increase as a result of a shortage in the supply of these skilled personnel. Labor shortages or increased labor costs could impair our ability to maintain our business or grow our revenues.
Our unionized workforce could adversely affect our operations, and we participate in many multiemployer union pension plans which could result in substantial liabilities being incurred. As of December 31, 2012, approximately 58% of our employees were covered by collective bargaining agreements. Although the majority of these agreements prohibit strikes and work stoppages, we cannot be certain that strikes or work stoppages will not occur in the future. However, only two of our collective bargaining agreements are national or regional in scope, and not all of our collective bargaining agreements expire at the same time. Strikes or work stoppages would adversely impact our relationships with our customers and could have a material adverse effect on our financial position, results of operations and cash flows. We contribute to over 200 multiemployer union pension plans based upon wages paid to our union employees that could result in our being responsible for a portion of the unfunded liabilities under such plans. Our potential liability for unfunded liabilities could be material. Under the Employee Retirement Income Security Act, we may become liable for our proportionate share of a multiemployer pension plan's underfunding, if we cease to contribute to that pension plan or significantly reduce the employees in respect of which we make contributions to that pension plan. See Note 15 - Retirement Plans of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for additional information regarding multiemployer plans.
Fluctuating foreign currency exchange rates impact our financial results. We have foreign operations in the United Kingdom, which in 2012 accounted for 8% of our revenues. Our reported financial position and results of operations are exposed to the effects (both positive and negative) that fluctuating exchange rates have on the process of translating the financial statements of our United Kingdom operations, which are denominated in local currencies, into the U.S. dollar.
Our failure to comply with environmental laws could result in significant liabilities. Our operations are subject to various laws, including environmental laws and regulations, among which many deal with the handling and disposal of asbestos and other hazardous or universal waste products, PCBs and fuel storage. A violation of such laws and regulations may expose us to various claims, including claims by third parties, as well as remediation costs and fines. We own and lease many facilities. Some of these facilities contain fuel storage tanks, which may be above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines. As a part of our business, we also install fuel storage tanks and are sometimes required to deal with hazardous materials, all of which may expose us to environmental liability.
In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or become the basis for new or increased liabilities that could harm our financial position and results of operations, although certain of these costs might be covered by insurance. In some instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities that we believe are adequate to cover such obligations and liabilities. However, such third-party indemnities or covenants may not cover all of such costs or third-party indemnitors may default on their obligations. In addition, unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect on our business operations. Further, we cannot be certain that we will be able to identify, or be indemnified for, all potential environmental liabilities relating to any acquired business.
Adverse resolution of litigation and other legal proceedings may harm our operating results or financial position. We are a party to lawsuits and other legal proceedings, most of which occur in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular legal proceeding could have a material adverse effect on our business, operating results, financial position, and in some cases, on our reputation or our ability to obtain projects from customers, including governmental entities. See Item 3. Legal Proceedings and Note 16 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, for more information regarding legal proceedings in which we are involved.
Opportunities within the government sector could lead to increased governmental regulation applicable to us and unrecoverable startup costs. Most government contracts are awarded through a regulated competitive bidding process. As we pursue increased opportunities in the government arena, particularly in our facilities services segment, management's focus associated with the start-up and bidding process may be diverted away from other opportunities. If we are to be successful in being awarded additional government contracts, a significant amount of costs could be required before any revenues are realized from these contracts. In addition, as a government contractor we are subject to a number of procurement rules and other regulations, any deemed violation of which could lead to fines or penalties or a loss of business. Government agencies routinely audit and investigate government contractors. Government agencies may review a contractor's performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If government agencies determine through these audits or reviews that costs are

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improperly allocated to specific contracts, they will not reimburse the contractor for those costs or may require the contractor to refund previously reimbursed costs. If government agencies determine that we are engaged in improper activity, we may be subject to civil and criminal penalties and debarment or suspension from doing business with the government. Government contracts are also subject to renegotiation of profit by the government, termination by the government prior to the expiration of the term and non-renewal by the government.
A significant portion of our business depends on our ability to provide surety bonds. We may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds. Our construction contracts frequently require that we obtain from surety companies and provide to our customers payment and performance bonds as a condition to the award of such contracts. Such surety bonds secure our payment and performance obligations.
Surety market conditions have in recent years become more difficult due to the economy and the regulatory environment. Consequently, less overall bonding capacity is available in the market than in the past, and surety bonds have become more expensive and restrictive. Further, under standard terms in the surety market, surety companies issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing any bonds.
Current or future market conditions, as well as changes in our sureties' assessment of our or their own operating and financial risk, could cause our surety companies to decline to issue, or substantially reduce the amount of, bonds for our work and could increase our bonding costs. These actions can be taken on short notice. If our surety companies were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, we may be unable to compete for or work on certain projects.
We are effectively self-insured against many potential liabilities. Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers' compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on its obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of an actuary. We reflect these liabilities in our balance sheet as “Other accrued expenses and liabilities” and “Other long-term obligations.” The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.
Health care reform could adversely affect our operating results. In 2010, the United States government enacted comprehensive health care reform legislation. Due to the breadth and complexity of this legislation, as well as its phased-in nature of implementation and lack of interpretive guidance, it is difficult for us to predict the overall effects it will have on our business over the coming years. To date, we have not experienced material costs related to the health care reform legislation; however, it is possible that our operating results and/or cash flows could be adversely affected in the future by increased costs, expanded liability exposure and requirements that change the ways we provide healthcare and other benefits to our employees.
We may incur liabilities or suffer negative financial impact relating to occupational, health and safety matters. Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our robust occupational, health and safety programs, our industry involves a high degree of operational risk, and there can be no assurance that we will avoid significant liability exposure. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability.


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Our customers seek to minimize safety risks on their sites and they frequently review the safety records of contractors during the bidding process. If our safety record were to substantially deteriorate over time, we might become ineligible to bid on certain work and our customers could cancel our contracts and/or not award us future business.
If we fail to integrate future acquisitions successfully, this could adversely affect our business and results of operations. As part of our growth strategy, we acquire companies that expand, complement and/or diversify our business. Realization of the anticipated benefits of an acquisition will depend, among other things, upon our ability to integrate the acquired business successfully with our other operations and gain greater efficiencies and scale that will translate into reduced costs in a timely manner. However, there can be no assurance that an acquisition we may make in the future will provide the benefits anticipated when entering into the transaction. Acquisitions we have made and future acquisitions may expose us to operational challenges and risks, including the diversion of management's attention from our existing business, the failure to retain key personnel or customers of the acquired business, the assumption of unknown liabilities of the acquired business for which there are inadequate reserves and the potential impairment of acquired identifiable intangible assets, including goodwill. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify and acquire desirable businesses and successfully integrate any business acquired.
Our results of operations could be adversely affected as a result of goodwill and other identifiable intangible asset impairments. When we acquire a business, we record an asset called “goodwill” equal to the excess amount paid for the business, including liabilities assumed, over the fair value of the tangible and identifiable intangible assets of the business acquired. The Financial Accounting Standards Board (“FASB”) requires that all business combinations be accounted for using the acquisition method of accounting and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. FASB Accounting Standard Codification (“ASC”) Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) provides that goodwill and other identifiable intangible assets that have indefinite useful lives not be amortized, but instead must be tested at least annually for impairment, and identifiable intangible assets that have finite useful lives should continue to be amortized over their useful lives and be tested for impairment whenever facts and circumstances indicate that the carrying values may not be fully recoverable. ASC 350 also provides specific guidance for testing goodwill and other non-amortized identifiable intangible assets for impairment, which we test annually each October 1. ASC 350 requires management to make certain estimates and assumptions to allocate goodwill to reporting units and to determine the fair value of reporting unit net assets and liabilities. Such fair value is determined using discounted estimated future cash flows. Our development of the present value of future cash flow projections is based upon assumptions and estimates by management from a review of our operating results, business plans, anticipated growth rates and margins and the weighted average cost of capital, among others. Much of the information used in assessing fair value is outside the control of management, such as interest rates, and these assumptions and estimates can change in future periods. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding business plans or anticipated growth rates and/or margins are not achieved, or there is a rise in interest rates, we may be required to record goodwill and/or identifiable intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing on October 1, 2013 or earlier, if an indicator of an impairment is present prior to the quarter in which the annual goodwill impairment test is to be performed. It is not possible at this time to determine if any such additional impairment charge would result or, if it does, whether such a charge would be material to our results of operations.
We did not record an impairment of our goodwill or identifiable intangible assets for the year ended December 31, 2012.
Amounts included in our backlog may not result in actual revenues or translate into profits. Many of the contracts in our backlog do not require the purchase of a minimum amount of services. In addition, many contracts are subject to cancellation or suspension on short notice at the discretion of the client, and the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contract. We have historically experienced variances in the components of backlog related to project delays or cancellations resulting from weather conditions, external market factors and economic factors beyond our control, and we may experience more delays or cancellations in the future than in the past due to the current economic slowdown. The risk of contracts in backlog being cancelled or suspended generally increases during periods of widespread slowdowns. Accordingly, there is no assurance that backlog will actually be realized. If our backlog fails to materialize, we could experience a reduction in revenues and a decline in profitability, which could result in a deterioration of our financial position and liquidity.
We account for the majority of our construction projects using the percentage-of-completion method of accounting; therefore, variations of actual results from our assumptions may reduce our profitability. We recognize revenues on construction contracts using the percentage-of-completion method of accounting in accordance with ASC Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”. See Application of Critical Accounting Policies in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Under the percentage-of-completion method of accounting, we record revenue as work on the contract progresses. The cumulative amount of revenues recorded on a contract at a specified point in time is that percentage of total estimated revenues that costs incurred to date bear to estimated total costs.

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Accordingly, contract revenues and total cost estimates are reviewed and revised as the work progresses. Adjustments are reflected in contract revenues in the period when such estimates are revised. Estimates are based on management's reasonable assumptions and experience, but are only estimates. Variations of actual results from assumptions on an unusually large project or on a number of average size projects could be material. We are also required to immediately recognize the full amount of the estimated loss on a contract when estimates indicate such a loss. Such adjustments and accrued losses could result in reduced profitability, which could negatively impact our cash flow from operations.
The loss of one or a few customers could have an adverse effect on us. A few clients have in the past and may in the future account for a significant portion of our revenues in any one year or over a period of several consecutive years. Although we have long-standing relationships with many of our significant clients, our clients may unilaterally reduce, fail to renew or terminate their contracts with us at any time. A loss of business from a significant client could have a material adverse effect on our business, financial position, and results of operations.
Certain provisions of our corporate governance documents could make an acquisition of us, or a substantial interest in us, more difficult. The following provisions of our certificate of incorporation and bylaws, as currently in effect, as well as Delaware law, could discourage potential proposals to acquire us, delay or prevent a change in control of us, or limit the price that investors may be willing to pay in the future for shares of our common stock:
our certificate of incorporation permits our board of directors to issue “blank check” preferred stock and to adopt amendments to our bylaws;
our bylaws contain restrictions regarding the right of our stockholders to nominate directors and to submit proposals to be considered at stockholder meetings;
our certificate of incorporation and bylaws restrict the right of our stockholders to call a special meeting of stockholders and to act by written consent; and
we are subject to provisions of Delaware law, which prohibit us from engaging in any of a broad range of business transactions with an “interested stockholder” for a period of three years following the date such stockholder becomes classified as an interested stockholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES                 
Our operations are conducted primarily in leased properties. The following table lists facilities over 50,000 square feet, both leased and owned, and identifies the business segment that is the principal user of each such facility.
 
 
Approximate Square Feet
 
Lease Expiration Date, Unless Owned 
1168 Fesler Street
 El Cajon, California (b)
67,560

 
8/31/2020
22302 Hathaway Avenue
Hayward, California (b)
105,000

 
7/31/2016
4462 Corporate Center Drive
Los Alamitos, California (c)
57,863

 
9/30/2014
18111 South Santa Fe Avenue
Rancho Dominguez, California (a)
66,246

 
12/31/2016
940 Remillard Court
San Jose, California (a)
119,560

 
7/31/2017
5101 York Street
Denver, Colorado (b)
77,553

 
2/28/2014
345 Sheridan Boulevard
Lakewood, Colorado (c)
63,000

 
Owned
3100 Woodcreek Drive
Downers Grove, Illinois (c)
56,551

 
7/31/2017
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b)
136,695

 
10/31/2018
2655 Garfield Avenue
Highland, Indiana (c)
57,765

 
6/30/2014
4250 Highway 30
St. Gabriel, Louisiana (a)
90,000

 
Owned
1750 Swisco Road
Sulphur, Louisiana (a)
112,000

 
Owned
111-01 and 111-21 14th Avenue
College Point, New York (c)
72,813

 
2/28/2021
70 Schmitt Boulevard
Farmingdale, New York (b)
76,380

 
7/31/2021
Two Penn Plaza
New York, New York (c)
55,891

 
1/31/2016
2102 Tobacco Road
Durham, North Carolina (b)
55,944

 
9/30/2015
2900 Newpark Drive
Norton, Ohio (b)
91,831

 
11/1/2017
1800 Markley Street
Norristown, Pennsylvania (a)
103,000

 
9/30/2021
227 Trade Court
Aiken, South Carolina (b)
71,158

 
9/30/2013
6045 East Shelby Drive
Memphis, Tennessee (a)
53,618

 
4/30/2018
937 Pine Street
Beaumont, Texas (a)
78,962

 
Owned
895 North Main Street
Beaumont, Texas (a)
75,000

 
Owned
410 Flato Road
Corpus Christi, Texas (a)
57,000

 
Owned
5550 Airline Drive and 25 Tidwell Road
Houston, Texas (b)
97,936

 
12/31/2014

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Approximate Square Feet
 
Lease Expiration Date, Unless Owned 
12415 Highway 225
La Porte, Texas (a)
78,000

 
Owned
1574 South West Temple
Salt Lake City, Utah (c)
120,904

 
Month-To-Month
2455 West 1500 South
Salt Lake City, Utah (c)
58,339

 
4/30/2018
670 and 686 Truman Avenue
Richland, Washington (b)
56,567

 
8/31/2016
We believe that our property, plant and equipment are well maintained, in good operating condition and suitable for the purposes for which they are used.
See Note 16 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for additional information regarding lease costs. We utilize substantially all of our leased or owned facilities and believe there will be no difficulty either in negotiating the renewal of our 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.
ITEM 3. LEGAL PROCEEDINGS
We are involved in several proceedings in which damages and claims have been asserted against us. Other potential claims may exist that have not yet been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity. Litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial position, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) was previously included in Exhibit 95 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.

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EXECUTIVE OFFICERS OF THE REGISTRANT
Anthony J. Guzzi, Age 48; President since October 25, 2004 and Chief Executive Officer since January 3, 2011. From October 25, 2004 to January 2, 2011, Mr. Guzzi served as Chief Operating Officer of the Company. 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 after-market services and components of its own products and those of other manufacturers in both the HVAC and refrigeration industries.
Sheldon I. Cammaker, Age 73; 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.
R. Kevin Matz, Age 54; Executive Vice President-Shared Services of the Company since December 2007 and Senior Vice President-Shared Services from June 2003 to December 2007. 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.
Mark A. Pompa, Age 48; Executive Vice President and Chief Financial Officer of the Company since April 3, 2006. From June 2003 to April 2, 2006, Mr. Pompa was Senior Vice President-Chief Accounting Officer of the Company, and from June 2003 to January 2007, Mr. Pompa was also Treasurer of the Company. From September 1994 to June 2003, Mr. Pompa was Vice President and Controller of the Company.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our common stock trades on the New York Stock Exchange under the symbol “EME”.
The following table sets forth high and low sales prices for our common stock for the periods indicated as reported by the New York Stock Exchange:
 
2012
High
 
Low
First Quarter
$
30.91

 
$
26.32

Second Quarter
$
30.52

 
$
25.68

Third Quarter
$
30.52

 
$
25.32

Fourth Quarter
$
34.95

 
$
27.91

 
2011
High
 
Low
First Quarter
$
32.75

 
$
28.23

Second Quarter
$
31.92

 
$
28.03

Third Quarter
$
30.86

 
$
18.25

Fourth Quarter
$
27.12

 
$
18.91

Holders. As of February 21, 2013, there were approximately 136 stockholders of record and, as of that date, we estimate there were approximately 31,686 beneficial owners holding our common stock in nominee or “street” name.
Dividends. On September 26, 2011, we announced plans to pay a regular quarterly dividend of $0.05 per share. We have paid quarterly dividends since October 25, 2011. On December 7, 2012, our Board of Directors declared a special dividend of $0.25 per share, payable in December 2012, and announced its intention to increase the regular quarterly dividend to $0.06 per share. In addition, at the December 7, 2012 meeting of our Board of Directors, the regular quarterly dividend that would have been paid in January 2013 was declared, its amount increased to $0.06 per share and its payment date accelerated to December 28, 2012. We expect that such quarterly dividends will be paid in the foreseeable future. Prior to October 25, 2011, no cash dividends had been paid on the Company's common stock. Our revolving credit facility limits the amount of dividends we can pay on our common stock. However, we do not believe that the terms of the credit facility currently materially limit our ability to pay a quarterly dividend of $0.06 per share for the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes, as of December 31, 2012, certain information regarding equity compensation plans that were approved by stockholders and equity compensation plans that were not approved by stockholders. The information in the table and in the Notes thereto has been adjusted for stock splits.
 
 
Equity Compensation Plan Information
 
 
 
A
 
B
 
C
 
Plan Category
 
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column A)
 
Equity Compensation Plans Approved by Security Holders
 
2,009,363

(1) 
$
13.07

(1) 
2,439,979

(2) 
Equity Compensation Plans Not Approved by Security Holders
 
425,396

(3) 
$
10.70

 

 
Total
 
2,434,759

 
$
12.66

 
2,439,979

 



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_________
 
(1)
Included within this amount are 638,382 restricted stock units awarded to our non-employee directors and employees. The weighted average exercise price would have been $19.16 had the weighted average exercise price calculation excluded such restricted stock units.
(2)
Represents shares of our common stock available for future issuance under our 2010 Incentive Plan (the "2010 Plan"), which may be issuable in respect of options and/or stock appreciation rights granted under the 2010 Plan and/or may also be issued pursuant to the award of restricted stock, unrestricted stock and/or awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, our common stock.
(3)
Represents shares of our common stock that may be issued upon the exercise of options to our executive officers.
Stock Options. Stock options, which have been adjusted for stock splits, were awarded pursuant to equity compensation programs that were not approved by stockholders. 339,396 of these options, which are referred to in note (3) to the Table, were granted to four of our then executive officers in connection with employment agreements with us, which employment agreements were dated January 1, 2002 (the “2002 Employment Agreements”) and have since expired, and 86,000 of them were granted to Mr. Anthony Guzzi, our President and Chief Executive Officer, when he joined us in October 2004. Of these options, (i) an aggregate of 339,396 were granted on January 2, 2004 with an exercise price of $10.96 per share and (ii) 86,000 were granted to Mr. Guzzi on October 25, 2004 with an exercise price of $9.67 per share. Each of the these options have a term of ten years from their respective grant dates, an exercise price per share equal to the fair market value of a share of common stock on their respective grant dates, and are currently exercisable.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes repurchases of our common stock made during the quarter ended December 31, 2012 by us: 
Period
Total Number of
Shares Purchased(1)
Average Price
Paid Per Share
Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
Maximum Number
(or Approximate Dollar Value)
of Shares That May Yet be
Purchased Under
the Plan or Programs
 
 
 
 
 
October 1, 2012 to
October 31, 2012
None
None
None
$48,565,219
November 1, 2012 to
November 30, 2012
None
None
None
$48,565,219
December 1, 2012 to
December 31, 2012
None
None
None
$48,565,219
_________
 
(1)
On September 26, 2011, we announced that our Board of Directors had authorized the Company to repurchase up to $100.0 million of its outstanding common stock. The repurchase program remains in effect. No other shares have been repurchased since the program has been announced other than pursuant to this publicly announced program. Acquisitions under our repurchase program may be made from time to time as permitted by securities laws and other legal requirements.


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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited financial statements and should be read in conjunction with the consolidated financial statements, the related notes thereto and the report of our independent registered public accounting firm thereon included elsewhere in this and our previously filed annual reports on Form 10-K.
See Note 3 - Acquisitions of Businesses and Note 4 - Disposition of Assets of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for a discussion regarding acquisitions and dispositions. The results of operations for all periods presented reflect discontinued operations accounting due to the disposition of our interest in our Canadian subsidiary in August 2011 and the disposition of our interest in a consolidated joint venture in 2007.
Income Statement Data
(In thousands, except per share data)
 
 
Years Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Revenues
$
6,346,679

 
$
5,613,459

 
$
4,851,953

 
$
5,227,699

 
$
6,360,695

Gross profit
806,354

 
733,949

 
693,523

 
784,225

 
845,707

Impairment loss on goodwill and identifiable intangible assets

 
3,795

 
246,081

 
13,526

 

Operating income (loss)
249,967

 
210,793

 
(26,528
)
 
250,122

 
291,693

Net income (loss) attributable to EMCOR Group, Inc.
$
146,584

 
$
130,826

 
$
(86,691
)
 
$
160,756

 
$
182,204

 
 
 
 

 
 

 
 

 
 

Basic earnings (loss) per common share:
 
 
 

 
 

 
 

 
 

From continuing operations
$
2.20

 
$
1.82

 
$
(1.30
)
 
$
2.31

 
$
2.64

From discontinued operations

 
0.14

 
(0.01
)
 
0.13

 
0.15

 
$
2.20

 
$
1.96

 
$
(1.31
)
 
$
2.44

 
$
2.79

 
 
 
 

 
 

 
 

 
 

Diluted earnings (loss) per common share:
 
 
 

 
 

 
 

 
 

From continuing operations
$
2.16

 
$
1.78

 
$
(1.30
)
 
$
2.25

 
$
2.57

From discontinued operations

 
0.13

 
(0.01
)
 
0.13

 
0.14

 
$
2.16

 
$
1.91

 
$
(1.31
)
 
$
2.38

 
$
2.71

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
(In thousands) 
 
As of December 31,  
 
2012
 
2011
 
2010
 
2009
 
2008
Equity (1)
$
1,357,179

 
$
1,245,131

 
$
1,162,845

 
$
1,226,466

 
$
1,050,769

Total assets
3,107,070

 
3,014,076

 
2,755,542

 
2,981,894

 
3,030,443

Goodwill
566,588

 
566,805

 
406,804

 
593,628

 
582,714

Borrowings under revolving credit facility
150,000

 
150,000

 
150,000

 

 

Term loan, including current maturities

 

 

 
194,750

 
197,750

Other long-term debt, including current maturities
18

 

 
24

 

 
41

Capital lease obligations, including current maturities
$
5,881

 
$
4,857

 
$
1,649

 
$
601

 
$
2,313

 
 _______
(1)
On September 26, 2011, we announced plans to pay a regular quarterly dividend of $0.05 per share. We have paid quarterly dividends since October 25, 2011. On December 7, 2012, our Board of Directors declared a special dividend of $0.25 per share, payable in December 2012, and announced its intention to increase the regular quarterly dividend to $0.06 per share. In addition, at the December 7, 2012 meeting of our Board of Directors, the regular quarterly dividend that would have been paid in January 2013 was declared, its amount increased to $0.06 per share and its payment date accelerated to December 28, 2012. Prior to October 25, 2011, no cash dividends had been paid on the Company's common stock.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are one of the largest electrical and mechanical construction and facilities services firms in the United States, the United Kingdom and in the world. We provide services to a broad range of commercial, industrial, utility and institutional customers through approximately 70 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom. We had conducted business in Canada through an indirect wholly owned subsidiary and in the Middle East through a joint venture. We sold our interest in our Canadian operations in August 2011 and our interest in the Middle East joint venture in June 2010.
The results of operations for all periods presented reflect: (a) discontinued operations accounting due to the disposition of our interest in our Canadian subsidiary in August 2011 and (b) certain reclassifications of prior period amounts to conform to current year presentation.
Overview
The following table presents selected financial data for the fiscal years ended December 31, 2012, 2011 and 2010 (in millions, except percentages and per share data):
 
 
2012
 
2011
 
2010
Revenues
$
6,346.7

 
$
5,613.5

 
$
4,852.0

Revenues increase (decrease) from prior year
13.1
%
 
15.7
%
 
(7.2
)%
Impairment loss on goodwill and identifiable intangible assets
$

 
$
3.8

 
$
246.1

Operating income (loss)
$
250.0

 
$
210.8

 
$
(26.5
)
Operating income (loss) as a percentage of revenues
3.9
%
 
3.8
%
 
(0.5
)%
Income (loss) from continuing operations
$
148.9

 
$
124.6

 
$
(81.8
)
Net income (loss) attributable to EMCOR Group, Inc.
$
146.6

 
$
130.8

 
$
(86.7
)
Diluted earnings (loss) per common share from continuing operations
$
2.16

 
$
1.78

 
$
(1.30
)
Net cash provided by operating activities
$
184.4

 
$
149.4

 
$
69.5

We remain cautiously optimistic regarding some of our end user markets inasmuch as revenues, operating income and operating margins (operating income as a percentage of revenues) showed an increase from 2011 levels. We continue to experience excellent large project execution and see an increased demand for some of our offerings, including those within the industrial and oil and gas markets. In addition, we added a company in 2012 to our portfolio of companies, which expands and further strengthens our service offerings to new and existing customers. Despite these trends, we continue to see a very competitive marketplace in which there are a significant number of bidders willing to work at extremely low margins on any given project. However, we continue to replace our backlog with profitable work that delivers cost effective solutions and value to our customers throughout the United States and the United Kingdom. Additionally, we continue to integrate and refocus one of our 2011 acquisitions to deliver more consistent operating results.
The increase in 2012 revenues compared to 2011 was primarily attributable to: (a) higher revenues across all of our business segments, excluding the effect of acquisitions, and (b) incremental revenues of approximately $303.9 million attributable to companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment.
Our increase in operating income and operating margin for 2012, when compared to 2011, was primarily a result of: (a) higher operating income and operating margin from our United States electrical construction and facilities services segment, (b) higher operating income and operating margin from our United States facilities services segment, excluding operating income from acquisitions in 2011, and (c) higher operating income from our United States mechanical construction and facilities services segment, excluding the effect of our 2012 and 2011 acquisitions. Companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment, in the aggregate, contributed approximately $2.3 million to operating income, including $5.1 million of amortization expense attributable to identifiable intangible assets included in cost of sales and selling, general and administrative expenses. The 2012 increase in operating income was partially offset by lower operating income and operating margin from our United Kingdom operations. Net cash provided by operating activities of $184.4 million in 2012 increased, when compared to 2011, primarily due to improved operating results and changes in our working capital.


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We acquired one company during 2012 for an immaterial amount. The results of the acquired company, which primarily provides mechanical construction services, have been included in our United States mechanical construction and facilities services segment; the acquired company expands our service capabilities into new geographic and technical areas. The acquisition is not material to our results of operations for the periods presented.
Operating Segments
Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States facilities services segment due to changes in our internal reporting structure.
We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; controls and filtration; water and wastewater treatment; central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States facilities services; (d) United Kingdom construction and facilities services; and (e) 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 (industrial maintenance and services; outage services to utilities and industrial plants; commercial and government site-based operations and maintenance; military base operations support services; mobile maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; small modification and retrofit projects; and retrofit projects to comply with clean air laws), which services are not generally related to customers' construction programs. The United Kingdom and Other international construction and facilities services segments perform electrical construction, mechanical construction and facilities services. In August 2011, we sold our Canadian subsidiary, which represented our Canada construction segment and which performed electrical construction and mechanical construction. Our “Other international construction and facilities services” segment consisted of our equity interest in a Middle East venture, which interest we sold in June 2010.
Discussion and Analysis of Results of Operations
Revenues
As described in more detail below, revenues for 2012 were $6.3 billion compared to $5.6 billion for 2011 and $4.9 billion for 2010. The increase in revenues for 2012 compared to 2011 was primarily attributable to: (a) increased revenues from all of our operating segments, excluding incremental revenues attributable to acquisitions in 2012 and 2011, and (a) incremental revenues of approximately $303.9 million generated by companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment. An increase in revenues at our United Kingdom operations was offset by a decrease of $6.5 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. While overall revenues have increased, we continue to be disciplined in a very competitive marketplace by only accepting work that we believe can be performed at a reasonable margin.
The increase in revenues for 2011 compared to 2010 was primarily attributable to: (a) incremental revenues of approximately $407.1 million generated by companies acquired in 2011 and 2010, which are reported within our United States facilities services and our United States mechanical construction and facilities services segments, (b) increased revenues in our United States facilities services segment, excluding incremental revenues attributable to acquisitions in 2011 and 2010, particularly within our industrial services, mobile mechanical services and government services markets, and (c) an increase in revenues from our United Kingdom operations. The results of our United Kingdom operations were also impacted by an increase of $18.3 million relating to the effect of favorable exchange rates for the British pound versus the United States dollar.
Our backlog at December 31, 2012 was $3.37 billion compared to $3.33 billion of backlog at December 31, 2011. This slight increase in backlog, excluding the effect of acquisitions, was primarily attributable to: (a) an increase in contracts awarded for work in all of our domestic segments and (b) an increase of $27.7 million in backlog associated with a company acquired in 2012, which is included in our United States mechanical construction and facilities services segment. This increase was partially offset by lower backlog within our United Kingdom segment. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of facilities services contracts. 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 the next 12 months of revenues.

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The following table presents our revenues for each of our operating segments and the approximate percentages that each segment's revenues were of total revenues for the years ended December 31, 2012, 2011 and 2010 (in millions, except for percentages):
 
 
2012 
 
% of
Total 
 
2011 
 
% of
Total 
 
2010
 
% of
Total 
Revenues from unrelated entities:
 
 
 
 
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
1,211.7

 
19
%
 
$
1,155.1

 
21
%
 
$
1,158.9

 
24
%
United States mechanical construction and facilities services
2,296.4

 
36
%
 
1,917.4

 
34
%
 
1,720.2

 
35
%
United States facilities services
2,299.8

 
36
%
 
2,012.0

 
36
%
 
1,510.5

 
31
%
Total United States operations
5,807.9

 
92
%
 
5,084.5

 
91
%
 
4,389.6

 
90
%
United Kingdom construction and facilities services
538.8

 
8
%
 
529.0

 
9
%
 
462.4

 
10
%
Other international construction and facilities services

 

 

 

 

 

Total worldwide operations
$
6,346.7

 
100
%
 
$
5,613.5

 
100
%
 
$
4,852.0

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenues of our United States electrical construction and facilities services segment were $1,211.7 million for the year ended December 31, 2012 compared to revenues of $1,155.1 million for the year ended December 31, 2011. This increase in revenues was primarily attributable to higher levels of work from industrial, institutional and commercial construction projects, partially offset by a decrease in revenues from healthcare, transportation and hospitality construction projects.
Revenues of our United States electrical construction and facilities services segment were $1,155.1 million for the year ended December 31, 2011 compared to revenues of $1,158.9 million for the year ended December 31, 2010. This slight decrease in revenues was primarily attributable to a decline in revenues from hospitality construction projects, as we substantially completed work on a major project, and lower revenues from transportation construction projects. The decrease was mostly offset by increased revenues from industrial, commercial, and water and wastewater construction projects.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2012 were $2,296.4 million, a $379.0 million increase compared to revenues of $1,917.4 million for the year ended December 31, 2011. This increase in revenues was primarily attributable to: (a) an increase in revenues from industrial, commercial and transportation construction projects, excluding the effect of acquisitions made in 2012 and 2011, and (b) incremental revenues of approximately $128.6 million generated by companies acquired in 2012 and 2011, partially offset by a decrease in revenues from healthcare, institutional, hospitality and water and wastewater construction projects.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2011 were $1,917.4 million, a $197.2 million increase compared to revenues of $1,720.2 million for the year ended December 31, 2010. This increase in revenues was primarily attributable to incremental revenues of approximately $186.4 million generated by a company acquired in 2011. Revenues from this segment for the year ended December 31, 2011, excluding incremental revenues attributable to the 2011 acquisition made in this segment, also increased compared to the same period in 2010. This slight increase in revenues was primarily attributable to increased work on commercial and industrial construction projects, offset in part by a decline in revenues from hospitality construction projects, as we substantially completed work on a major project, and a decline in water and wastewater construction projects.
Revenues of our United States facilities services segment were $2,299.8 million and $2,012.0 million in 2012 and 2011, respectively. This increase in revenues was primarily attributable to incremental revenues of approximately $175.3 million generated by companies acquired in 2011, which perform facilities maintenance services and mobile mechanical services, and from an increase in revenues at: (a) our industrial services operations, which have seen a continued increase in demand for our services in the refinery market, (b) our commercial site-based operations, excluding the effect of the acquisition made in 2011, primarily the result of new project awards, and (c) our government services operations, primarily due to new contract awards and organic growth in the medical facilities services portfolio. This increase was partially offset by a decrease in revenues from our energy services operations primarily as a result of the loss of a contract at the end of 2011.
Revenues of our United States facilities services segment were $2,012.0 million and $1,510.5 million in 2011 and 2010, respectively. This increase in revenues was primarily attributable to incremental revenues of approximately $220.7 million generated by companies acquired in 2011 and 2010, which perform facilities maintenance services, government infrastructure contracting services and mobile mechanical services, and to an increase in revenues at: (a) our industrial services operations, which have seen an increase in demand for our services in the refinery and petrochemical markets, (b) our mobile mechanical services, excluding revenues attributable to acquisitions made in 2011 and 2010, reflecting an increase in demand for our repair services,

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controls installation and small project work and (c) our government services operations, due to new project awards. Additionally, a contract amendment with a client resulted in an increase in revenues as the new terms and conditions required us to act as a principal and no longer as the client's agent.
Our United Kingdom construction and facilities services segment revenues were $538.8 million in 2012 compared to $529.0 million in 2011. This increase in revenues was primarily attributable to growth in revenues in our facilities services business as a result of an expansion in scope of contracts with our existing customers in the commercial and transportation markets, partially offset by a decrease in revenues from our United Kingdom construction business as a result of lower volume from institutional and healthcare construction projects and a decrease of $6.5 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar.
Our United Kingdom construction and facilities services segment revenues were $529.0 million in 2011 compared to $462.4 million in 2010. This increase in revenues was primarily attributable to growth in revenues from our facilities services business as a result of an expansion in scope of contracts with our existing customers in the commercial market. This increase was also partly attributable to an increase of $18.3 million relating to the effect of favorable exchange rates for the British pound versus the United States dollar.
Other international construction and facilities services activities consisted of a venture in the Middle East. The results of the venture were accounted for under the equity method of accounting. In June 2010, we sold our equity interest in a Middle East venture to our partner in the venture. As a result of this sale, we received $7.9 million and recognized a pretax gain in this amount, which is classified as a “Gain on sale of equity investment” on the Consolidated Statement of Operations.
Cost of sales and Gross profit
The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2012, 2011 and 2010 (in millions, except for percentages):  
 
2012
 
2011
 
2010
Cost of sales
$
5,540.3

 
$
4,879.5

 
$
4,158.4

Gross profit
$
806.4

 
$
733.9

 
$
693.5

Gross profit margin
12.7
%
 
13.1
%
 
14.3
%
Our gross profit for the year ended December 31, 2012 was $806.4 million, an increase of $72.4 million compared to the gross profit for the year ended December 31, 2011 of $733.9 million. The increase in gross profit was primarily attributable to: (a) companies acquired in 2012 and 2011 reported within our United States mechanical construction and facilities services segment and our United States facilities services segment, which contributed approximately $29.2 million to gross profit, net of amortization expense attributable to identifiable intangible assets of $0.2 million, (b) our United States facilities services segment, excluding gross profit from acquisitions made in 2011, primarily due to our industrial services operations, (c) our United States electrical construction and facilities services segment and (d) our United States mechanical construction and facilities services segment, excluding the gross profit from companies acquired in 2012 and 2011. These increases were partially offset by lower gross profit from our United Kingdom operations, whose construction business experienced several project write-downs. The increase in gross profit was also negatively impacted by changes in the exchange rates for the British pound versus the United States dollar.
Our gross profit margin was 12.7% for 2012 compared to 13.1% for 2011. The decrease in gross profit margin was primarily the result of lower gross profit margin at: (a) our United States mechanical construction and facilities services segment, primarily as a result of the favorable resolution in 2011 of various uncertainties on projects and the settlement of a long outstanding construction claim, (b) our United States facilities services segment, partially attributable to the margin dilutive impact of an acquisition in 2011, and (c) our United Kingdom operations, as a result of the operating loss from its construction business. The decrease in gross profit margin in 2012 was partially offset by higher gross profit margin at our United States electrical construction and facilities services segment, primarily as a result of: (a) the favorable resolution of a long outstanding construction claim on a water and wastewater construction project and (b) higher margins from certain other construction projects, as a result of claim settlements and better than anticipated project execution on other contracts.
Our gross profit for the year ended December 31, 2011 was $733.9 million, an increase of $40.4 million compared to the gross profit for the year ended December 31, 2010 of $693.5 million. The increase in gross profit was primarily attributable to: (a) companies acquired in 2011 and 2010 within our United States mechanical construction and facilities services and our United States facilities services segments, which contributed approximately $38.5 million to gross profit, net of amortization expense of $4.6 million attributable to identifiable intangible assets, (b) our United States facilities services segment, excluding gross profit from acquisitions in 2011 and 2010, primarily due to our industrial services operations and (c) our United States electrical construction and facilities services segment. The increase in gross profit was also attributable to an increase of $1.9 million relating

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to the effect of favorable exchange rates for the British pound versus the United States dollar. These increases were partially offset by lower gross profit and gross profit margin from: (a) our United States mechanical construction and facilities services segment, excluding gross profit from the 2011 acquisition in this segment, primarily as a result of lower margin work acquired during the then economic slow down and (b) our United Kingdom operations, whose construction business experienced project write-downs. Gross profit and gross profit margin for 2010 were favorably impacted by the resolution of long outstanding legal claim on a healthcare construction project in our United States mechanical construction and facilities services segment and the receipt of a contract termination fee pursuant to the terms of a contract in our United Kingdom operations. Additionally in 2010, we recognized a pretax gain of $4.5 million by our energy services operations within our United States facilities services segment from the sale of our interest in a venture, which gain is classified as a component of “Cost of sales” on the Consolidated Statements of Operations.
Our gross profit margin was 13.1% for 2011 compared to 14.3% for 2010. The decrease in gross profit margin was primarily the result of lower gross profit margin at: (a) our United States mechanical construction and facilities services segment (excluding gross profit margin attributable to the 2011 acquisition in this segment) for reasons discussed in the preceding paragraph, (b) our United States facilities services segment, partially attributable to acquisitions made in 2011 and 2010, and the contract amendment mentioned above and (c) our United Kingdom operations. Additionally in 2010, we recognized a pretax gain of $4.5 million by our energy services operations within our United States facilities services segment as discussed in the preceding paragraph. This decrease in gross profit margin in 2011 was partially offset by higher gross profit margin at our United States electrical construction and facilities services segment, primarily as a result of: (a) the favorable resolution of uncertainties upon the substantial completion of a hospitality construction project and (b) higher margins from certain transportation construction projects, as a result of claim settlements and better than anticipated project execution on other contracts.
Selling, general and administrative expenses
The following table presents selling, general and administrative expenses, and selling, general and administrative expenses as a percentage of revenues, for the years ended December 31, 2012, 2011 and 2010 (in millions, except for percentages):  
 
2012
 
2011
 
2010
Selling, general and administrative expenses
$
556.2

 
$
518.1

 
$
472.1

Selling, general and administrative expenses as a percentage of revenues
8.8
%
 
9.2
%
 
9.7
%
Our selling, general and administrative expenses for the year ended December 31, 2012 were $556.2 million, a $38.1 million increase compared to selling, general and administrative expenses of $518.1 million for the year ended December 31, 2011. This increase was primarily attributable to: (a) $26.9 million of incremental expenses directly related to companies acquired in 2012 and 2011, including amortization expense attributable to identifiable intangible assets of $4.9 million, and (b) higher employee related costs such as incentive compensation and employee benefits, partially as a result of improved results and share-based compensation costs. This increase was partially offset by: (a) the $6.4 million reversal of contingent consideration accruals relating to acquisitions made prior to 2012 and (b) a decrease in professional fees, as we had incurred $4.7 million of transaction costs associated with an acquisition made in 2011. Selling, general and administrative expenses as a percentage of revenues decreased for 2012 compared to 2011, primarily related to our ability to increase revenues at a greater rate than the increase in overhead costs.
Our selling, general and administrative expenses for the year ended December 31, 2011 were $518.1 million, a $46.0 million increase compared to selling, general and administrative expenses of $472.1 million for the year ended December 31, 2010. This increase was primarily attributable to: (a) $35.2 million of incremental expenses directly related to companies acquired in 2011 and 2010, including amortization expense of $7.9 million attributable to identifiable intangible assets, and (b) transaction costs of $4.7 million associated with an acquisition made in 2011, partially offset by the $2.8 million reversal of contingent consideration accruals relating to acquisitions made prior to 2011. Selling, general and administrative expenses in 2010 benefited from a reduction in our provision for doubtful accounts due to the favorable settlements of amounts previously determined to be uncollectible. Selling, general and administrative expenses as a percentage of revenues decreased for 2011 compared to 2010, primarily due to increased overall revenues and reduced discretionary spending.
Restructuring expenses
Restructuring expenses, primarily relating to employee severance obligations and/or the termination of leased facilities, were $0.1 million, $1.2 million and $1.8 million for 2012, 2011 and 2010, respectively. The 2012 restructuring expenses were primarily attributable to employee severance obligations and the termination of leased facilities incurred in our United States facilities services segment. In 2011, restructuring expenses were primarily related to employee severance obligations at our corporate headquarters and in 2010 to our United States electrical construction and facilities services segment. As of December 31, 2012, 2011 and 2010, the balance of obligations yet to be paid was $0.1 million, $0.2 million and $0.3 million, respectively. The majority of obligations outstanding as of December 31, 2011 and 2010 were paid during 2012 and 2011. The majority of obligations outstanding as of December 31, 2012 will be paid after 2013.

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Impairment loss on goodwill and identifiable intangible assets
In conjunction with our 2011 annual impairment test on October 1, 2011, we recognized a $3.8 million non-cash impairment charge related to customer relationships and trade names within the United States facilities services segment during the fourth quarter of 2011. This impairment primarily resulted from both lower forecasted revenues from, and lower operating margins at, specific companies within this segment.
During the third quarter of 2010 and prior to our October 1, 2010 annual impairment test, we recognized a $226.2 million non-cash impairment charge. Of this amount, $210.6 million related to goodwill and $15.6 million related to trade names. Additionally, during the second quarter of 2010, we recorded a $19.9 million non-cash impairment charge related to trade names. All of these impairments were within our United States facilities services segment.
Based upon our annual impairment testing as of October 1, 2012, no additional impairment of our goodwill or our identifiable intangible assets was recognized for the year ended December 31, 2012.
Operating income (loss)
The following table presents our operating income (loss) (gross profit less selling, general and administrative expenses, restructuring expenses, and impairment loss on goodwill and identifiable intangible assets) by segment, and each segment's operating income (loss) as a percentage of such segment's revenues from unrelated entities, for the years ended December 31, 2012, 2011 and 2010 (in millions, except for percentages):
 
 
2012
 
% of Segment Revenues
 
2011 
 
% of
Segment
Revenues 
 
2010
 
% of
Segment
Revenues 
Operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
100.7

 
8.3
%
 
$
84.6

 
7.3
%
 
$
70.4

 
6.1
 %
United States mechanical construction and facilities services
123.5

 
5.4
%
 
116.0

 
6.0
%
 
132.0

 
7.7
 %
United States facilities services
82.3

 
3.6
%
 
69.1

 
3.4
%
 
59.3

 
3.9
 %
Total United States operations
306.5

 
5.3
%
 
269.7

 
5.3
%
 
261.7

 
6.0
 %
United Kingdom construction and facilities services
7.1

 
1.3
%
 
9.2

 
1.7
%
 
15.7

 
3.4
 %
Other international construction and facilities services

 

 

 

 
(0.1
)
 

Corporate administration
(63.5
)
 

 
(63.1
)
 

 
(55.9
)
 

Restructuring expenses
(0.1
)
 

 
(1.2
)
 

 
(1.8
)
 

Impairment loss on goodwill and identifiable intangible assets

 

 
(3.8
)
 

 
(246.1
)
 

Total worldwide operations
250.0

 
3.9
%
 
210.8

 
3.8
%
 
(26.5
)
 
(0.5
)%
Other corporate items:
 

 
 

 
 

 
 

 
 

 
 

Interest expense
(7.3
)
 
 

 
(11.3
)
 
 

 
(12.2
)
 
 

Interest income
1.6

 
 

 
1.8

 
 

 
2.7

 
 

Gain on sale of equity investment

 
 

 

 
 

 
7.9

 
 

Income (loss) from continuing operations before income taxes
$
244.2

 
 

 
$
201.4

 
 

 
$
(28.1
)
 
 

As described in more detail below, we had operating income of $250.0 million for 2012 compared to operating income of $210.8 million for 2011 and an operating loss of $26.5 million for 2010. The 2010 operating loss was due to the impairment loss on goodwill and identifiable intangible assets of $246.1 million.
Operating income of our United States electrical construction and facilities services segment was $100.7 million for the year ended December 31, 2012 compared to operating income of $84.6 million for the year ended December 31, 2011. This increase in operating income primarily resulted from an increase in gross profit from: (a) water and wastewater construction projects and (b) industrial and institutional construction projects. In addition, operating income in 2012 benefited from the favorable resolution of a construction claim on a healthcare project, as well as from a long outstanding construction claim on a water and wasterwater construction project. These increases were partially offset by a decrease in gross profit attributable to: (a) hospitality construction projects and (b) smaller quick turn project work. Additionally, operating income in 2011 benefited from the favorable resolution of uncertainties on a hospitality construction project and from the favorable resolution of an institutional construction claim. Selling, general and administrative expenses increased for the year ended December 31, 2012, compared to 2011, principally due

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to higher employee related costs, primarily incentive compensation accruals as a result of improved results, and higher professional fees. The increase in operating margin for the year ended December 31, 2012 was primarily the result of an increase in gross profit margin and a decrease in the ratio of selling, general and administrative expense to revenues.
Operating income of our United States electrical construction and facilities services segment was $84.6 million for the year ended December 31, 2011 compared to operating income of $70.4 million for the year ended December 31, 2010. This increase in operating income primarily resulted from an increase in gross profit from: (a) water and wastewater construction projects, (b) commercial, transportation and healthcare construction projects and (c) smaller quick turn project work. In addition, operating income in 2011 benefited from the favorable resolution of uncertainties on a substantially complete hospitality construction project. The increase in 2011 operating income was partially offset by a decrease in gross profit attributable to institutional construction projects and lower operating income from certain of our Southern California operations. Selling, general and administrative expenses decreased for the year ended December 31, 2011, compared to 2010, principally due to lower employment costs, such as salaries and employee benefits. The increase in operating margin for the year ended December 31, 2011 was primarily the result of an increase in gross profit margin and a decrease in the ratio of selling, general and administrative expense to revenues.
Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2012 was $123.5 million, an $7.5 million increase compared to operating income of $116.0 million for the year ended December 31, 2011. This increase in operating income, excluding operating income from the 2012 and 2011 acquisitions in this segment, was primarily due to higher gross profit from industrial and commercial construction projects. Additionally, the increase in operating income was partially attributable to companies acquired in 2012 and 2011, which generated approximately $4.2 million of operating income, net of amortization expense attributable to identifiable intangible assets of $0.3 million. This increase was partially offset by a decrease in operating income from hospitality, healthcare and institutional construction projects. Selling, general and administrative expenses increased in 2012 compared to 2011, excluding expenses directly related to the 2012 and 2011 acquisitions in this segment, which added $11.9 million of selling, general and administrative costs, including $0.2 million of amortization expense attributable to identifiable intangible assets, primarily due to an increase in employee related costs, such as salaries and incentive compensation accruals as a result of improved results and a higher provision for doubtful accounts. A decrease in operating margin for the year ended December 31, 2012 was the result of a reduction in gross profit margin, partially offset by a decrease in the ratio of selling, general and administrative expenses to revenues.
Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2011 was $116.0 million, a $16.0 million decrease compared to operating income of $132.0 million for the year ended December 31, 2010. This decrease in operating income, excluding operating income from the 2011 acquisition in this segment, was primarily due to lower gross profit from industrial, commercial and institutional construction projects, as a result of the then economic environment and our selectivity in bidding on contracts. Additionally, 2010 benefited from the favorable resolution of long outstanding legal claim on a healthcare construction project. This decline was partially offset by an increase in operating income from: (a) a company acquired in 2011, which contributed approximately $7.1 million of operating income, net of amortization expense of $3.2 million, (b) gross profit associated with hospitality construction projects, as a result of, among other things, the favorable resolution of uncertainties on current projects and the settlement of a long outstanding construction claim and (c) gross profit from healthcare construction projects. Selling, general and administrative expenses were flat in 2011 compared to 2010, excluding expenses directly related to the 2011 acquisition in this segment, which added $18.5 million of selling, general and administrative costs, including $1.8 million of amortization expense attributable to identifiable intangible assets. A decrease in operating margin for the year ended December 31, 2011 was primarily the result of a reduction in gross profit margin.
Operating income of our United States facilities services segment was $82.3 million and $69.1 million in 2012 and 2011, respectively. The increase in operating income for 2012 compared to 2011 was primarily due to: (a) higher operating income from our industrial services operations, which have seen a continued increase in demand for our services in the refinery market, (b) higher operating income from our mobile mechanical services as a result of improved project performance compared to 2011 and (c) income attributable to the reversal of contingent consideration accruals relating to acquisitions made prior to 2012. The increase in operating income for 2012 was partially offset by lower operating income from our government services operations as a result of several project write-downs, the majority of which were due to difficult job site conditions. Additionally, companies acquired in 2011 negatively impacted operating income by approximately $1.9 million, including $4.8 million of amortization expense attributable to identifiable intangible assets. Selling, general and administrative expenses increased by $5.5 million for 2012 compared to 2011, excluding the increase of $15.0 million of selling, general and administrative expenses associated with companies acquired in 2011, including amortization expense of $4.7 million. This increase was primarily attributable to an increase in employee related costs such as salaries, incentive compensation and employee benefits, due to higher volume and profitability, and higher depreciation and amortization costs. The increases in selling, general and administrative expenses were partially offset by a reduction in the provision for doubtful accounts due to favorable settlements of amounts previously determined to be uncollectible. An increase in operating margin for 2012 was the result of a decrease in the ratio of selling, general and administrative expenses to revenues, which is related to our ability to increase revenues at a greater rate than the increase in overhead costs, partially offset by a reduction in gross profit margin.

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Operating income of our United States facilities services segment was $69.1 million and $59.3 million in 2011 and 2010, respectively. This increase in operating income was primarily due to higher operating income from our industrial services operations, which have seen an increase in demand for our services in the refinery and petrochemical markets. The increase in operating income for 2011 was partially offset by lower operating income from lower margins on project work attributable to several project write-downs, the largest of which was due to difficult job site conditions, and lower margins on projects as a result of the then very competitive market conditions. Additionally in 2010, our energy services operations benefited from the recognition of a pretax gain of $4.5 million from the sale of our interest in a venture, which gain was classified as a component of “Cost of sales” on the Consolidated Statements of Operations. Companies acquired in 2011 and 2010 negatively impacted operating income by approximately $3.8 million, including $9.2 million of amortization expense attributable to identifiable intangible assets. Selling, general and administrative expenses increased by $6.4 million for 2011 compared to 2010, excluding the increase of $16.7 million of selling, general and administrative expenses associated with companies acquired in 2011 and 2010, including amortization expense of $6.0 million. This increase in selling, general and administrative expenses was primarily attributable to an increase in employment costs such as salaries, bonuses and commissions due to higher volume. A decrease in operating margin for 2011 was primarily the result of a reduction in the gross profit margin.
Our United Kingdom construction and facilities services segment operating income was $7.1 million in 2012 compared to $9.2 million in 2011. This decrease in operating income was primarily attributable to an operating loss within our United Kingdom construction business as a result of losses recognized on various hospitality, institutional and commercial construction projects and a decrease of $0.2 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The decrease in operating income was partially offset by an increase in operating income from its facilities services business as a result of better performance on its commercial and institutional portfolio of contracts. A decrease in operating margin for 2012 was brought about by a combination of lower gross profit margins, partially offset by a decrease in selling, general and administrative expenses as a percentage of revenues.
Our United Kingdom construction and facilities services segment operating income was $9.2 million in 2011 compared to $15.7 million in 2010. This decrease in operating income was primarily attributable to an operating loss within our United Kingdom construction business as a result of losses recognized on various institutional and commercial construction projects and a decrease in the gross margin from its facilities services business, which benefited in 2010 from favorable gross profit associated with the receipt of a contract termination fee pursuant to the terms of a contract. The decrease in operating income was partially offset by a reduction in the actuarially determined pension costs associated with our United Kingdom defined pension plan and an increase of $0.6 million relating to the effect of favorable exchange rates for the British pound versus the United States dollar. A decrease in operating margin for 2011 was brought about by a mix of lower gross profit margins, partially offset by a decrease in selling, general and administrative expenses as a percentage of revenues.
In June 2010, we sold our equity interest in a Middle East venture to our partner in the venture. As a result of this sale, we received $7.9 million and recognized a pretax gain in this amount, which is classified as a “Gain on sale of equity investment” on the Consolidated Statements of Operations. The Other international construction and facilities services segment operating loss was approximately $0.1 million for 2010.
Our corporate administration expenses were $63.5 million for 2012 compared to $63.1 million in 2011. This increase in expenses was primarily attributable to higher share-based compensation costs as a result of improved operating performance. This increase was partially offset by lower transaction costs of approximately $4.7 million associated with an acquisition made in 2011 and reduced salaries at headquarters, as a result of the restructuring at our corporate headquarters earlier in 2011. The increase of $7.2 million in 2011 corporate administration expenses, compared to 2010, was primarily attributable to $4.7 million of transaction costs mentioned above and higher incentive compensation costs. This increase was partially offset by reduced employee costs, such as salaries, as a result of the restructuring at our corporate headquarters.
Non-operating items
Interest expense was $7.3 million, $11.3 million and $12.2 million for 2012, 2011 and 2010, respectively. The $4.0 million decrease in interest expense for 2012 compared to 2011 was primarily due to lower borrowing rates under the credit facility that we entered into in late 2011. The $0.9 million decrease in interest expense for 2011 compared to 2010 was primarily due to lower borrowing rates. This decrease in 2011 compared to 2010 was partially offset by an increase in the amortization of debt issuance costs of $0.4 million associated with the acceleration of some of these costs in conjunction with the amendment and restatement of our credit facility in 2011.
Interest income was $1.6 million, $1.8 million and $2.7 million for 2012, 2011 and 2010, respectively. The decreases in interest income were primarily related to lower invested cash balances in 2012 and lower interest rates on those invested cash balances for all periods presented.


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The $7.9 million “Gain on sale of equity investment” in 2010 was attributable to the June 2010 sale of our equity interest in a Middle East venture to our partner in the venture, the operating results of which have been reported in our Other international construction and facilities services segment.
For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interest represents the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.
Our 2012 income tax provision from continuing operations was $95.4 million compared to $76.8 million for 2011 and $53.7 million for 2010. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2012, 2011 and 2010, were 39.4%, 38.7% and (167.2)%, respectively. The actual income tax rate for 2010, before non-cash impairment charges and less amounts attributable to noncontrolling interests, was 37.2%. The increase in the 2012 and 2011 income tax provisions was primarily due to increased income before income taxes, the effect of a change in the United Kingdom statutory tax rate and a change in the mix of earnings among various jurisdictions. The Company recognized a non-cash goodwill impairment charge of approximately $210.6 million during 2010. Approximately $34.0 million of this impairment was deductible for income tax purposes. The remaining $176.6 million of this impairment was not deductible for income tax purposes. This non-deductible portion had a significant impact on the effective income tax rate for 2010.
Discontinued operations
In August 2011, we disposed of our entire interest in our Canadian subsidiary, which represented our Canada construction segment, to a group of investors, including members of the former subsidiary's management team. We received approximately $17.3 million in payment for the shares. In addition, we also received approximately $26.4 million in repayment of indebtedness owed by our Canadian subsidiary to us. Proceeds from the sale of discontinued operation, net of cash sold, totaled $26.6 million. Net income from discontinued operation for the year ended December 31, 2011 was $9.1 million, net of income taxes. Included in the net income from discontinued operation for the year ended December 31, 2011 was a gain on sale of $9.1 million (net of income tax provision of $2.8 million) resulting from the sale of the subsidiary. The gain on sale of discontinued operation includes $15.5 million related to amounts previously reported in the foreign translation adjustment component of accumulated other comprehensive income. Loss from discontinued operation included income tax benefits of $0.4 million and $1.3 million for the years ended December 31, 2011 and 2010, respectively.
Liquidity and Capital Resources
The following table presents net cash provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2012, 2011 and 2010 (in millions):

 
2012
 
2011
 
2010
Net cash provided by operating activities
$
184.4

 
$
149.4

 
$
69.5

Net cash used in investing activities
$
(42.5
)
 
$
(320.5
)
 
$
(32.7
)
Net cash used in financing activities
$
(50.6
)
 
$
(29.3
)
 
$
(48.0
)
Effect of exchange rate changes on cash and cash equivalents
$
2.7

 
$
0.9

 
$
(4.9
)
Our consolidated cash balance increased by approximately $94.0 million from $511.3 million at December 31, 2011 to $605.3 million at December 31, 2012. Net cash provided by operating activities for 2012 was $184.4 million compared to $149.4 million in net cash provided by operating activities for 2011. The increase was primarily due to improved operating results and changes in our working capital. Net cash used in investing activities was $42.5 million for 2012 compared to $320.5 million used in 2011. The decrease was primarily due to a $281.1 million decrease in payments for businesses acquired, partially offset by an $8.3 million increase in amounts paid for the purchase of property, plant and equipment. Net cash used in financing activities for 2012 was $50.6 million compared to $29.3 million used in 2011. The increase was primarily attributable to the payment of dividends.
Our consolidated cash balance decreased by approximately $199.5 million from $710.8 million at December 31, 2010 to $511.3 million at December 31, 2011. Net cash provided by operating activities for 2011 was $149.4 million compared to $69.5 million in net cash provided by operating activities for 2010. The increase was primarily due to improved operating results and changes in our working capital. Additionally in 2010, we made a $25.9 million one-time supplemental contribution to our United Kingdom defined benefit pension plan. Net cash used in investing activities was $320.5 million for 2011 compared to $32.7 million used in 2010. This increase was primarily due to a $262.5 million increase in payments for businesses acquired, a $10.2 million increase in amounts paid for the purchase of property, plant and equipment, and a $17.6 million increase in short-term investments. Net cash used in financing activities for 2011 was $29.3 million compared to $48.0 million used in 2010. This decrease was primarily

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attributable to the repayment of a term loan and debt issuance costs in 2010, partially offset by the $27.5 million used to repurchase our common stock in 2011. The non-cash impairment charges in 2011 and 2010 did not have any impact on our compliance with our debt covenants or on our cash flows.
The following is a summary of material contractual obligations and other commercial commitments (in millions):
 
Payments Due by Period
Contractual Obligations 
Total
 
Less
than
1 year 
 
1-3
years
 
3-5
years
 
After
5 years
Revolving Credit Facility (including interest at 1.71%) (1)
$
160.1

 
$
2.6

 
$
5.2

 
$
152.3

 
$

Capital lease obligations
6.4

 
2.0

 
3.4

 
1.0

 

Operating leases
196.0

 
52.9

 
80.0

 
48.8

 
14.3

Open purchase obligations (2)
856.8

 
720.0

 
122.6

 
14.2

 

Other long-term obligations, including current portion (3)
272.1

 
32.7

 
228.0

 
11.4

 

Liabilities related to uncertain income tax positions
13.9

 
5.5

 
8.1

 
0.3

 

Total Contractual Obligations
$
1,505.3

 
$
815.7

 
$
447.3

 
$
228.0

 
$
14.3

 
 
 
 
 
 
 
 
 
 
 
 
Amount of Commitment Expirations by Period 
Other Commercial Commitments
Total
Amounts
Committed 
 
Less
than
1 year
 
1-3
years 
 
4-5
years
 
After
5 years
Letters of credit
$
84.2

 
$
82.1

 
$
2.1

 
$

 
$

 
 
 
 
 
 
 
 
 
 

_________
 
(1)
We classify these borrowings as long-term on our consolidated balance sheets because of our intent to repay the amounts on a long-term basis. These amounts are outstanding at our discretion and are not payable until the 2011 Revolving Credit Facility expires in November 2016. As of December 31, 2012, there were borrowings of $150.0 million outstanding under the 2011 Revolving Credit Facility.
(2)
Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in EMCOR's consolidated balance sheets and should not impact future cash flows, as amounts should be recovered through customer billings.
(3)
Represents primarily insurance related liabilities and liabilities for deferred income taxes, incentive compensation and earn-out arrangements, classified as other long-term liabilities in the consolidated balance sheets. Cash payments for insurance related liabilities may be payable beyond three years, but it is not practical to estimate these payments. We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations. In determining the minimum required funding, we utilize current actuarial assumptions and exchange rates to forecast estimates of amounts that may be payable for up to five years in the future. In our judgment, minimum funding estimates beyond a five year time horizon cannot be reliably estimated, and therefore, have not been included in the table.
Until November 21, 2011, we had a revolving credit agreement (the “2010 Revolving Credit Facility”) as amended, which provided for a credit facility of $550.0 million. The 2010 Revolving Credit Facility was effective February 4, 2010 and replaced an earlier revolving credit facility (the “2005 Revolving Credit Facility”) of $375.0 million. Effective November 21, 2011, we replaced the 2010 Revolving Credit Facility that was due to expire February 4, 2013 with an amended and restated $750.0 million revolving credit facility (the “2011 Revolving Credit Facility”). The 2011 Revolving Credit Facility expires in November 2016 and permits us to increase our borrowing to $900.0 million if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $250.0 million of the borrowing capacity under the 2011 Revolving Credit Facility to letters of credit, which amount compares to $175.0 million under the 2010 Revolving Credit Facility and $125.0 million under the 2005 Revolving Credit Facility. The 2011 Revolving Credit Facility is guaranteed by certain of our direct and indirect subsidiaries and is secured by substantially all of our assets and most of the assets of most of our subsidiaries. The 2011 Revolving Credit Facility contains various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. A commitment fee is payable on the average daily unused amount of the 2011 Revolving Credit Facility, which ranges from 0.25% to 0.35%, based on certain financial tests. The fee in effect on December 31, 2012 was 0.25% of the unused amount as of such date. Borrowings under the 2011 Revolving Credit Facility bear interest at (1) a rate which is the prime commercial

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lending rate announced by Bank of Montreal from time to time (3.25% at December 31, 2012) plus 0.50% to 1.00%, based on certain financial tests or (2) United States dollar LIBOR (0.21% at December 31, 2012) plus 1.50% to 2.00%, based on certain financial tests. The interest rate in effect at December 31, 2012 was 1.71%. Letter of credit fees issued under this facility range from 1.50% to 2.00% of the respective face amounts of the letters of credit issued and are charged based on certain financial tests. We capitalized approximately $4.2 million of debt issuance costs associated with the 2011 Revolving Credit Facility. This amount is being amortized over the life of the facility and is included as part of interest expense. In connection with the termination of the 2010 Revolving Credit Facility, $0.4 million attributable to the acceleration of expense for debt issuance costs in connection with the 2010 Revolving Credit Facility was recorded as part of interest expense. As of December 31, 2012 and December 31, 2011, we had approximately $84.0 million and $82.9 million of letters of credit outstanding, respectively. We had borrowings of $150.0 million outstanding under the 2010 Revolving Credit Facility at December 31, 2010, and we have borrowings of $150.0 million outstanding under the 2011 Revolving Credit Facility at December 31, 2012, which may remain outstanding at our discretion until the 2011 Revolving Credit Facility expires. Based on the $150.0 million borrowings outstanding as of December 31, 2012 on the 2011 Revolving Credit Facility, if overall interest rates were to increase by 25 basis points, interest expense, net of income taxes, would increase by approximately $0.2 million in the next twelve months. Conversely, if overall interest rates were to decrease by 25 basis points, interest expense, net of income taxes, would decrease by approximately $0.2 million in the next twelve months.
On September 19, 2007, we entered into an agreement providing for a $300.0 million term loan (“Term Loan”). The proceeds of the Term Loan were used to pay a portion of the consideration for an acquisition and costs and expenses incident thereto. In connection with the closing of the 2010 Revolving Credit Facility, we borrowed $150.0 million under that facility and used the proceeds along with cash on hand to prepay on February 4, 2010 all indebtedness outstanding under the Term Loan, which then terminated. In connection with this prepayment, $0.6 million attributable to the acceleration of expense for debt issuance costs associated with the Term Loan was recorded as part of interest expense.
On January 27, 2009, we entered into an interest rate swap, which hedged our interest rate risk associated with the Term Loan. We de-designated $45.5 million of the interest rate swap on December 31, 2009 as it was determined that it was no longer probable that the future estimated cash flows were going to occur as originally estimated. Accordingly, we discontinued the application of hedge accounting associated for this portion of the interest rate swap, and $0.2 million was expensed as part of interest expense, and removed from Accumulated other comprehensive loss, for the year ended December 31, 2010. The interest rate swap matured in October 2010.
One of our subsidiaries had a 40% interest in a venture that designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in air conditioning commercial properties. The other venture partner, Baltimore Gas and Electric (a subsidiary of Constellation Energy), had a 60% interest in the venture. As a result of this, we were required to make an additional capital contribution of $8.0 million to the venture. In January 2010, this venture, including our investment, was sold to a third party. As a result of this sale, we received an aggregate amount of $17.7 million for our 40% interest and recognized a pretax gain of $4.5 million, which gain is included in our United States facilities services segment and classified as a component of “Cost of sales” on the Consolidated Statements of Operations.
On September 26, 2011, our Board of Directors authorized the Company to repurchase up to $100.0 million of its outstanding common stock. During 2012, we repurchased approximately 0.9 million shares of our common stock for approximately $23.9 million. As of December 31, 2012, we repurchased 2.1 million shares of our common stock for approximately $51.4 million, and there remained authorization for us to repurchase approximately $48.6 million of our shares. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be suspended, recommenced or discontinued at any time or from time to time without prior notice. Acquisitions under our repurchase program may be made from time to time as permitted by securities laws and other legal requirements, including provisions in our revolving credit facility placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.
The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of December 31, 2012, based on our percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $0.9 billion. The Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond.
In recent years, there has been a reduction in the aggregate Surety Bond issuance capacity of Surety Companies due to the economy and the regulatory environment. Consequently, the availability of Surety Bonds has become more limited and the terms upon which Surety Bonds are available have become more restrictive. We continually monitor our available limits of Surety Bonds

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and discuss with our current and other Surety Bond providers the amount of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond issued on our behalf. However, if we experience changes in our bonding relationships or if there are further changes in the surety industry, we may seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds such as letters of credit or guarantees by EMCOR Group, Inc., by seeking to convince customers to forego the requirement for Surety Bonds, by increasing our activities in business segments that rarely require Surety Bonds such as the facilities services segment, and/or by refraining from bidding for certain projects that require Surety Bonds. There can be no assurance that we will be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds to replace projects requiring Surety Bonds that we may decide not to pursue. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flows.
From time to time in the ordinary course of business, we guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.
Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain our 2011 Revolving Credit Facility, that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient or to enable us to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash on short notice or for any other reason. However, negative macroeconomic trends may have an adverse effect on liquidity. In addition to managing borrowings, our focus on the facilities services market is intended to provide an additional buffer against economic downturns inasmuch as a part of our facilities services business is characterized by annual and multi-year contracts that provide a more predictable stream of cash flow than the construction business. Short-term liquidity is also impacted by the type and length of construction contracts in place. During past economic downturns, there were typically fewer small discretionary projects from the private sector, and companies like us aggressively bid larger long-term infrastructure and public sector contracts. Performance of long duration contracts typically requires greater amounts of working capital. While we strive to maintain a net over-billed position with our customers, there can be no assurance that a net over-billed position can be maintained. Our net over-billings, defined as the balance sheet accounts “Billings in excess of costs and estimated earnings on uncompleted contracts” less “Cost and estimated earnings in excess of billings on uncompleted contracts”, were $290.5 million and $326.9 million as of December 31, 2012 and 2011, respectively.
Long-term liquidity requirements can be expected to be met through cash generated from operating activities and our 2011 Revolving Credit Facility. Based upon our current credit ratings and financial position, we can reasonably expect to be able to incur long-term debt to fund acquisitions. Over the long term, our primary revenue risk factor continues to be the level of demand for non- residential construction services, which is influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting long-term liquidity requirements.
We believe that current cash balances and our borrowing capacity available under the 2011 Revolving Credit Facility or other forms of financing available to us through borrowings, combined with cash expected to be generated from operations, will be sufficient to provide our short-term and foreseeable long-term liquidity needs and meet our expected capital expenditure requirements. However, we are a party to lawsuits and other proceedings in which other parties seek to recover from us amounts ranging from a few thousand dollars to over $10.0 million. We do not believe that any such matters will have a materially adverse effect on our financial position, results of operations or liquidity.
On September 26, 2011, we announced plans to pay a regular quarterly dividend of $0.05 per share. We have paid quarterly dividends since October 25, 2011. On December 7, 2012, our Board of Directors declared a special dividend of $0.25 per share, payable in December 2012, and announced its intention to increase the regular quarterly dividend to $0.06 per share. In addition, at the December 7, 2012 meeting of our Board of Directors, the regular quarterly dividend that would have been paid in January 2013 was declared, its amount increased to $0.06 per share and its payment date accelerated to December 28, 2012. We expect that such quarterly dividends will be paid in the foreseeable future. Prior to October 25, 2011, no cash dividends had been paid on the Company's common stock. Our revolving credit facility limits the amount of dividends we can pay on our common stock. However, we do not believe that the terms of the credit facility currently materially limit our ability to pay a quarterly dividend of $0.06 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations.
Certain Insurance Matters
As of December 31, 2012 and 2011, we utilized approximately $84.0 million and $82.9 million, respectively, of letters of credit obtained under our 2011 Revolving Credit Facility and our 2010 Revolving Credit Facility, respectively, as collateral for insurance obligations.

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New Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of such standards will have. As of the filing of this Annual Report on Form 10-K, there were no new accounting standards that were projected to have a material impact on our consolidated financial position, results of operations or liquidity. See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding new accounting standards recently issued and/or adopted by us.
Application of Critical Accounting Policies
Our consolidated financial statements are based on the application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are described in Note 2-Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. We believe that some of the more critical judgment areas in the application of accounting policies that affect our financial position 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) goodwill and identifiable intangible assets.
Revenue Recognition from Long-term Construction Contracts and Services Contracts
We believe our most critical accounting policy is revenue recognition from long-term construction contracts for which we use the percentage-of-completion method of accounting. Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with Accounting Standards Codification (“ASC”) Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”, and, accordingly, is the method used for revenue recognition within our industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts in our 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 we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value and take into account factors that may affect our ability to bill unbilled revenues and collect amounts after billing. The profit associated with claim amounts is not recognized until the claim has been settled and payment has been received. As of December 31, 2012 and 2011, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $13.8 million and $14.5 million, respectively, and claims of approximately $0.7 million and $1.6 million, respectively. In addition, accounts receivable as of December 31, 2012 and 2011 included claims of approximately $0.8 million and $0.2 million, respectively. In addition, there are contractually billed amounts and retention related to such contracts of approximately $41.0 million and $40.4 million as of December 31, 2012 and 2011, respectively. Generally, contractually billed amounts will not be paid by the customer to us 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, we recognize revenues from the performance of facilities services for maintenance, repair and retrofit work consistent with the performance of services, which are generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers are recognized when the product is shipped and all other revenue recognition criteria have been met. Costs related to this work are included in inventory until the product is shipped. Provisions for the entirety of estimated losses on contracts are made in the period in which such losses are determined.
Accounts Receivable
We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of past due balances. The provision for (recovery of) doubtful accounts during 2012, 2011 and 2010 amounted to approximately $1.2 million, $2.2 million and $(5.1) million, respectively. At December 31,

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2012 and 2011, our accounts receivable of $1,222.0 million and $1,187.8 million, respectively, included allowances for doubtful accounts of $11.5 million and $16.7 million, respectively. The decrease in our allowance for doubtful accounts was due to the recovery of amounts previously determined to be uncollectible and the write-off of accounts receivable against the allowance for doubtful accounts. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to deterioration of its financial position or its credit ratings. The allowance for doubtful accounts requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis as additional information is received.
Insurance Liabilities
We have loss payment deductibles for certain workers' compensation, automobile liability, general liability and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related health care claims. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences and effectiveness of safety and risk management programs. Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known.
Income Taxes
We had net deferred income tax liabilities at December 31, 2012 of $35.6 million and net deferred income tax liabilities of $29.0 million at December 31, 2011, primarily resulting from differences between the carrying value and income tax basis of certain identifiable intangible assets and depreciable fixed assets, which will impact our 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 income tax asset will not be realized. As of December 31, 2012 and 2011, the total valuation allowance on gross deferred income tax assets was approximately $2.5 million and $3.4 million, respectively.
Goodwill and Identifiable Intangible Assets
As of December 31, 2012, we had $566.6 million and $343.7 million, respectively, of goodwill and net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, non-competition agreements and trade names), primarily arising out of the acquisition of companies. As of December 31, 2011, goodwill and net identifiable intangible assets were $566.8 million and $370.4 million, respectively. 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, as well as macroeconomic conditions. ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, but instead must be tested at least annually for impairment (which we test each October 1, absent any impairment indicators), and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.
We test for impairment of goodwill at the reporting unit level utilizing the two-step process as prescribed by ASC 350. The first step of this test compares the fair value of the reporting unit, determined based upon discounted estimated future cash flows, to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no further work is required and no impairment loss is recognized. If the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is potentially impaired and step two of the goodwill impairment test would need to be performed to measure the amount of an impairment loss, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of its goodwill, an impairment loss in the amount of the excess is recognized and charged to operations. The weighted average cost of capital used in our annual testing for impairment as of October 1, 2012 was 12.8% and 12.1% for our domestic construction segments and our United States facilities services segment, respectively. The perpetual growth rate used for our annual testing was 2.7% for our domestic segments. For the years ended December 31, 2012 and 2011, no impairment of our goodwill was recognized.
During the third quarter of 2010 and prior to our October 1, 2010 annual impairment test, we concluded that impairment indicators may have existed within the United States facilities services segment based upon the then year to date results and recent forecasts. As a result of that conclusion, we performed a step one test as prescribed under ASC 350 for that particular reporting unit which concluded that impairment indicators existed within that reporting unit due to significant declines in year to date revenues and operating margins which caused us to revise our expectations for the strength of a near term recovery in our financial models for businesses within that reporting unit. Specifically, we reduced our net sales growth rates and operating margins within our discounted

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cash flow model, as well as our terminal value growth rates. In addition, we estimated a higher participant risk adjusted weighted average cost of capital. Therefore, the required second step of the assessment for the reporting unit was performed in which the implied fair value of that reporting unit's goodwill was compared to the book value of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, that is, the estimated fair value of the reporting unit is allocated to all of those assets and liabilities of that unit (including both recognized and unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of that reporting unit's goodwill, an impairment loss is recognized in the amount of the excess and is charged to operations. We determined the fair value of the reporting unit using discounted estimated future cash flows. The weighted average cost of capital used in testing for impairment at the interim date was 12.5% with a perpetual growth rate of 2.8% for our United States facilities services segment. As a result of our interim impairment assessment in 2010, we recognized a $210.6 million non-cash goodwill impairment charge in the third quarter of 2010. Additionally, we performed our annual impairment test as of October 1, 2010, and no additional impairment of our goodwill was recognized for any of our reporting segments in the fourth quarter of 2010. The weighted average cost of capital used in our 2010 annual testing for impairment was 13.2% and 12.2% for our domestic construction segments and our United States facilities services segment, respectively. The perpetual growth rate used for our 2010 annual testing was 3.0% for our domestic construction segments and 2.8% for our United States facilities services segment, respectively.
As of December 31, 2012, we had $566.6 million of goodwill on our balance sheet and, of this amount, approximately 63.8% relates to our United States facilities services segment, approximately 35.5% relates to our United States mechanical construction and facilities services segment and approximately 0.7% relates to our United States electrical construction and facilities services segment. As of the date of our latest impairment test, the fair values of our United States facilities services, United States mechanical construction and facilities services and United States electrical construction and facilities services segments exceeded their carrying values by approximately $109.2 million, $376.5 million and $306.9 million, respectively.
We also test for the impairment of trade names that are not subject to amortization by calculating the fair value using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. The annual impairment review of our trade names for the year ended December 31, 2011 resulted in a $1.0 million non-cash impairment charge as a result of a change in the fair value of trade names associated with certain prior acquisitions reported within our United States facilities services segment. This impairment primarily resulted from both lower forecasted revenues from, and operating margins at, specific companies within our United States facilities services segment. During the second and third quarters of 2010, we recorded non-cash impairment charges of $35.5 million associated with the fair value of trade names from prior acquisitions reported within our United States facilities services segment. For the year ended December 31, 2012, no impairment of our trade names was recognized.
In addition, we review for the impairment of other identifiable intangible assets that are being amortized whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their future discounted cash flows. Based on facts and circumstances that indicated an impairment may exist, we performed an impairment review of our other identifiable intangible assets for the year ended December 31, 2011. As a result of this review, we recognized a $2.8 million non-cash impairment charge as a result of a change in the fair value of customer relationships associated with certain prior acquisitions reported within our United States facilities services segment for the year ended December 31, 2011. For the years ended December 31, 2012 and 2010, no impairment of our other identifiable intangible assets was recognized.
We have certain businesses, particularly within our United States facilities services segment, whose results are highly impacted by weather. In addition, certain of these businesses are dependent upon a return to historical snowfall patterns during the winter months to achieve such businesses' expected performance. Future performance of this segment, along with a continued evaluation of the conditions of its end user markets, will be important to ongoing impairment assessments. Should its actual results suffer a decline or expected future results be revised downward, the risk of goodwill impairment or impairment of other identifiable intangible assets would increase.
Our development of the present value of future cash flow projections used in impairment testing is based upon assumptions and estimates by management from a review of our operating results, business plans, anticipated growth rates and margins and weighted average cost of capital, among others. Much of the information used in assessing fair value is outside the control of management, such as interest rates, and these assumptions and estimates can change in future periods. There can be no assurances that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding business plans or anticipated growth rates and/or margins are

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not achieved, or there is a rise in interest rates, we may be required, as we did in 2011 and 2010 to record further goodwill and/or identifiable intangible asset impairment charges in future periods.
During 2011, we recognized a $3.8 million non-cash impairment charge as discussed above. Of this amount, $2.8 million related to customer relationships and $1.0 million related to trade names. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such a charge would be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used any derivative financial instruments, except as discussed below, during the years ended December 31, 2012 and 2011, including trading or speculating on changes in commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings under the 2011 Revolving Credit Facility. Borrowings under the 2011 Revolving Credit Facility bear interest at variable rates. For further information on borrowing rates and interest rate sensitivity, refer to the Liquidity and Capital Resources discussion in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As of December 31, 2012, there were borrowings of $150.0 million outstanding under the 2011 Revolving Credit Facility. Based on the $150.0 million borrowings outstanding on the 2011 Revolving Credit Facility, if overall interest rates were to increase by 25 basis points, interest expense, net of income taxes, would increase by approximately $0.2 million in the next twelve months. Conversely, if overall interest rates were to decrease by 25 basis points, interest expense, net of income taxes, would decrease by approximately $0.2 million in the next twelve months.
We are also exposed to construction market risk and its potential related impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if our customers' ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, we believe we take appropriate action to manage market and other risks, but there is no assurance that we will be able to reasonably identify all risks with respect to collectibility of these assets. See also the previous discussions of Revenue Recognition from Long-term Construction Contracts and Services Contracts and Accounts Receivable under Application of Critical Accounting Policies in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at year end. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), a component of equity, in our Consolidated Balance Sheets. We believe the exposure to the effects that fluctuating foreign currencies may have on our consolidated results of operations is limited because the foreign operations primarily invoice customers and collect obligations in their respective local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in their same local currencies.
In addition, we are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in both our construction and facilities services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 8,500 vehicles. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to projects in progress.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and share data)
 
 
December 31,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
605,303

 
$
511,322

Accounts receivable, less allowance of doubtful accounts of $11,472 and $16,685, respectively
1,221,956

 
1,187,832

Costs and estimated earnings in excess of billings on uncompleted contracts
93,061

 
114,836

Inventories
50,512

 
44,914

Prepaid expenses and other
73,621

 
77,749

Total current assets
2,044,453

 
1,936,653

Investments, notes and other long-term receivables
4,959

 
5,618

Property, plant and equipment, net
116,631

 
101,663

Goodwill
566,588

 
566,805

Identifiable intangible assets, net
343,748

 
370,373

Other assets
30,691

 
32,964

Total assets
$
3,107,070

 
$
3,014,076

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Borrowings under revolving credit facility
$

 
$

Current maturities of long-term debt and capital lease obligations
1,787

 
1,522

Accounts payable
490,621

 
477,801

Billings in excess of costs and estimated earnings on uncompleted contracts
383,527

 
441,695

Accrued payroll and benefits
224,555

 
204,785

Other accrued expenses and liabilities
194,029

 
205,110

Total current liabilities
1,294,519

 
1,330,913

Borrowings under revolving credit facility
150,000

 
150,000

Long-term debt and capital lease obligations
4,112

 
3,335

Other long-term obligations
301,260

 
284,697

Total liabilities
1,749,891

 
1,768,945

Equity:
 
 
 
EMCOR Group, Inc. stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 68,010,419 and 68,125,437 shares issued, respectively
680

 
681

Capital surplus
416,104

 
417,136

Accumulated other comprehensive loss
(81,040
)
 
(78,649
)
Retained earnings
1,022,239

 
910,042

Treasury stock, at cost 1,046,257 and 1,681,037 shares, respectively
(11,903
)
 
(14,476
)
Total EMCOR Group, Inc. stockholders’ equity
1,346,080

 
1,234,734

Noncontrolling interests
11,099

 
10,397

Total equity
1,357,179

 
1,245,131

Total liabilities and equity
$
3,107,070

 
$
3,014,076

The accompanying notes to consolidated financial statements are an integral part of these statements.

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EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
(In thousands, except per share data)

 
2012
 
2011
 
2010
Revenues
$
6,346,679

 
$
5,613,459

 
$
4,851,953

Cost of sales
5,540,325

 
4,879,510

 
4,158,430

Gross profit
806,354

 
733,949

 
693,523

Selling, general and administrative expenses
556,242

 
518,121

 
472,135

Restructuring expenses
145

 
1,240

 
1,835

Impairment loss on goodwill and identifiable intangible assets

 
3,795

 
246,081

Operating income (loss)
249,967

 
210,793

 
(26,528
)
Interest expense
(7,275
)
 
(11,261
)
 
(12,153
)
Interest income
1,556

 
1,820

 
2,657

Gain on sale of equity investment

 

 
7,900

Income (loss) from continuing operations before income taxes
244,248

 
201,352

 
(28,124
)
Income tax provision
95,362

 
76,764

 
53,711

Income (loss) from continuing operations
148,886

 
124,588

 
(81,835
)
Income (loss) from discontinued operation, net of income taxes

 
9,083

 
(849
)
Net income (loss) including noncontrolling interests
148,886

 
133,671

 
(82,684
)
Less: Net income attributable to noncontrolling interests
(2,302
)
 
(2,845
)
 
(4,007
)
Net income (loss) attributable to EMCOR Group, Inc.
$
146,584

 
$
130,826

 
$
(86,691
)
Basic earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
2.20

 
$
1.82

 
$
(1.30
)
From discontinued operation

 
0.14

 
(0.01
)
Net income (loss) attributable to EMCOR Group, Inc. common stockholders
$
2.20

 
$
1.96

 
$
(1.31
)
Diluted earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
2.16

 
$
1.78

 
$
(1.30
)
From discontinued operation

 
0.13

 
(0.01
)
Net income (loss) attributable to EMCOR Group, Inc. common stockholders
$
2.16

 
$
1.91

 
$
(1.31
)
Dividends declared per common share
$
0.51

 
$
0.05

 
$

The accompanying notes to consolidated financial statements are an integral part of these statements.



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EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For The Years Ended December 31,
(In thousands)

 
2012
 
2011
 
2010
Net income (loss) including noncontrolling interests
$
148,886

 
$
133,671

 
$
(82,684
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments (1)
120

 
(14,182
)
 
3,196

Changes in post retirement plans (2)
(2,511
)
 
(22,056
)
 
6,501

Deferred gain on cash flow hedge (3)

 

 
591

Other comprehensive (loss) income
(2,391
)
 
(36,238
)
 
10,288

Comprehensive income (loss)
146,495

 
97,433

 
(72,396
)
Less: Comprehensive income attributable to the noncontrolling interest
(2,302
)
 
(2,845
)
 
(4,007
)
Comprehensive income (loss) attributable to EMCOR Group, Inc.
$
144,193

 
$
94,588

 
$
(76,403
)
_________________
(1)
Includes a $15.5 million foreign currency translation reversal relating to the disposition of our Canadian subsidiary, which was included as part of the gain on sale of discontinued operation, for the year ended December 31, 2011.
(2)
Net of tax of $0.8 million, $7.6 million and $2.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(3)
Net of tax of $0.4 million for the year ended December 31, 2010.
The accompanying notes to consolidated financial statements are an integral part of these statements.



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EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
(In thousands)
 
2012
 
2011
 
2010
Cash flows - operating activities:
 
 
 
 
 
Net income (loss) including noncontrolling interests
$
148,886

 
$
133,671

 
$
(82,684
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
31,204

 
27,426

 
25,498

Amortization of identifiable intangible assets
29,762

 
26,350

 
16,417

Provision for (recovery of) doubtful accounts
1,163

 
2,238

 
(5,126
)
Deferred income taxes
6,626

 
8,826

 
(15,390
)
Gain on sale of discontinued operation, net of income taxes

 
(9,127
)
 

Gain on sale of equity investments

 

 
(12,409
)
Loss on sale of property, plant and equipment
272

 
592

 
127

Excess tax benefits from share-based compensation
(7,083
)
 
(3,619
)
 
(1,474
)
Equity income from unconsolidated entities
(930
)
 
(1,301
)
 
(843
)
Non-cash expense for amortization of debt issuance costs
1,212

 
2,438

 
2,703

Non-cash income from contingent consideration arrangements
(6,381
)
 
(2,798
)
 
(394
)
Non-cash expense for impairment of goodwill and identifiable intangible assets

 
3,795

 
246,081

Non-cash share-based compensation expense
6,766

 
5,447

 
5,742

Supplemental defined benefit plan contribution

 

 
(25,916
)
Distributions from unconsolidated entities
887

 
606

 
958

Changes in operating assets and liabilities, excluding the effect of businesses acquired:
 
 
 
 
 
Increase in accounts receivable
(12,852
)
 
(75,529
)
 
(8,342
)
(Increase) decrease in inventories
(5,597
)
 
(10,549
)
 
2,118

Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts
24,126

 
(33,816
)
 
8,757

Increase in accounts payable
5,425

 
34,727

 
16,992

Decrease in billings in excess of costs and estimated earnings on uncompleted contracts
(62,533
)
 
(16,278
)
 
(73,714
)
Increase (decrease) in accrued payroll and benefits and other accrued expenses and liabilities
24,345

 
49,634

 
(42,639
)
Changes in other assets and liabilities, net
(890
)
 
6,692

 
13,065

Net cash provided by operating activities
184,408

 
149,425

 
69,527

Cash flows - investing activities:
 
 
 
 
 
Payments for acquisitions of businesses, net of cash acquired, and related contingent consideration arrangement
(20,613
)
 
(301,306
)
 
(39,902
)
Proceeds from sale of discontinued operation, net of cash sold

 
26,627

 

Proceeds from sale of equity investments

 

 
25,570

Proceeds from sale of property, plant and equipment
3,070

 
1,409

 
1,032

Purchase of property, plant and equipment
(37,875
)
 
(29,581
)
 
(19,359
)
Investments in and advances to unconsolidated entities and joint ventures

 
(28
)
 
(65
)
Purchase of short-term investments
(22,433
)
 
(17,639
)
 

Maturity of short-term investments
35,305

 

 

Net cash used in investing activities
(42,546
)
 
(320,518
)
 
(32,724
)
Cash flows - financing activities:
 
 
 
 
 
Proceeds from revolving credit facility

 

 
153,000

Repayments of revolving credit facility

 

 
(3,000
)
Net repayments of long-term debt and debt issuance costs
(40
)
 
(4,147
)
 
(200,828
)
Repayments of capital lease obligations
(1,978
)
 
(1,095
)
 
(430
)
Dividends paid to stockholders
(34,073
)
 
(3,336
)
 

Repurchase of common stock
(23,912
)
 
(27,523
)
 

Proceeds from exercise of stock options
8,786

 
5,608

 
2,818

Payments to satisfy minimum tax withholding
(1,654
)
 
(1,256
)
 
(875
)
Issuance of common stock under employee stock purchase plan
2,549

 
2,310

 
2,305

Payments for contingent consideration arrangements
(5,748
)
 
(1,118
)
 

Distributions to noncontrolling interests
(1,600
)
 
(2,350
)
 
(2,500
)
Excess tax benefits from share-based compensation
7,083

 
3,619

 
1,474

Net cash used in financing activities
(50,587
)
 
(29,288
)
 
(48,036
)
Effect of exchange rate changes on cash and cash equivalents
2,706

 
867

 
(4,906
)
Increase (decrease) in cash and cash equivalents
93,981

 
(199,514
)
 
(16,139
)
Cash and cash equivalents at beginning of year
511,322

 
710,836

 
726,975

Cash and cash equivalents at end of period
$
605,303

 
$
511,322

 
$
710,836

The accompanying notes to consolidated financial statements are an integral part of these statements.

37

Table of Contents

EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
For The Years Ended December 31,
(In thousands)
 
 
 
EMCOR Group, Inc. Stockholders
 
 
 
Total
 
Common
stock
 
Capital
surplus
 
Accumulated other comprehensive (loss) income (1)
 
Retained
earnings
 
Treasury
stock
 
Noncontrolling
interests
Balance, December 31, 2009
$
1,226,466

 
$
687

 
$
416,267

 
$
(52,699
)
 
$
869,267

 
$
(15,451
)
 
$
8,395

Net (loss) income including noncontrolling interests
(82,684
)
 

 

 

 
(86,691
)
 

 
4,007

Other comprehensive income
10,288

 

 

 
10,288

 

 

 

Treasury stock, at cost (2)
(875
)
 

 

 

 

 
(875
)
 

Common stock issued under share-based compensation plans (3)
4,103

 
3

 
3,299

 

 

 
801

 

Common stock issued under employee stock purchase plan
2,305

 

 
2,305

 

 

 

 

Distributions to noncontrolling interests
(2,500
)
 

 

 

 

 

 
(2,500
)
Share-based compensation expense
5,742

 

 
5,742

 

 

 

 

Balance, December 31, 2010
$
1,162,845

 
$
690

 
$
427,613

 
$
(42,411
)
 
$
782,576

 
$
(15,525
)
 
$
9,902

Net income including noncontrolling interests
133,671

 

 

 

 
130,826

 

 
2,845

Other comprehensive loss
(36,238
)
 

 

 
(36,238
)
 

 

 

Treasury stock, at cost (2)
(1,256
)
 

 

 

 

 
(1,256
)
 

Common stock issued under share-based compensation plans (3)
11,561

 
3

 
9,253

 

 

 
2,305

 

Common stock issued under employee stock purchase plan
2,310

 

 
2,310

 

 

 

 

Common stock dividends
(3,336
)
 
 
 
24

 
 
 
(3,360
)
 
 
 
 
Repurchase of common stock
(27,523
)
 
(12
)
 
(27,511
)
 

 

 

 

Distributions to noncontrolling interests