UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
| ¨ | 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 No.) | |
| 301 Merritt Seven | 06851-1092 | |
| Norwalk, Connecticut (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 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. ¨
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 in 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 $1,576,000,000 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, 2012: 66,575,882 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2012 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, 2011, June 30, 2011 and September 30, 2011 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
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.
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 2011, we had revenues of approximately $5.6 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; |
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| • | Mobile mechanical maintenance and services; |
| • | Floor care and janitorial services; |
| • | Landscaping, lot sweeping and snow removal; |
| • | Facilities management; |
| • | 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, 2011, we had over 25,000 employees.
Our revenues are derived from many different customers in numerous industries, which have operations in several different geographical areas. Of our 2011 revenues, approximately 91% were generated in the United States and approximately 9% were generated in the United Kingdom. In 2011, approximately 36% of revenues were derived from new construction projects, 20% 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 and operating income of each of our segments with respect to each of the last three years, total assets of each of our segments with respect to each of the last two years, and our revenues and assets attributable to the United States, the United Kingdom and all other foreign countries, see Note 19—Segment Information of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.
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 in all types of projects. For these reasons, buildings need extensive electrical distribution systems. In addition, advanced voice and data communication systems require more sophisticated power supplies and extensive low-voltage and fiber-optic communications cabling. Moreover, the need for 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
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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 52% of our 2011 revenues, of which revenues of approximately 65% were related to new construction and approximately 35% were related to renovation and retrofit projects. Our United Kingdom electrical and mechanical construction services operations accounted for approximately 4% of our 2011 revenues, of which revenues of approximately 54% were related to new construction and approximately 46% 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 31% of our construction services revenues in 2011.
Our projects of less than $10.0 million accounted for approximately 69% of our 2011 electrical and mechanical construction services revenues. 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 2011 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 2011 facilities services revenues, approximately 88% were generated in the United States and approximately 12% were generated in the United Kingdom.
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Our facilities services operations have built on 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; 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 own 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 the federal government, utilities, independent power producers, refineries, pulp and paper producers and major 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 or regions of the country.
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) the oversight of logistical processes; (c) servicing, upgrade and retrofit of HVAC, electrical, plumbing and industrial piping and sheet metal systems in existing facilities; (d) interior and exterior services, including floor care and janitorial services, landscaping, lot sweeping and snow removal; (e) diagnostic and solution engineering for building systems and their components; (f) maintenance and support services to manufacturers and power producers; and (g) 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 World Bank, the National Affairs Training Center, and the Department of Health and Human Services. We also provide facilities services to a number of military bases, including base operations support services to the Navy Capital Region, 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 subject to renegotiation of terms and prices by the government, termination by the government prior to the expiration of the term, and non-renewal.
As part of our facilities services operations, we also provide aftermarket maintenance and repair services for highly engineered shell and tube heat exchangers for refineries and the petrochemical industry both at 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.
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 around the world. However, there are a few United States based 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. A majority of our revenues are derived from projects requiring
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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 Johnson Controls, Inc., Fluor Corp., 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.
At December 31, 2011, we employed over 25,000 people, approximately 61% of whom are represented by various unions pursuant to more than 400 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.
We had backlog as of December 31, 2011 of approximately $3.3 billion, compared with backlog of approximately $3.1 billion as of December 31, 2010, excluding backlog from our Canadian subsidiary, which we sold in August 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. However, 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.
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.
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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.
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 condition and results of operations 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 lead 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 downturn in the industries we service, as well as in the economy in general. As the general level of economic activity has slowed, 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 downturn has adversely affected our ability to continue to grow and has resulted in a reduction in our revenues and profitability, 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 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. The 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 condition.
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 affected by current government budget deficits. Significant budget deficits faced by the federal, state and local governments as a result of declining tax and other revenues may result in their curtailment of future spending on
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government infrastructure projects and/or expenditures, from which expenditures some of our businesses derive a significant portion of revenue. In addition, recent federal legislation aimed at curtailing spending by federal agencies and departments may result in those governmental bodies deferring or canceling projects that we might otherwise seek to perform.
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 8,000 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.
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-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 affect our ability to perform efficient work outdoors in certain regions of the United States and the United Kingdom. As a result, we could experience reduced revenues. In addition, cooler than normal temperatures during the summer months could reduce the need for our services, and warmer than normal temperatures during the winter months would also reduce the need for our services, and we may experience 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.
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Many of our contracts, especially our facilities services contracts, 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 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, 2011, approximately 61% 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 condition, results of operations and cash flows. We contribute to over 175 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 16—Retirement Plans of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for additional information regarding multiemployer plans.
8
Fluctuating foreign currency exchange rates impact our financial results. We have foreign operations in the United Kingdom, which in 2011 accounted for 9% of our revenues. Our reported financial condition 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 condition 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 condition. We are a party to lawsuits and other legal proceedings, most of which are 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 condition, and in some cases, on our reputation or our ability to obtain projects from customers, including governmental entities. See Item 3. Legal Proceedings, 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 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.
9
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.
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.
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 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 an 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 businesses 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,
10
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, 2012 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.
The annual impairment review of our indefinite lived intangible assets for the year ended December 31, 2011 resulted in a $3.8 million non-cash impairment charge as a result of a change in the fair value of various trade names and customer relationships associated with certain prior acquisitions reported within our United States facilities services segment. We did not record an impairment of our goodwill for the year ended December 31, 2011.
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 condition 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. 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
11
long-standing relationships with many of our significant clients, our clients may unilaterally reduce or discontinue 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 condition, 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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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 | 8/31/20 | ||||||
| 22302 Hathaway Avenue Hayward, California (b) |
105,000 | 7/31/16 | ||||||
| 4462 Corporate Center Drive Los Alamitos, California (c) |
57,863 | 9/30/14 | ||||||
| 825 Howe Road Martinez, California (c) |
109,795 | 12/31/12 | ||||||
| 18111 South Santa Fe Avenue Rancho Dominguez, California (a) |
66,246 | 12/31/16 | ||||||
| 940 Remillard Court San Jose, California (a) |
119,560 | 7/31/19 | ||||||
| 5101 York Street Denver, Colorado (b) |
77,553 | 2/28/14 | ||||||
| 345 Sheridan Boulevard Lakewood, Colorado (c) |
63,000 | Owned | ||||||
| 3100 Woodcreek Drive Downers Grove, Illinois (c) |
56,551 | 7/31/17 | ||||||
| 1406 West Cardinal Court Urbana, Illinois (b) |
161,956 | 9/30/12 | ||||||
| 7614 and 7720 Opportunity Drive Fort Wayne, Indiana (b) |
136,695 | 10/31/18 | ||||||
| 2655 Garfield Avenue Highland, Indiana (c) |
57,765 | 6/30/14 | ||||||
| 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) |
253,291 | 2/28/21 | ||||||
| 70 Schmitt Boulevard Farmingdale, New York (b) |
76,380 | 7/31/21 | ||||||
| Two Penn Plaza New York, New York (c) |
55,891 | 1/31/16 | ||||||
| 2900 Newpark Drive Norton, Ohio (b) |
91,831 | 11/1/17 | ||||||
| 1800 Markley Street Norristown, Pennsylvania (a) |
103,000 | 9/12/21 | ||||||
| 227 Trade Court Aiken, South Carolina (b) |
66,000 | 9/30/12 | ||||||
| 6045 East Shelby Drive Memphis, Tennessee (a) |
53,618 | 4/30/18 | ||||||
| 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 | ||||||
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| Approximate Square Feet |
Lease Expiration Date, Unless Owned |
|||||||
| 5550 Airline Drive and 25 Tidwell Road Houston, Texas (b) |
157,544 | 12/31/14 | ||||||
| 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 | 4/30/18 | ||||||
| 670 and 686 Truman Avenue Richland, Washington (b) |
56,567 | 8/31/16 | ||||||
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 17—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. |
We are involved in several proceedings in which damages and claims have 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 materially adverse effect on our financial position, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
As previously disclosed in our Form 10-Q for the quarterly period ended September 30, 2011, a subsidiary of the Company occasionally performs maintenance work at mines covered by the Federal Mine Safety and Health Act of 1977 (“MSHA”). On August 9, 2010, the subsidiary received three citations claiming the occurrence of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under MSHA. All of such citations were related to an accident at a customer’s mine that resulted in the death of one employee of such subsidiary during normal maintenance activities conducted by the subsidiary at the customer’s mine. All of the alleged violations were timely abated. The U.S. Mine Safety and Health Administration has issued a proposed assessment of $15,000 against the subsidiary for such alleged violations, and the subsidiary is contesting such assessment.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Anthony J. Guzzi, Age 47; 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 72; 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 53; 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 47; 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.
15
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:
| 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 | ||||
| 2010 |
High | Low | ||||||
| First Quarter |
$ | 27.95 | $ | 22.06 | ||||
| Second Quarter |
$ | 29.80 | $ | 22.93 | ||||
| Third Quarter |
$ | 27.69 | $ | 22.29 | ||||
| Fourth Quarter |
$ | 29.92 | $ | 24.15 | ||||
Holders. As of February 21, 2012, there were approximately 122 stockholders of record and, as of that date, we estimate there were approximately 40,650 beneficial owners holding our common stock in nominee or “street” name.
Dividends. On September 26, 2011, we announced our plans to pay a regular quarterly dividend of $.05 per common share. We paid a quarterly dividend of $.05 per common share on October 25, 2011 and on January 31, 2012. Prior to October 25, 2011, no cash dividends had been paid on the Company’s common stock. Our revolving credit facility limits the payment of dividends 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 $.05 per share for the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes, as of December 31, 2011, 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 2-for-1 stock splits effected on July 9, 2007 and February 10, 2006.
| Plan Category |
Equity Compensation Plan Information | |||||||||||
| A | B | C | ||||||||||
| 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 |
2,555,224 | $ | 14.22 | (1) | 2,805,494 | (2) | ||||||
| Equity Compensation Plans Not Approved by Security Holders |
1,331,136 | (3) | $ | 11.78 | — | |||||||
|
|
|
|
|
|||||||||
| Total |
3,886,360 | $ | 13.39 | 2,805,494 | ||||||||
|
|
|
|
|
|||||||||
| (1) | Included within this amount are 328,051 restricted stock units issued pursuant to our Long-Term Incentive Plan, 80,000 restricted stock units issued to Mr. Guzzi and 77,768 restricted stock units issued to our non-employee directors. The weighted average exercise price would have been $17.56 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, which may be issuable in respect of options and/or stock appreciation rights granted under the 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) | 1,315,136 shares relate to outstanding options to purchase shares of our common stock, which were granted to our executive officers (the “Executive Options”) and 16,000 shares relate to outstanding options to purchase shares of our common stock, which were granted to our Directors (the “Director Options”). |
16
Stock Options. The following stock options, which have been adjusted for two 2-for-1 stock splits, one effected on July 9, 2007 and the other on February 10, 2006, were awarded pursuant to equity compensation programs that were not approved by stockholders.
Executive Options
1,209,136 of the Executive Options referred to in note (3) to the Table were granted to six 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 106,000 of the Executive Options were granted to Mr. Anthony Guzzi, our President and Chief Executive Officer, when he joined us in October 2004. Of these Executive Options, (i) an aggregate of 439,544 of such Executive Options were granted on January 2, 2003 with an exercise price of $13.69 per share, (ii) an aggregate of 769,592 of such Executive Options were granted on January 2, 2004 with an exercise price of $10.96 per share and (iii) 106,000 of such Executive Options were granted to Mr. Guzzi on October 25, 2004 with an exercise price of $9.67 per share.
Each of the Executive Options granted 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.
Director Options
During 2002, each of our non-employee directors who then served as a director received 8,000 Director Options. These options were in addition to the 12,000 options to purchase our common stock that were granted on June 19, 2002 to each such non-employee director under our 1995 Non-Employee Directors’ Non-Qualified Stock Option Plan, which plan had been approved by our stockholders. The price at which such Director Options are exercisable is equal to the fair market value per share of common stock on the grant date. The exercise price per share of the Director Options is $13.88 per share, except those granted to Mr. Michael T. Yonker, upon his election to the Board on October 25, 2002, which have an exercise price of $12.94 per share. All of these options became exercisable commencing with the grant date and have a term of ten years from the grant date.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes, as of December 31, 2011, certain information regarding purchases of our common stock by us or any affiliated purchaser:
| Period | Total Number of Shares Purchased(1) |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part |
Maximum Number (or Approximate Dollar Value) of Shares That May Yet be Purchased Under the Plan or Programs | ||||||||||||||||
| October 1, 2011 to October 31, 2011 |
293,556 | $ | 19.70 | 293,556 | $94,208,512 | |||||||||||||||
| November 1, 2011 to November 30, 2011 |
905,844 | $ | 23.96 | 905,844 | $72,476,506 | |||||||||||||||
| December 1, 2011 to December 31, 2011 |
None | None | None | $72,476,506 | ||||||||||||||||
| (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 in previously filed annual reports on Form 10-K of EMCOR.
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, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| Revenues |
$ | 5,613,459 | $ | 4,851,953 | $ | 5,227,699 | $ | 6,360,695 | $ | 5,545,159 | ||||||||||
| Gross profit |
733,949 | 693,523 | 784,225 | 845,707 | 667,515 | |||||||||||||||
| Impairment loss on goodwill and identifiable intangible assets |
3,795 | 246,081 | 13,526 | — | — | |||||||||||||||
| Operating income (loss) |
210,793 | (26,528 | ) | 250,122 | 291,693 | 193,033 | ||||||||||||||
| Net income (loss) attributable to EMCOR Group, Inc. |
$ | 130,826 | $ | (86,691 | ) | $ | 160,756 | $ | 182,204 | $ | 126,808 | |||||||||
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| Basic earnings (loss) per common share: |
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| From continuing operations |
$ | 1.82 | $ | (1.30 | ) | $ | 2.31 | $ | 2.64 | $ | 1.81 | |||||||||
| From discontinued operations |
0.14 | (0.01 | ) | 0.13 | 0.15 | 0.16 | ||||||||||||||
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| $ | 1.96 | $ | (1.31 | ) | $ | 2.44 | $ | 2.79 | $ | 1.97 | ||||||||||
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| Diluted (loss) earnings per common share: |
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| From continuing operations |
$ | 1.78 | $ | (1.30 | ) | $ | 2.25 | $ | 2.57 | $ | 1.75 | |||||||||
| From discontinued operations |
0.13 | (0.01 | ) | 0.13 | 0.14 | 0.15 | ||||||||||||||
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| $ | 1.91 | $ | (1.31 | ) | $ | 2.38 | $ | 2.71 | $ | 1.90 | ||||||||||
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Balance Sheet Data (In thousands)
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| As of December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| Equity (1) |
$ | 1,245,131 | $ | 1,162,845 | $ | 1,226,466 | $ | 1,050,769 | $ | 891,734 | ||||||||||
| Total assets |
3,014,076 | 2,755,542 | 2,981,894 | 3,030,443 | 2,887,000 | |||||||||||||||
| Goodwill |
566,805 | 406,804 | 593,628 | 582,714 | 563,918 | |||||||||||||||
| Borrowings under revolving credit facility |
150,000 | 150,000 | — | — | — | |||||||||||||||
| Term loan, including current maturities |
— | — | 194,750 | 197,750 | 225,000 | |||||||||||||||
| Other long-term debt, including current maturities |
— | 24 | — | 41 | 93 | |||||||||||||||
| Capital lease obligations, including current maturities |
$ | 4,857 | $ | 1,649 | $ | 601 | $ | 2,313 | $ | 2,151 | ||||||||||
| (1) | On September 26, 2011, we announced our plans to pay a regular quarterly dividend of $.05 per common share. We paid a quarterly dividend of $.05 per common share on October 25, 2011 and on January 31, 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, 2011, 2010 and 2009 (in millions, except percentages and per share data):
| 2011 | 2010 | 2009 | ||||||||||
| Revenues |
$ | 5,613.5 | $ | 4,852.0 | $ | 5,227.7 | ||||||
| Revenues increase (decrease) from prior year |
15.7 | % | (7.2 | )% | (17.8 | )% | ||||||
| Impairment loss on goodwill and identifiable intangible assets |
$ | 3.8 | $ | 246.1 | $ | 13.5 | ||||||
| Operating income (loss) |
$ | 210.8 | $ | (26.5 | ) | $ | 250.1 | |||||
| Operating income (loss) as a percentage of revenues |
3.8 | % | (0.5 | )% | 4.8 | % | ||||||
| Net income (loss) attributable to EMCOR Group, Inc. |
$ | 130.8 | $ | (86.7 | ) | $ | 160.8 | |||||
| Diluted earnings (loss) per common share from continuing operations |
$ | 1.78 | $ | (1.30 | ) | $ | 2.25 | |||||
| Net cash provided by operating activities |
$ | 149.4 | $ | 69.5 | $ | 360.8 | ||||||
2011 was a year in which we continued to reposition EMCOR by adding three companies to our portfolio, which extended and further strengthened our service offerings to new and existing customers. Additionally during the year, we sold our operations in Canada, as it was determined that it was no longer a strategic fit. Our results for 2011 demonstrate that we continue to successfully execute our work, taken as whole, on all fronts, despite the pricing challenges posed by the current economic environment and integrating our new acquisitions. 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 across all of our businesses. Despite this, we continue to replace our backlog with profitable work that delivers cost effective solutions and value to our customers throughout the United States and United Kingdom.
The increase in revenues for 2011 compared to 2010 was primarily attributable to: (a) 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) an increase in revenues in our United States facilities services segment, excluding revenues attributable to acquisitions in 2011 and 2010, particularly within our industrial services operations, as a result of an increase in demand for our services in the refinery and petrochemical markets, and also within our mobile mechanical 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 the effect of favorable exchange rates for the British pound versus the United States dollar.
The increase in operating income and operating margin (operating income as a percentage of revenues) for 2011, when compared to 2010, was primarily a result of: (a) higher operating income from our United States electrical construction and facilities services segment and (b) excluding operating income from acquisitions in 2011 and 2010, higher operating income from our United States facilities services segment. Acquisitions that are within our United States mechanical construction and facilities services and our United States facilities services segments contributed $3.3 million to operating income, including $12.5 million of amortization expense attributable to identifiable intangible assets included in cost of sales and selling, general and administrative expenses. Operating income and operating margin for 2010 were adversely impacted by a significant non-cash impairment charge related to goodwill and identifiable intangible assets. The 2011 increase in operating income was partially
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offset by: (a) lower operating income from our United States mechanical construction and facilities services segment, excluding operating income from the 2011 acquisition in this segment, (b) lower operating income from our United Kingdom operations and (c) lower operating income, primarily as a result of $4.7 million of transaction costs associated with a 2011 acquisition and higher employment costs within our United States facilities services segment. Net cash provided by operating activities of $149.4 million in 2011 increased, when compared to 2010, primarily due to improved operating results and changes in our working capital.
We acquired three companies during 2011. In June 2011, we acquired USM Services Holdings, Inc. (“USM”), which is a leading provider of facilities maintenance services, and in November 2011, we acquired another company, which provides mobile mechanical services. Both of these companies’ results have been included in our United States facilities services segment since the dates of their respective acquisition. The third company was acquired in January 2011, which primarily provides mechanical construction services, and its results have been included in our United States mechanical construction and facilities services segment since the date of its acquisition. All of these acquisitions expand our service capabilities into new geographic and/or technical areas and are not material to our results of operations for the periods presented.
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. 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.
On September 26, 2011, our Board of Directors authorized the Company to repurchase up to $100.0 million of its outstanding common stock. During 2011, we repurchased approximately 1.2 million shares of our common stock for approximately $27.5 million. As of December 31, 2011, there remained authorization for us to repurchase approximately $72.5 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. The repurchase program has been and will be funded from the Company’s internal funds.
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; 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.
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Discussion and Analysis of Results of Operations
Revenues
As described in more detail below, revenues for 2011 were $5.6 billion compared to $4.9 billion for 2010 and $5.2 billion for 2009. The increase in revenues for 2011 compared to 2010 was primarily attributable to: (a) 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 revenues attributable to acquisitions in 2011 and 2010, particularly within our industrial services, mobile mechanical 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 the effect of favorable exchange rates for the British pound versus the United States dollar.
The decrease in revenues for 2010 compared to 2009, excluding revenues attributable to acquisitions in 2010 and 2009, extended across all of our business segments and was primarily attributable to: (a) lower revenues in both our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment, (b) lower revenues from our United Kingdom operations, (c) lower revenues from our United States facilities services segment, and (d) the effect of unfavorable exchange rates for the British pound versus the United States dollar. This decrease in revenues was partially offset by revenues of $66.3 million generated by companies acquired in 2010 and 2009, which are reported in our United States facilities services segment.
Our backlog at December 31, 2011 was $3.3 billion, compared to $3.1 billion of backlog at December 31, 2010, excluding backlog of our Canadian subsidiary which we sold in August 2011. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. The increase in backlog as of December 31, 2011, compared to such backlog at December 31, 2010, was attributable to $414.7 million of backlog associated with the acquisition of three companies in 2011. Two of these companies are included in our United States facilities services segment, and the third is included in our United States mechanical construction and facilities services segment. Excluding backlog attributable to companies acquired in 2011, backlog decreased year over year, primarily within our United States electrical construction and facilities services, our United Kingdom and our United States facilities services segments. 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. However, 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.
The following table presents our revenues by each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2011, 2010 and 2009 (in millions, except for percentages):
| 2011 | % of Total |
2010 | % of Total |
2009 | % of Total |
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| Revenues from unrelated entities: |
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| United States electrical construction and facilities services |
$ | 1,155.1 | 21 | % | $ | 1,158.9 | 24 | % | $ | 1,273.7 | 24 | % | ||||||||||||
| United States mechanical construction and facilities services |
1,904.5 | 34 | % | 1,708.4 | 35 | % | 1,959.9 | 37 | % | |||||||||||||||
| United States facilities services |
2,024.9 | 36 | % | 1,522.3 | 31 | % | 1,493.6 | 29 | % | |||||||||||||||
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| Total United States operations |
5,084.5 | 91 | % | 4,389.6 | 90 | % | 4,727.2 | 90 | % | |||||||||||||||
| United Kingdom construction and facilities services |
529.0 | 9 | % | 462.4 | 10 | % | 500.5 | 10 | % | |||||||||||||||
| Other international construction and facilities services |
— | — | — | — | — | — | ||||||||||||||||||
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| Total worldwide operations |
$ | 5,613.5 | 100 | % | $ | 4,852.0 | 100 | % | $ | 5,227.7 | 100 | % | ||||||||||||
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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. The slight decrease in revenues for the year ended December 31, 2011 was primarily attributable to a continued decline in revenues from hospitality construction projects, principally in the Las Vegas market as we substantially completed work on our last major project within that market, and lower revenues from transportation construction projects. This decrease was mostly offset by increased revenues
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from industrial, commercial, and water and wastewater construction projects. We continue to exercise discipline in taking on projects in the current economic environment, and we accept work only when we believe it can be performed at a reasonable margin.
Revenues of our United States electrical construction and facilities services segment for 2010 decreased by $114.8 million compared to 2009. The decrease in revenues for 2010 compared to 2009 was primarily attributable to lower levels of work on industrial construction projects, most notably in the Northern California and Pacific Northwest markets, and on commercial and transportation construction projects. Additionally, the decrease in revenues was partially attributable to a decline in work on hospitality construction projects, principally in the Las Vegas market. This 2010 decrease in revenues was partially offset by an increase in revenues from water/wastewater, healthcare and institutional construction projects.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2011 were $1,904.5 million, a $196.1 million increase compared to revenues of $1,708.4 million for the year ended December 31, 2010. The increase in revenues for the year ended December 31, 2011 was primarily attributable to 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 revenues attributable to the 2011 acquisition 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 continued decline in revenues from hospitality construction projects, primarily in the Las Vegas market, as we substantially completed work on our last major project in that market, and water and wastewater construction projects primarily in the South Florida market.
Our United States mechanical construction and facilities services segment revenues for 2010 decreased by $251.5 million compared to 2009. The decrease in revenues for 2010 compared to 2009 was primarily attributable to reduced work on industrial, commercial and healthcare construction projects as a result of the economic downturn and our decision to only accept work that we believe can be performed at reasonable margins. Additionally, the decrease in revenues was attributable to a decline in work on water/wastewater construction projects in the South Florida market and a decline in work on hospitality construction projects in the Las Vegas market.
Revenues of our United States facilities services segment were $2,024.9 million and $1,522.3 million in 2011 and 2010, respectively. The increase in revenues for 2011 compared to 2010 was primarily attributable to revenues of $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 from 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 operations, excluding revenues attributable to acquisitions in 2011 and 2010, reflecting an increase in demand for our repair services, 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 based on the new terms and conditions. The amended contract provides that we are to act as a principal, whereas prior to the amendment, we acted as an agent.
Revenues of our United States facilities services segment increased by $28.7 million in 2010 compared to 2009. This increase was primarily attributable to revenues of $66.3 million generated by companies acquired in 2010 and 2009, which perform mobile mechanical services and government infrastructure contracting services, and from an increase in revenues at our government and commercial site-based facilities services operations. This increase in revenues in 2010 was offset by a decline in revenues from: (a) our industrial services operations, which had been adversely affected by a lower demand for our refinery and petrochemical services as a result of capital project curtailments and deferred maintenance, and (b) fewer discretionary projects attributable to economic conditions.
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. The increase in revenues for 2011 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.
Our United Kingdom construction and facilities services segment revenues decreased by $38.1 million in 2010 compared to 2009. This decline in revenues was attributable to a decrease in revenues from institutional construction projects, partially offset by an increase in revenues from commercial construction projects. The decrease in revenues for 2010 was also attributable to a decrease of $6.7 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar.
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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, 2011, 2010 and 2009 (in millions, except for percentages):
| 2011 | 2010 | 2009 | ||||||||||
| Cost of sales |
$ | 4,879.5 | $ | 4,158.4 | $ | 4,443.5 | ||||||
| Gross profit |
$ | 733.9 | $ | 693.5 | $ | 784.2 | ||||||
| Gross profit margin |
13.1 | % | 14.3 | % | 15.0 | % | ||||||
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 $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 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 current economic environment 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 an historical 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 our acquisitions 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. The 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.
Our gross profit decreased by $90.7 million for 2010 compared to 2009. The decrease in gross profit was primarily attributable to reduced volume across all of our business segments, excluding gross profit from acquisitions in 2010 and 2009, and lower gross profit margins at: (a) our United States electrical construction and facilities services segment and (b) our industrial services and mobile mechanical services operations, excluding gross profit from acquisitions in 2010 and 2009, within our United States facilities services segment. The decrease in gross profit was also attributable to a decrease of $1.0 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The overall decrease in gross profit was partially offset by: (a) the favorable resolution of uncertainties on certain construction projects at or nearing completion in the United States mechanical construction and facilities services segment, (b) the favorable resolution of an historical legal claim on a healthcare construction project within our United States mechanical construction and facilities services segment, (c) improved gross profit from our commercial and government site-based operations within our United States facilities services segment and (d) companies acquired in 2010 and 2009 within our United States facilities services segment, which contributed $5.6 million to gross profit, net of amortization expense of $1.6 million attributable to identifiable intangible assets. In addition, the decrease in
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gross profit was partially offset by: (a) an increase in gross profit contributed by our energy services operations within our United States facilities services segment, primarily as a result of the recognition of a pretax gain of $4.5 million from the sale of our interest in a venture and (b) favorable gross profit associated with the receipt of a contract termination fee pursuant to the terms of a contract within our United Kingdom construction and facilities services segment.
Our gross profit margin was 14.3% for 2010 compared to 15.0% for 2009. The decrease in gross profit margin was primarily the result of: (a) lower gross profit margins at our United States electrical construction and facilities services segment as a result of lower margins on new work performed in 2010, (b) lower gross profit margins at our industrial services and mobile mechanical services operations, excluding gross profit margin attributable to acquisitions in 2010 and 2009, within our United States facilities services segment and (c) an increase in institutional work which generally has lower margins than private sector work. In addition, 2009 was more positively affected by the favorable resolution of uncertainties on certain construction projects at or nearing completion in our United States electrical construction and facilities services segment compared to 2010. The decrease in gross profit margin in 2010 was partially offset by higher gross profit margins at our United States mechanical construction and facilities services segment, primarily as a result of: (a) the favorable resolution of uncertainties on certain construction projects at or nearing completion and (b) the favorable resolution of an historical legal claim on a healthcare construction project.
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, 2011, 2010 and 2009 (in millions, except for percentages):
| 2011 | 2010 | 2009 | ||||||||||
| Selling, general and administrative expenses |
$ | 518.1 | $ | 472.1 | $ | 517.3 | ||||||
| Selling, general and administrative expenses as a percentage of revenues |
9.2 | % | 9.7 | % | 9.9 | % | ||||||
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 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 the acquisition of USM during 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 higher overall revenues and reduced discretionary spending.
Selling, general and administrative expenses decreased by $45.2 million for 2010 compared to 2009 primarily due to: (a) reduced employee costs, such as salaries, commissions and incentive compensation, primarily as a result of the downsizing of staff at numerous locations in 2009 and lower operating results and (b) a reduction in our provision for doubtful accounts due to favorable settlements of amounts previously determined to be uncollectible. These decreases were partially offset by $4.3 million of expenses directly related to companies acquired in 2010 and 2009, including amortization expense of $0.7 million attributable to identifiable intangible assets. Selling, general and administrative expenses as a percentage of revenues decreased for 2010 compared to 2009, primarily due to lower selling, general and administrative expenses.
Restructuring expenses
Restructuring expenses, primarily relating to employee severance obligations and/or the termination of leased facilities, were $1.2 million, $1.8 million and $3.3 million for 2011, 2010 and 2009, respectively. The 2011 restructuring expenses were primarily related to employee severance obligations at our corporate headquarters. The 2010 restructuring expenses were primarily attributable to our United States electrical construction and facilities services segment, while the 2009 restructuring expenses were primarily related to our UK operations. As of December 31, 2011, 2010 and 2009, the balance of our severance obligations was $0.2 million, $0.3 million and $0.7 million, respectively. The severance obligations outstanding as of December 31, 2010 and 2009 were paid during 2011 and 2010. The majority of severance obligations outstanding as of December 31, 2011 will be paid in 2012.
Impairment loss on goodwill and identifiable intangible assets
In conjunction with our 2011 annual impairment test on October 1, we recognized a $3.8 million non-cash impairment charge related to customer relationships and trade names within the United States facilities services segment. The 2011 impairment primarily results from both lower forecasted revenues from and operating margins at specific companies within this segment.
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During the third quarter of 2010 and prior to our October 1 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.
During 2009, we recognized a $13.5 million non-cash impairment charge related to trade names and customer relationships in conjunction with our annual impairment test. Of this amount, $11.2 million related to trade names within the United States facilities services segment and $2.3 million related to trade names and customer relationships within the United States mechanical construction and facilities services segment.
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, 2011, 2010 and 2009 (in millions, except for percentages):
| 2011 | % of Segment Revenues |
2010 | % of Segment Revenues |
2009 | % of Segment Revenues |
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| Operating income (loss): |
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| United States electrical construction and facilities services |
$ | 84.6 | 7.3 | % | $ | 70.4 | 6.1 | % | $ | 114.5 | 9.0 | % | ||||||||||||
| United States mechanical construction and facilities services |
117.0 | 6.1 | % | 131.3 | 7.7 | % | 129.7 | 6.6 | % | |||||||||||||||
| United States facilities services |
68.1 | 3.4 | % | 60.0 | 3.9 | % | 73.7 | 4.9 | % | |||||||||||||||
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| Total United States operations |
269.7 | 5.3 | % | 261.7 | 6.0 | % | 317.9 | 6.7 | % | |||||||||||||||
| United Kingdom construction and facilities services |
9.2 | 1.7 | % | 15.7 | 3.4 | % | 12.0 | 2.4 | % | |||||||||||||||
| Other international construction and facilities services |
— | — | (0.1 | ) | — | (0.1 | ) | — | ||||||||||||||||
| Corporate administration |
(63.1 | ) | — | (55.9 | ) | — | (62.9 | ) | — | |||||||||||||||
| Restructuring expenses |
(1.2 | ) | — | (1.8 | ) | — | (3.3 | ) | — | |||||||||||||||
| Impairment loss on goodwill and identifiable intangible assets |
(3.8 | ) | — | (246.1 | ) | — | (13.5 | ) | — | |||||||||||||||
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| Total worldwide operations |
210.8 | 3.8 | % | (26.5 | ) | (0.5 | )% | 250.1 | 4.8 | % | ||||||||||||||
| Other corporate items: |
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| Interest expense |
(11.3 | ) | (12.2 | ) | (7.9 | ) | ||||||||||||||||||
| Interest income |
1.8 | 2.7 | 4.7 | |||||||||||||||||||||
| Gain on sale of equity investment |
— | 7.9 | — | |||||||||||||||||||||
| Income (loss) from continuing operations before income taxes |
$ | 201.4 | $ | (28.1 | ) | $ | 247.0 | |||||||||||||||||
As described in more detail below, we had operating income of $210.8 million for 2011, compared to an operating loss of $26.5 million for 2010 and operating income of $250.1 million for 2009. 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 $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. The increase in operating income for 2011 compared to 2010 primarily resulted from an increase in gross profit from: (a) water and wastewater construction projects, primarily in the New York market, (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. These increases were 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, 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.
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Operating income of our United States electrical construction and facilities services segment for 2010 decreased by $44.1 million compared to 2009. The decrease in operating income in 2010 compared to 2009 was primarily the result of lower gross profit from commercial and industrial construction projects, as a result of the economic slowdown and our selectivity in bidding on contracts. The decrease in operating income for 2010 was partially offset by an increase in the gross profit from water/wastewater construction projects. Selling, general and administrative expenses also decreased for 2010 compared to 2009, principally due to reduced employee costs, such as salaries, incentive compensation and employee benefits, primarily as a result of the downsizing of staff at numerous locations in 2009 and lower operating results. The decrease in operating margin for 2010 was primarily the result of a reduction in gross profit margin.
Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2011 was $117.0 million, a $14.3 million decrease compared to operating income of $131.3 million for the year ended December 31, 2010. The decrease in operating income for 2011 compared to 2010, 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 current economic environment and our selectivity in bidding on contracts. Additionally, 2010 benefited from the resolution of an historical 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 administrative costs, including $1.8 million of amortization expense attributable to identifiable intangible assets. The decrease in operating margin for the year ended December 31, 2011 was primarily the result of a reduction in gross profit margin.
Our United States mechanical construction and facilities services segment operating income for 2010 increased by $1.6 million compared to 2009. The increase in operating income in 2010 compared to 2009 was primarily due to the decrease in selling, general and administrative expenses, principally due to reduced employee costs, such as salaries and incentive compensation, primarily as a result of the downsizing of staff at numerous locations in 2009, as well as a reduction in the provision for doubtful accounts due to favorable settlements of amounts previously determined to be uncollectible. The increase in operating income was also due to: (a) the favorable resolution of uncertainties on certain construction projects at or nearing completion, particularly in the hospitality markets, and (b) the favorable resolution of an historical legal claim on a healthcare construction project. The increase in operating income for 2010 compared to 2009 was partially offset by lower gross profit from commercial, industrial and water/wastewater construction projects, as a result of the economic slowdown and our selectivity in bidding on contracts. The increase in operating margin for 2010 was primarily the result of increased gross profit margin due to the favorable resolution of matters discussed above.
Operating income of our United States facilities services segment was $68.1 million and $60.0 million in 2011 and 2010, respectively. The increase in operating income for 2011 compared to 2010 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 is due to difficult job site conditions, and lower margins on projects as a result of the competitive market in the current economic environment. 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 is 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 $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 was primarily attributable to an increase in employment costs such as salaries, bonuses and commissions due to higher volume. The decrease in operating margin for 2011 was primarily the result of a reduction in the gross profit margin.
Operating income of our United States facilities services segment decreased by $13.7 million in 2010 compared to 2009. The decrease in operating income for 2010 compared to 2009 was primarily due to lower operating income from: (a) our industrial services operation which had been adversely affected by lower demand for our refinery and petrochemical services as a result of capital project curtailments and deferred maintenance and lower gross profit margins and (b) fewer discretionary projects due to the effects of the economic slowdown and lower gross profit margins, primarily as a result of lower margins on recently acquired
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projects. The decrease in operating income for 2010 was partially offset by improved results from our commercial and government site-based operations and operating income from companies acquired in 2010 and 2009, which perform mobile mechanical services and government infrastructure contracting services and contributed $1.3 million of operating income, net of amortization expense of $2.3 million attributable to identifiable intangible assets. In addition, these decreases were partially offset by an increase in operating income for 2010 from our energy services operation, primarily as a result of the recognition of a pretax gain of $4.5 million from the sale of our interest in a venture. Selling, general and administrative expenses decreased by $8.0 million for 2010 compared to 2009, excluding the increase of $4.3 million of selling, general and administrative expenses associated with companies acquired in 2010 and 2009, including amortization expense of $0.7 million, due to reduced employee costs, such as salaries and commissions, primarily as a result of the downsizing of staff at numerous locations in 2009 and due to lower revenues. In addition, the decrease was due to a reduction in our provision for doubtful accounts. These decreases were partially offset by increased professional fees. The decrease in operating margin for 2010 was primarily the result of a reduction in gross profit margin.
Our United Kingdom construction and facilities services segment operating income was $9.2 million in 2011 compared to $15.7 million in 2010. The decrease in operating income for 2011 compared to 2010 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 continued decrease 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. The decrease in operating margin for 2011 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 increased by $3.7 million in 2010 compared to 2009. The increase in operating income for 2010 compared to 2009 was primarily attributable to the decrease in the actuarially determined pension costs associated with the curtailment of our United Kingdom defined pension plan and the favorable gross profit associated with the receipt of a contract termination fee pursuant to the terms of a contract. These increases were partially offset by a decrease of $0.6 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for 2010 was brought about by a combination of increased gross profit margins and 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 and $0.1 million for 2010 and 2009, respectively.
Our corporate administration expenses were $63.1 million for 2011 compared to $55.9 million in 2010. The increase in expenses for 2011 as compared to 2010 is primarily attributable to $4.7 million of transaction costs associated with the acquisition of USM during 2011 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 earlier in 2011. The decrease of $7.0 million in expenses comparing 2010 to 2009 was primarily attributable to a decline in incentive compensation, marketing and advertising expenses, as well as lower professional fees.
Non-operating items
Interest expense was $11.3 million, $12.2 million and $7.9 million for 2011, 2010 and 2009, respectively. The $0.9 million decrease in interest expense for 2011 compared to 2010 was primarily due to lower interest rates. This decrease 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. The $4.3 million increase in interest expense for 2010 compared to 2009 was due to higher cost of borrowing and the acceleration of expense for debt issuance costs associated with the termination of a term loan and the amendment and restatement of our credit facility in 2010.
Interest income was $1.8 million, $2.7 million and $4.7 million for 2011, 2010 and 2009, respectively. The decreases in interest income were primarily related to lower interest rates earned on our invested cash balances, as well as lower cash available to invest in 2011.
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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 2011 income tax provision from continuing operations was $76.8 million compared to $53.7 million for 2010 and $92.6 million for 2009 based on effective income tax rates, before the tax effect of non-cash impairment charges, of approximately 38.7%, 37.2% and 37.8%, respectively. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to non-controlling interests, for the years ended December 31, 2011, 2010 and 2009, inclusive of non-cash impairment charges, were 38.7%, (167.2)% and 37.8%, respectively. The increase in the 2011 income tax provision 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 allocation 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 is deductible for income tax purposes. The remaining $176.6 million of this impairment is 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.
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, 2011 and 2010 (in millions):
| 2011 | 2010 | |||||||
| Net cash provided by operating activities |
$ | 149.4 | $ | 69.5 | ||||
| Net cash used in investing activities |
$ | (320.5 | ) | $ | (32.7 | ) | ||
| Net cash used in financing activities |
$ | (29.3 | ) | $ | (48.0 | ) | ||
| Effect of exchange rate changes on cash and cash equivalents |
$ | 0.9 | $ | (4.9 | ) | |||
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 of $149.4 million, compared to $69.5 million in net cash provided by operating activities for 2010, 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 the 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 acquisitions of businesses, 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 attributable to the repayment of our 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 did not have any impact on our compliance with our debt covenants or on our cash flows.
Our consolidated cash balance decreased by approximately $16.1 million from $727.0 million at December 31, 2009 to $710.8 million at December 31, 2010. Net cash provided by operating activities for 2010 of $69.5 million, compared to $360.8 million in
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net cash provided by operating activities for 2009, was primarily due to lower operating results, changes in our working capital, including a reduction in accruals for payroll and benefits and a one-time contribution of $25.9 million to the United Kingdom defined benefit pension plan. Net cash used in investing activities was $32.7 million for 2010 compared to $52.6 million used in 2009. This decrease was primarily due to $25.6 million of proceeds from the sale of equity investments, a $7.9 million decrease in investments in and advances to unconsolidated entities and joint ventures, a $4.7 million decrease in amounts paid for the purchase of property, plant and equipment, and a $4.4 million decrease in payments pursuant to earn-out agreements, offset by a $22.6 million increase in payments for acquisitions of businesses. Net cash used in financing activities for 2010 increased by $48.1 million, compared to 2009, primarily attributable to repayment of our term loan and debt issuance costs, partially offset by borrowings under our new revolving credit facility. The non-cash impairment charges 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 |
4-5 years |
After 5 years |
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| Revolving Credit Facility (including interest at 1.80%) (1) |
$ | 163.4 | $ | 2.7 | $ | 5.5 | $ | 155.2 | $ | — | ||||||||||
| Capital lease obligations |
5.3 | 1.8 | 2.7 | 0.8 | — | |||||||||||||||
| Operating leases |
212.9 | 54.3 | 78.8 | 46.8 | 33.0 | |||||||||||||||
| Open purchase obligations (2) |
845.2 | 697.2 | 129.6 | 18.4 | — | |||||||||||||||
| Other long-term obligations, including current portion (3) |
266.5 | 41.2 | 214.3 | 11.0 | — | |||||||||||||||
| Liabilities related to uncertain income tax positions |
8.0 | 0.3 | 7.3 | 0.4 | — | |||||||||||||||
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| Total Contractual Obligations |
$ | 1,501.3 | $ | 797.5 | $ | 438.2 | $ | 232.6 | $ | 33.0 | ||||||||||
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| 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 |
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| Letters of credit |
$ | 83.1 | $ | 83.1 | $ | — | $ | — | $ | — | ||||||||||
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| (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, 2011, 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
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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 is 0.25% of the unused amount as of December 31, 2011. Borrowings under the 2011 Revolving Credit Facility bear interest at (1) a rate which is the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at December 31, 2011) plus 0.50% to 1.00%, based on certain financial tests or (2) United States dollar LIBOR (0.30% at December 31, 2011) plus 1.50% to 2.00%, based on certain financial tests. The interest rate in effect at December 31, 2011 was 1.80%. 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 $4.1 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, 2011 and December 31, 2010, we had approximately $83.1 million and $82.4 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, 2011, which may remain outstanding at our discretion until the 2011 Revolving Credit Facility expires. 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.
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 and $0.3 million was expensed as part of interest expense, and removed from Accumulated other comprehensive loss, for the years ended December 31, 2010 and 2009, respectively. 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. In 2009, the venture, using its own cash and cash from additional capital contributions, acquired its outstanding bonds in the principal amount of $25.0 million. 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 2011, we repurchased approximately 1.2 million shares of our common stock for approximately $27.5 million. As of December 31, 2011, there remained authorization for us to repurchase approximately $72.5 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. The repurchase program has been and will be funded from the Company’s internal funds.
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
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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, 2011, 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 $1.2 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 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 $326.9 million and $368.4 million as of December 31, 2011 and 2010, 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 do not expect the disposition of our Canadian subsidiary to have a material impact on our future liquidity.
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
31
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 our plans to pay a regular quarterly dividend of $.05 per common share. We paid a quarterly dividend of $.05 per common share on October 25, 2011 and on January 31, 2012. Prior to October 25, 2011, no cash dividends had been paid on the Company’s common stock. Our revolving credit facility limits the payment of dividends 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 $.05 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, 2011 and 2010, we utilized approximately $82.9 million and $82.2 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.
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 condition and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from (i) long-term construction contracts for which the percentage-of-completion method of accounting is used and (ii) services contracts; (b) collectibility or valuation of accounts receivable; (c) insurance liabilities; (d) income taxes; and (e) 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
32
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, 2011 and 2010, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $14.5 million and $9.3 million, respectively, and claims of approximately $1.6 million and $6.3 million, respectively. In addition, accounts receivable as of December 31, 2011 and 2010 included claims of approximately $0.2 million and $1.8 million, respectively, plus unapproved change orders and contractually billed amounts related to such contracts of approximately $40.4 million and $42.7 million, 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. 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 2011, 2010 and 2009 amounted to approximately $2.2 million, $(5.1) million and $7.2 million, respectively. At December 31, 2011 and 2010, our accounts receivable of $1,187.8 million and $1,090.9 million, respectively, included allowances for doubtful accounts of $16.7 million and $17.3 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 condition 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, 2011 of $29.0 million and net deferred income tax assets of $5.2 million at December 31, 2010, 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, 2011 and 2010, the total valuation allowance on gross deferred income tax assets was approximately $3.4 million and $0.8 million, respectively.
Goodwill and Identifiable Intangible Assets
As of December 31, 2011, we had $566.8 million and $370.4 million, respectively, of goodwill and net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships,
33
non-competition agreements and trade names), primarily arising out of the acquisition of companies. As of December 31, 2010, goodwill and net identifiable intangible assets were $406.8 million and $245.1 million, respectively. The changes to goodwill and net identifiable intangible assets (net of accumulated amortization) since December 31, 2010 were related to: (a) the acquisition of three companies during 2011, (b) the finalization of the purchase price accounting for the acquisition of a company during the fourth quarter of 2010 and (c) earn-outs paid and/or accrued related to previous acquisitions. During 2011, the purchase price accounting for acquisitions made during the first quarter of 2011 and the fourth quarter of 2010 was finalized. As a result, identifiable intangible assets ascribed to its goodwill, contract backlog, customer relationships, trade name and related non-competition agreements were adjusted with an insignificant impact. 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, 2011 was 13.6% and 12.3% 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, 2011 and 2009, no impairment of our goodwill was recognized.
During the third quarter of 2010 and prior to our October 1 annual impairment test, we concluded that impairment indicators may have existed within the United States facilities services segment based upon the 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 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, 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, and no additional impairment of our goodwill was recognized in the fourth quarter of 2010. The weighted average cost of capital used in our 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 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, 2011, we had $566.8 million of goodwill on our balance sheet and, of this amount, approximately 64.3% relates to our United States facilities services segment, approximately 35.0% 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
34
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 $88.3 million, $346.9 million and $285.6 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. 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. The annual impairment review of our trade names for the year ended December 31, 2009 resulted in an $11.5 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 and United States mechanical construction and facilities services segments. The current year impairment primarily results from both lower forecasted revenues from and operating margins at specific companies within our United States facilities services segment.
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 years ended December 31, 2011 and 2009. As a result of these reviews, 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 and a $2.0 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 mechanical construction and facilities services segment for the year ended December 31, 2009. For the year ended December 31, 2010 no impairment of our other identifiable intangible assets was recognized.
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 not achieved, or there is a rise in interest rates, we may be required, as we did in 2011, 2010 and 2009 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 relates to customer relationships and $1.0 million relates 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, 2011 and 2010, 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 and were exposed to market risk as it related to the interest rate swap. 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, 2011, 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
35
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. As of December 31, 2009, the fair value of our interest rate swap was a net liability of $1.2 million. Under the terms of the interest rate swap, which matured in October 2010, we paid the counterparty a fixed rate of interest of 2.225% and received a variable rate of interest from the same counterparty.
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 8,000 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.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 511,322 | $ | 710,836 | ||||
| Accounts receivable, less allowance for doubtful accounts of $16,685 and $17,287, respectively |
1,187,832 | 1,090,927 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
114,836 | 88,253 | ||||||
| Inventories |
44,914 | 32,778 | ||||||
| Prepaid expenses and other |
77,749 | 57,373 | ||||||
|
|
|
|
|
|||||
| Total current assets |
1,936,653 | 1,980,167 | ||||||
| Investments, notes and other long-term receivables |
5,618 | 6,211 | ||||||
| Property, plant and equipment, net |
101,663 | 88,615 | ||||||
| Goodwill |
566,805 | 406,804 | ||||||
| Identifiable intangible assets, net |
370,373 | 245,089 | ||||||
| Other assets |
32,964 | 28,656 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 3,014,076 | $ | 2,755,542 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: |
||||||||
| Borrowings under revolving credit facility |
$ | — | $ | — | ||||
| Current maturities of long-term debt and capital lease obligations |
1,522 | 489 | ||||||
| Accounts payable |
477,801 | 416,715 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts |
441,695 | 456,690 | ||||||
| Accrued payroll and benefits |
204,785 | 192,407 | ||||||
| Other accrued expenses and liabilities |
205,110 | 166,398 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
1,330,913 | 1,232,699 | ||||||
| Borrowings under revolving credit facility |
150,000 | 150,000 | ||||||
| Long-term debt and capital lease obligations |
3,335 | 1,184 | ||||||
| Other long-term obligations |
284,697 | 208,814 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
1,768,945 | 1,592,697 | ||||||
|
|
|
|
|
|||||
| 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, 68,125,437 and 68,954,426 shares issued, respectively |
681 | 690 | ||||||
| Capital surplus |
417,136 | 427,613 | ||||||
| Accumulated other comprehensive loss |
(78,649 | ) | (42,411 | ) | ||||
| Retained earnings |
910,042 | 782,576 | ||||||
| Treasury stock, at cost 1,681,037 and 2,293,875 shares, respectively |
(14,476 | ) | (15,525 | ) | ||||
|
|
|
|
|
|||||
| Total EMCOR Group, Inc. stockholders’ equity |
1,234,734 | 1,152,943 | ||||||
| Noncontrolling interests |
10,397 | 9,902 | ||||||
|
|
|
|
|
|||||
| Total equity |
1,245,131 | 1,162,845 | ||||||
|
|
|
|
|
|||||
| Total liabilities and equity |
$ | 3,014,076 | $ | 2,755,542 | ||||
|
|
|
|
|
|||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
37
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
(In thousands, except per share data)
| 2011 | 2010 | 2009 | ||||||||||
| Revenues |
$ | 5,613,459 | $ | 4,851,953 | $ | 5,227,699 | ||||||
| Cost of sales |
4,879,510 | 4,158,430 | 4,443,474 | |||||||||
|
|
|
|
|
|
|
|||||||
| Gross profit |
733,949 | 693,523 | 784,225 | |||||||||
| Selling, general and administrative expenses |
518,121 | 472,135 | 517,302 | |||||||||
| Restructuring expenses |
1,240 | 1,835 | 3,275 | |||||||||
| Impairment loss on goodwill and identifiable intangible assets |
3,795 | 246,081 | 13,526 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating income (loss) |
210,793 | (26,528 | ) | 250,122 | ||||||||
| Interest expense |
(11,261 | ) | (12,153 | ) | (7,872 | ) | ||||||
| Interest income |
1,820 | 2,657 | 4,708 | |||||||||
| Gain on sale of equity investment |
— | 7,900 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations before income taxes |
201,352 | (28,124 | ) | 246,958 | ||||||||
| Income tax provision |
76,764 | 53,711 | 92,553 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations |
124,588 | (81,835 | ) | 154,405 | ||||||||
| Income (loss) from discontinued operation, net of income taxes |
9,083 | (849 | ) | 8,672 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) including noncontrolling interests |
133,671 | (82,684 | ) | 163,077 | ||||||||
| Less: Net income attributable to noncontrolling interests |
(2,845 | ) | (4,007 | ) | (2,321 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. |
$ | 130,826 | $ | (86,691 | ) | $ | 160,756 | |||||
|
|
|
|
|
|
|
|||||||
| Basic earnings (loss) per common share: |
||||||||||||
| From continuing operations attributable to EMCOR Group, Inc. common stockholders |
$ | 1.82 | $ | (1.30 | ) | $ | 2.31 | |||||
| From discontinued operation |
0.14 | (0.01 | ) | 0.13 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. common stockholders |
$ | 1.96 | $ | (1.31 | ) | $ | 2.44 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted earnings (loss) per common share: |
||||||||||||
| From continuing operations attributable to EMCOR Group, Inc. common stockholders |
$ | 1.78 | $ | (1.30 | ) | $ | 2.25 | |||||
| From discontinued operation |
0.13 | (0.01 | ) | 0.13 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. common stockholders |
$ | 1.91 | $ | (1.31 | ) | $ | 2.38 | |||||
|
|
|
|
|
|
|
|||||||
| Dividends declared per common share |
$ | 0.05 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
38
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
(In thousands)
| 2011 | 2010 | 2009 | ||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income (loss) including noncontrolling interests |
$ | 133,671 | $ | (82,684 | ) | $ | 163,077 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
27,426 | 25,498 | 26,768 | |||||||||
| Amortization of identifiable intangible assets |
26,350 | 16,417 | 18,977 | |||||||||
| Provision for (recovery of) doubtful accounts |
2,238 | (5,126 | ) | 7,178 | ||||||||
| Deferred income taxes |
8,826 | (15,390 | ) | 2,922 | ||||||||
| 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 |
592 | 127 | 387 | |||||||||
| Excess tax benefits from share-based compensation |
(3,619 | ) | (1,474 | ) | (2,203 | ) | ||||||
| Equity income from unconsolidated entities |
(1,301 | ) | (843 | ) | (2,706 | ) | ||||||
| Non-cash expense for amortization of debt issuance costs |
2,438 | 2,703 | 1,530 | |||||||||
| Non-cash income from contingent consideration arrangements |
(2,772 | ) | (394 | ) | (304 | ) | ||||||
| Non-cash expense for impairment of goodwill and identifiable intangible assets |
3,795 | 246,081 | 13,526 | |||||||||
| Non-cash compensation expense |
5,447 | 5,742 | 7,454 | |||||||||
| Supplemental defined benefit plan contribution |
— | (25,916 | ) | — | ||||||||
| Distributions from unconsolidated entities |
606 | 958 | 6,177 | |||||||||
| Changes in operating assets and liabilities, excluding effect of businesses acquired: |
||||||||||||
| (Increase) decrease in accounts receivable |
(75,529 | ) | (8,342 | ) | 354,206 | |||||||
| (Increase) decrease in inventories |
(10,549 | ) | 2,118 | 20,135 | ||||||||
| (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts |
(33,816 | ) | 8,757 | 18,472 | ||||||||
| Increase (decrease) in accounts payable |
34,727 | 16,992 | (135,107 | ) | ||||||||
| Decrease in billings in excess of costs and estimated earnings on uncompleted contracts |
(16,278 | ) | (73,714 | ) | (87,645 | ) | ||||||
| Increase (decrease) in accrued payroll and benefits and other accrued expenses and liabilities |
49,608 | (42,639 | ) | (19,014 | ) | |||||||
| Changes in other assets and liabilities, net |
6,692 | 13,065 | (33,058 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
149,425 | 69,527 | 360,772 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Payments for acquisitions of businesses, net of cash acquired, and related earn-out agreements |
(301,306 | ) | (39,902 | ) | (21,686 | ) | ||||||
| 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 |
1,409 | 1,032 | 1,215 | |||||||||
| Purchase of property, plant and equipment |
(29,581 | ) | (19,359 | ) | (24,100 | ) | ||||||
| Purchases of short-term investments with original maturities greater than 90 days |
(17,639 | ) | — | — | ||||||||
| Investment in and advances to unconsolidated entities and joint ventures |
(28 | ) | (65 | ) | (8,000 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(320,518 | ) | (32,724 | ) | (52,571 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from revolving credit facility |
— | 153,000 | — | |||||||||
| Repayments of revolving credit facility |
— | (3,000 | ) | — | ||||||||
| Repayments of long-term debt and debt issuance costs |
(4,147 | ) | (200,828 | ) | (3,041 | ) | ||||||
| Repayments of capital lease obligations |
(1,095 | ) | (430 | ) | (1,085 | ) | ||||||
| Dividends paid to stockholders |
(3,336 | ) | — | — | ||||||||
| Repurchase of common stock |
(27,523 | ) | — | — | ||||||||
| Proceeds from exercise of stock options |
5,608 | 2,818 | 2,801 | |||||||||
| Shares tendered to satisfy minimum tax withholding |
(1,256 | ) | (875 | ) | (1,660 | ) | ||||||
| Issuance of common stock under employee stock purchase plan |
2,310 | 2,305 | 2,165 | |||||||||
| Payment for contingent consideration arrangement |
(1,118 | ) | — | — | ||||||||
| Distributions to noncontrolling interests |
(2,350 | ) | (2,500 | ) | (1,350 | ) | ||||||
| Excess tax benefits from share-based compensation |
3,619 | 1,474 | 2,203 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) provided by financing activities |
(29,288 | ) | (48,036 | ) | 33 | |||||||
|
|
|
|
|
|
|
|||||||
| Effect of exchange rate changes on cash and cash equivalents |
867 | (4,906 | ) | 12,872 | ||||||||
|
|
|
|
|
|
|
|||||||
| (Decrease) increase in cash and cash equivalents |
(199,514 | ) | (16,139 | ) | 321,106 | |||||||
| Cash and cash equivalents at beginning of year |
710,836 | 726,975 | 405,869 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 511,322 | $ | 710,836 | $ | 726,975 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
39
EMCOR Group, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands)
| EMCOR Group, Inc. Stockholders | ||||||||||||||||||||||||||||||||
| Total | Comprehensive income (loss) |
Common stock |
Capital surplus |
Accumulated other comprehensive (loss) income (1) |
Retained earnings |
Treasury stock |
Noncontrolling interests |
|||||||||||||||||||||||||
| Balance, December 31, 2008 |
$ | 1,050,769 | $ | 681 | $ | 397,895 | $ | (49,318 | ) | $ | 708,511 | $ | (14,424 | ) | $ | 7,424 | ||||||||||||||||
| Net income including noncontrolling interests |
163,077 | $ | 163,077 | — | — | — | 160,756 | — | 2,321 | |||||||||||||||||||||||
| Foreign currency translation adjustments |
5,830 | 5,830 | — | 8 | 5,822 | — | — | — | ||||||||||||||||||||||||
| Post retirement adjustment, net of tax of $3.2 million |
(8,612 | ) | (8,612 | ) | — | — | (8,612 | ) | — | — | — | |||||||||||||||||||||
| Deferred loss on cash flow hedge, net of tax of $0.5 million |
(746 | ) | (746 | ) | — | — | (746 | ) | — | — | — | |||||||||||||||||||||
| Loss on partial de-designation of cash flow hedge, net of tax of $0.1 million |
155 | 155 | — | — | 155 | — | — | — | ||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive income |
159,704 | |||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests |
(2,321 | ) | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive income attributable to EMCOR |
$ | 157,383 | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Treasury stock, at cost (2) |
(1,660 | ) | — | — | — | — | (1,660 | ) | — | |||||||||||||||||||||||
| Common stock issued under share-based compensation plans (3) |
9,384 | 6 | 8,745 | — | — | 633 | — | |||||||||||||||||||||||||
| Common stock issued under employee stock purchase plan |
2,165 | — | 2,165 | — | — | — | — | |||||||||||||||||||||||||
| Distributions to noncontrolling interests |
(1,350 | ) | — | — | — | — | — | (1,350 | ) | |||||||||||||||||||||||
| Share-based compensation expense |
5,492 | — | 5,492 | — | — | — | — | |||||||||||||||||||||||||
| Capital contributed by selling shareholders of an acquired business (4) |
1,962 | — | 1,962 | — | — | — | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| 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 | ) | $ | (82,684 | ) | — | — | — | (86,691 | ) | — | 4,007 | ||||||||||||||||||||
| Foreign currency translation adjustments |
3,196 | 3,196 | — | — | 3,196 | — | — | — | ||||||||||||||||||||||||
| Post retirement adjustment, net of tax of $2.5 million |
6,501 | 6,501 | — | — | 6,501 | — | — | — | ||||||||||||||||||||||||
| Deferred gain on cash flow hedge, net of tax of $0.4 million |
591 | 591 | — | — | 591 | — | — | — | ||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive loss |
(72,396 | ) | ||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests |
(4,007 | ) | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive loss attributable to EMCOR |
$ | (76,403 | ) | |||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 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 | $ | 133,671 | — | — | — | 130,826 | — | 2,845 | |||||||||||||||||||||||
| Foreign currency translation adjustments (5) |
(14,182 | ) | (14,182 | ) | — | — | (14,182 | ) | — | — | — | |||||||||||||||||||||
| Post retirement adjustment, net of tax of $7.6 million |
(22,056 | ) | (22,056 | ) | — | — | (22,056 | ) | — | — | — | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive income |
97,433 | |||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests |
(2,845 | ) | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| Comprehensive income attributable to EMCOR |
$ | 94,588 | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 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 |
(2,350 | ) | — | — | — | — | — | (2,350 | ) | |||||||||||||||||||||||
| Share-based compensation expense |
5,447 | — | 5,447 | — | — | — | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2011 |
$ | 1,245,131 | $ | 681 | $ | 417,136 | $ | (78,649 | ) | $ | 910,042 | $ | (14,476 | ) | $ | 10,397 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| (1) | As of December 31, 2011, represents cumulative foreign currency translation and post retirement liability adjustments of $5.6 million and $(84.2) million, respectively. As of December 31, 2010, represents cumulative foreign currency translation and post retirement liability adjustments of $19.8 million, $(62.2) million, respectively. As of December 31, 2009, represents cumulative foreign currency translation, post retirement liability adjustments and deferred loss on interest rate swap of $16.6 million, $(68.7) million and $(0.6) million, respectively. |
| (2) | Represents value of shares of common stock withheld by EMCOR for minimum statutory income tax withholding requirements upon the issuance of shares in respect of restricted stock units. |
| (3) | Includes the tax benefit associated with share-based compensation of $6.2 million in 2011, $2.0 million in 2010 and $2.2 million in 2009. |
| (4) | Represents redistributed portion of acquisition-related payments to certain employees of a company, the outstanding stock of which we acquired. These employees were not shareholders of that company. Such payments were dependent on continuing employment with us and were recorded as non-cash compensation expense. |
| (5) | 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. |
The accompanying notes to consolidated financial statements are an integral part of these statements.
40
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1— NATURE OF OPERATIONS
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.
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 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.”
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. All investments over which we exercise significant influence, but do not control (a 20% to 50% ownership interest), are accounted for using the equity method of accounting. Additionally, we participate in a joint venture with another company, and we have consolidated this joint venture as we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidation”.
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.
The results of operations of companies acquired have been included in the results of operations from the date of the respective acquisition.
Principles of Preparation
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
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.
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.
Revenue Recognition
Revenues from long-term construction contracts are recognized on the percentage-of-completion method in accordance with ASC Topic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. 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. Revenues from the performance of facilities services for maintenance, repair and retrofit work are recognized consistent with the performance of services, which are
41
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. In the case of customer change orders for uncompleted long-term construction contracts, estimated recoveries are included for work performed in forecasting ultimate profitability on certain contracts. Due to uncertainties inherent in the estimation process, it is possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised in the near-term. Such revisions to costs and income are recognized in the period in which the revisions are determined. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Costs and estimated earnings on uncompleted contracts
Costs and estimated earnings in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Also included in costs and estimated earnings on uncompleted contracts are 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/or 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 when realization is probable and can be reasonably estimated. No profit is recognized on construction costs incurred in connection with claim amounts. Claims and unapproved change orders made by us involve negotiation and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims or unapproved change orders, such litigation costs are expensed as incurred, although we may seek to recover these costs. We believe that we have established legal bases for pursuing recovery of our recorded unapproved change orders and claims, and it is management’s intention to pursue and litigate such claims, if necessary, until a decision or settlement is reached. Unapproved change orders and claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded claims and unapproved change orders may be made in the near term. If we do not successfully resolve these matters, a net expense (recorded as a reduction in revenues) may be required, in addition to amounts that may have been previously provided for. We record the profit associated with the settlement of claims upon receipt of final payment. Claims against us are recognized when a loss is considered probable and amounts are reasonably determinable.
Costs and estimated earnings on uncompleted contracts and related amounts billed as of December 31, 2011 and 2010 were as follows (in thousands):
| 2011 | 2010 | |||||||
| Costs incurred on uncompleted contracts |
$ | 7,598,325 | $ | 7,274,211 | ||||
| Estimated earnings, thereon |
830,622 | 811,651 | ||||||
|
|
|
|
|
|||||
| 8,428,947 | 8,085,862 | |||||||
| Less: billings to date |
8,755,806 | 8,454,299 | ||||||
|
|
|
|
|
|||||
| $ | (326,859 | ) | $ | (368,437 | ) | |||
|
|
|
|
|
|||||
Such amounts were included in the accompanying Consolidated Balance Sheets at December 31, 2011 and 2010 under the following captions (in thousands):
| 2011 | 2010 | |||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
$ | 114,836 | $ | 88,253 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts |
(441,695 | ) | (456,690 | ) | ||||
|
|
|
|
|
|||||
| $ | (326,859 | ) | $ | (368,437 | ) | |||
|
|
|
|
|
|||||
42
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
As of December 31, 2011 and 2010, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $14.5 million and $9.3 million, respectively, and claims of approximately $1.6 million and $6.3 million, respectively. In addition, accounts receivable as of December 31, 2011 and 2010 included claims of approximately $0.2 million and $1.8 million, respectively, plus contractually billed amounts related to such contracts of $40.4 million and $42.7 million, respectively. Generally, contractually billed amounts will not be paid by the customer to us until final resolution of related claims.
Classification of Contract Amounts
In accordance with industry practice, we classify as current all assets and liabilities related to the performance of long-term contracts. The contracting cycle for certain long-term contracts may extend beyond one year, and, accordingly, collection or payment of amounts related to these contracts may extend beyond one year. Accounts receivable at December 31, 2011 and 2010 included $188.1 million and $213.8 million, respectively, of retainage billed under terms of these contracts. We estimate that approximately 77% of retainage recorded at December 31, 2011 will be collected during 2012. Accounts payable at December 31, 2011 and 2010 included $39.5 million and $42.8 million, respectively, of retainage withheld under terms of the contracts. We estimate that approximately 85% of retainage withheld at December 31, 2011 will be paid during 2012.
Cash and cash equivalents
For purposes of the consolidated financial statements, we consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. We maintain a centralized cash management system whereby our excess cash balances are invested in high quality, short-term money market instruments, which are considered cash equivalents. We have cash balances in certain of our domestic bank accounts that exceed federally insured limits.
Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts. This allowance is based upon the best estimate of the probable losses in existing accounts receivable. The Company determines the allowances based upon individual accounts when information indicates the customers may have an inability to meet the financial obligation, as well as historical collection and write-off experience. These amounts are re-evaluated and adjusted on a regular basis as additional information is received. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful. At December 31, 2011 and 2010, our accounts receivable of $1,187.8 million and $1,090.9 million, respectively, included allowances for doubtful accounts of $16.7 million and $17.3 million, respectively. The provision for (recovery of) doubtful accounts during 2011, 2010 and 2009 amounted to approximately $2.2 million, $(5.1) million and $7.2 million, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally using the average cost method.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation, including amortization of assets under capital leases, is recorded principally using the straight-line method over estimated useful lives of 3 to 10 years for machinery and equipment, 3 to 7 years for vehicles, furniture and fixtures and computer hardware/software and 25 years for buildings. Leasehold improvements are amortized over the shorter of the remaining life of the lease term or the expected service life of the improvement.
The carrying values of property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. In performing this review for recoverability, property, plant and equipment
43
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
is assessed for possible impairment by comparing their carrying values to their undiscounted net pre-tax cash flows expected to result from the use of the asset. Impaired assets are written down to their fair values, generally determined based on their estimated future discounted cash flows. Based on the results of our testing for the years ended December 31, 2011, 2010 and 2009, no impairment of property, plant and equipment was recognized.
Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets with indefinite lives that are not being amortized, such as trade names, are instead tested at least annually for impairment (which we test each October 1, absent any impairment indicators) and are written down if impaired. Identifiable intangible assets with finite lives are amortized over their useful lives and are reviewed for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable. See Note 9—Goodwill and Identifiable Intangible Assets of the notes to consolidated financial statements for additional information.
Insurance Liabilities
Our insurance liabilities are determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. At December 31, 2011 and 2010, the estimated current portion of undiscounted insurance liabilities of $23.7 million and $21.8 million, respectively, were included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets. The estimated non-current portion of the undiscounted insurance liabilities included in “Other long-term obligations” at December 31, 2011 and 2010 were $104.9 million and $98.5 million, respectively.
Foreign Operations
The financial statements and transactions of our foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars in accordance with ASC Topic 830, “Foreign Currency Matters”. Translation adjustments have been recorded as “Accumulated other comprehensive loss”, a separate component of “Equity”.
Income Taxes
We account for income taxes in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). ASC 740 requires an asset and liability approach which requires the recognition of deferred income tax assets and deferred income tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized.
We account for uncertain tax positions in accordance with the provisions of ASC 740. We recognize accruals of interest related to unrecognized tax benefits as a component of the income tax provision.
Valuation of Share-Based Compensation Plans
We have various types of share-based compensation plans and programs, which are administered by our Board of Directors or its Compensation and Personnel Committee. See Note 15—Share-Based Compensation Plans of the notes to consolidated financial statements for additional information regarding the share-based compensation plans and programs.
We account for share-based payments in accordance with the provision of ASC Topic 718, “Compensation—Stock Compensation” (“ASC 718”). ASC 718 requires that all share-based payments issued to acquire goods or services, including grants of employee stock options, be recognized in the statement of operations based on their fair values, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense related to share-based awards is recognized over the requisite service period, which is
44
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
generally the vesting period. For shares subject to graded vesting, our policy is to apply the straight-line method in recognizing compensation expense. ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash inflow, rather than as an operating cash inflow on the Consolidated Statements of Cash Flows. This requirement reduces net operating cash flows and increases net financing cash flows.
New Accounting Pronouncements
On January 1, 2011, we adopted the accounting pronouncement issued by the FASB updating existing guidance on revenue recognition for arrangements with multiple deliverables. This guidance eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration attributed to the delivered item. This may allow some companies to recognize revenue on transactions that involve multiple deliverables earlier than under previous requirements. We have determined that the adoption of the pronouncement did not have any effect on our financial position and/or results of operations, and we will review new and/or modified revenue arrangements after the adoption date to ensure compliance with this update.
On January 1, 2011, we adopted the accounting pronouncement issued by the FASB updating existing guidance on business combinations, which clarifies that if comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. We have considered the guidance in conjunction with acquisitions since its adoption.
On January 1, 2011, we adopted the accounting pronouncement issued by the FASB updating existing guidance, which modifies the goodwill impairment test for reporting units with zero or negative carrying amounts. For reporting units with zero or negative carrying amounts, the second step of the goodwill impairment test must be performed if it appears more likely than not that a goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors indicating that an impairment may exist. We have considered the guidance in conjunction with our goodwill impairment testing since its adoption.
In June 2011, an accounting pronouncement was issued by the FASB to update existing guidance on comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of our Condensed Consolidated Statements of Equity and Comprehensive Income, which is our current presentation. It requires companies to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. This pronouncement is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011, but early adoption is permitted. The adoption of this pronouncement will not have any effect on our financial condition or results of operations, though it will change our financial statement presentation.
In September 2011, an accounting pronouncement was issued by the FASB to update the disclosure requirements of an employer who participates in multiemployer pension plans. This new pronouncement requires the disclosure of: (a) the amount of employer contributions made to each significant plan and to all plans in the aggregate; (b) an indication of whether the employer’s contributions represent more than five percent of the total contributions to the plan; (c) an indication of which plans, if any, are subject to a funding improvement plan; (d) the expiration date(s) of collective bargaining agreement(s) and any minimum funding arrangements; (e) the most recent funded status of the plan; and (f) a description of the nature and effect of any changes affecting comparability for each period in which a statement of operations is presented. The enhanced disclosures are required for fiscal years ending after December 15, 2011. The adoption of this pronouncement did not have any effect on our financial condition or results of operations, though it will require enhanced disclosures in our notes to consolidated financial statements. See Note 16—Retirement Plans for additional information regarding multiemployer pension plans.
45
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
In September 2011, an accounting pronouncement was issued by the FASB to simplify how a company is required to test goodwill for impairment. Companies will now have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This pronouncement is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We have not determined whether we will apply this guidance in our future impairment testing.
NOTE 3— ACQUISITIONS OF BUSINESSES
In June 2011, we completed the acquisition of USM Services Holdings, Inc. (“USM”) from Transfield Services Limited. USM is a leading provider of facilities maintenance solutions in North America and is based in Norristown, Pennsylvania. Under the terms of the transaction, we acquired 100% of USM’s stock for total consideration of $251.1 million utilized cash on hand to fund the purchase. This acquisition has been accounted for using the acquisition method of accounting. We acquired working capital of $5.0 million and other net liabilities of $20.9 million, and have preliminarily ascribed $132.6 million to goodwill and $134.4 million to identifiable intangible assets in connection with this acquisition, which has been included in our United States facilities services segment. According to certain provisions of the stock purchase agreement, we are to be indemnified for certain costs. We have not yet completed the final allocation of the purchase price related to the USM acquisition. As we finalize the purchase price allocation, it is anticipated that additional purchase price adjustments will be recorded relating to finalization of intangible asset valuations, tax matters and other items. Such adjustments will be recorded during the measurement period. The finalization of the purchase price accounting assessment may result in changes in the valuation of assets and liabilities acquired, which are not expected to be significant.
In connection with this acquisition, we incurred approximately $4.7 million of transaction related expenses during 2011, which have been classified as a component of “Selling, general and administrative expenses” on the Consolidated Statements of Operations. USM is a leading provider of essential facilities maintenance services, including interior and exterior services and electrical, mechanical and plumbing services, to national and regional commercial customers that typically maintain over 100 sites across wide geographic areas. USM services these customers through its highly-developed proprietary network of over 11,000 service partners. We acquired USM because we believe that it further strengthens our market position in facilities and maintenance services and provides access to new customers for a range of services that we provide. Additionally, we believe that over the next two years we will be able to generate certain operating synergies with our existing facilities services operations.
We acquired two additional companies during 2011, two companies during 2010 and one company in 2009, each for an immaterial amount. One of the 2011 acquisitions primarily provides mechanical construction services and has been included in our United States mechanical construction and facilities services segment, and the other one primarily provides mobile mechanical services and has been included in our United States facilities services segment. One of the companies acquired in 2010 and the company acquired in 2009 provide mobile mechanical services, and the other company acquired in 2010 primarily performs government infrastructure contracting services. The aforementioned companies have been included in our United States facilities services reporting segment. We believe these acquisitions further expand our service capabilities into new geographical and/or technical areas.
The purchase price allocation for two of the companies acquired in 2011 is subject to the finalization of valuation of acquired identifiable intangible assets. During 2011, the purchase price accounting for one of the 2011 and one of the 2010 acquisitions referred to above was finalized. As a result, identifiable intangible assets ascribed to goodwill, contract backlog, customer relationships, trade names and related non-competition agreements were adjusted with an insignificant impact. These acquisitions were accounted for by the acquisition method, and the purchase prices for them have been allocated to their respective assets and liabilities, based upon the estimated fair values of the respective assets and liabilities at the dates of the respective acquisitions.
46
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3— ACQUISITIONS OF BUSINESSES — (Continued)
For the year ended December 31, 2009, we recorded approximately $2.0 million of non-cash compensation expense related to a prior acquisition, with an offsetting amount recorded as a capital contribution from the selling shareholders of the acquired company. This non-cash expense was a result of a redistributed portion of acquisition-related payments made by the former owners of the acquired company to certain employees. These employees were not shareholders of the acquired company, and such payments were dependent on continuing employment with us.
NOTE 4— DISPOSITION OF ASSETS
Results of our Canadian operations for the years ended December 31, 2011, 2010 and 2009 are presented in our Consolidated Financial Statements as 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. Included in the net income (loss) 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. (Loss) income from discontinued operation includes income tax (benefits) provision of $(0.4) million, $(1.3) million and $3.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. 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.
The components of the results of discontinued operations for the Canada construction segment are as follows (in thousands):
| For the years ended December 31, | ||||||||||||
| 2011 (1) | 2010 | 2009 | ||||||||||
| Revenues |
$ | 118,214 | $ | 269,332 | $ | 320,243 | ||||||
| (Loss) income from discontinued operation (net of income taxes) |
$ | (44 | ) | $ | (849 | ) | $ | 8,672 | ||||
| Gain on sale of discontinued operation (net of income taxes) |
$ | 9,127 | $ | — | $ | — | ||||||
| Net income (loss) from discontinued operation |
$ | 9,083 | $ | (849 | ) | $ | 8,672 | |||||
| Diluted earnings (loss) per share from discontinued operation |
$ | 0.13 | $ | (0.01 | ) | $ | 0.13 | |||||
(1) Through the date of sale, August 2, 2011.
Included in the Consolidated Balance Sheets at December 31, 2010 are the following major classes of assets and liabilities associated with the discontinued operation (in thousands):
| Assets of discontinued operation: |
||||||
| Current assets |
$ | 99,173 | ||||
| Non-current assets |
$ | 3,827 | ||||
| Liabilities of discontinued operation: |
||||||
| Current liabilities |
$ | 53,853 | ||||
| Non-current liabilities |
$ | 4,108 | ||||
47
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5— EARNINGS PER SHARE
The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the years ended December 31, 2011, 2010 and 2009 (in thousands, except share and per share data):
| 2011 | 2010 | 2009 | ||||||||||
| Numerator: |
||||||||||||
| Income (loss) from continuing operations attributable to EMCOR Group, Inc. common stockholders |
$ | 121,743 | $ | (85,842 | ) | $ | 152,084 | |||||
| Income (loss) from discontinued operation |
9,083 | (849 | ) | 8,672 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. available to common stockholders |
$ | 130,826 | $ | (86,691 | ) | $ | 160,756 | |||||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Weighted average shares outstanding used to compute basic earnings (loss) per common share |
66,780,093 | 66,393,782 | 65,910,793 | |||||||||
| Effect of diluted securities—Share-based awards |
1,595,409 | — | 1,534,492 | |||||||||
|
|
|
|
|
|
|
|||||||
| Shares used to compute diluted earnings (loss) per common share |
68,375,502 | 66,393,782 | 67,445,285 | |||||||||
|
|
|
|
|
|
|
|||||||
| Basic earnings (loss) per common share: |
||||||||||||
| From continuing operations attributable to EMCOR Group, Inc. common stockholders |
$ | 1.82 | $ | (1.30 | ) | $ | 2.31 | |||||
| From discontinued operation |
0.14 | (0.01 | ) | 0.13 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. common stockholders |
$ | 1.96 | $ | (1.31 | ) | $ | 2.44 | |||||
|
|
|
|
|
|
|
|||||||
| Diluted earnings (loss) per common share: |
||||||||||||
| From continuing operations attributable to EMCOR Group, Inc. common stockholders |
$ | 1.78 | $ | (1.30 | ) | $ | 2.25 | |||||
| From discontinued operation |
0.13 | (0.01 | ) | 0.13 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to EMCOR Group, Inc. common stockholders |
$ | 1.91 | $ | (1.31 | ) | $ | 2.38 | |||||
|
|
|
|
|
|
|
|||||||
The number of options granted to purchase shares of our common stock that were excluded from the computation of diluted EPS for the years ended December 31, 2011 and 2009 because they would be anti-dilutive were 321,443 and 516,386, respectively. The effect of 1,645,098 of common stock equivalents have been excluded from the calculation of diluted EPS for the year ended December 31, 2010 due to our net loss position in this period. Assuming dilution, there were 301,347 anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2010.
NOTE 6— INVENTORIES
Inventories as of December 31, 2011 and 2010 consist of the following amounts (in thousands):
| 2011 | 2010 | |||||||
| Raw materials and construction materials |
$ | 21,452 | $ | 17,749 | ||||
| Work in process |
23,462 | 15,029 | ||||||
|
|
|
|
|
|||||
| $ | 44,914 | $ | 32,778 | |||||
|
|
|
|
|
|||||
48
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7— INVESTMENTS, NOTES AND OTHER LONG-TERM RECEIVABLES
In January 2010, a venture in which one of our subsidiaries had a 40% interest and which designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in air conditioning commercial properties was sold to a third party. As a result of this sale, we received $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.
Additionally in June 2010, we sold our equity interest in a Middle East venture, which performed facilities services, 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.
NOTE 8— PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2011 and 2010 (in thousands):
| 2011 | 2010 | |||||||
| Machinery and equipment |
$ | 86,874 | $ | 83,498 | ||||
| Vehicles |
40,729 | 35,029 | ||||||
| Furniture and fixtures |
22,159 | 18,344 | ||||||
| Computer hardware/software |
84,473 | 77,016 | ||||||
| Land, buildings and leasehold improvements |
66,028 | 68,691 | ||||||
|
|
|
|
|
|||||
| 300,263 | 282,578 | |||||||
| Accumulated depreciation and amortization |
(198,600 | ) | (193,963 | ) | ||||
|
|
|
|
|
|||||
| $ | 101,663 | $ | 88,615 | |||||
|
|
|
|
|
|||||
Depreciation and amortization expense related to property, plant and equipment was $27.4 million, $25.5 million and $26.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.
NOTE 9— GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill at December 31, 2011 and 2010 was approximately $566.8 million and $406.8 million, respectively, and reflects the excess of cost over fair market value of net identifiable assets of companies acquired. Goodwill attributable to companies acquired in 2011 has been valued at $156.6 million. ASC Topic 805, “Business Combinations” (“ASC 805”) requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. ASC Topic 350, “Intangibles—Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, such as trade names, 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. As of December 31, 2011, approximately 64.3% of our goodwill related to our United States facilities services segment, approximately 35.0% related to our United States mechanical construction and facilities services segment and approximately 0.7% related to our United States electrical construction and facilities services segment.
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
49
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9— GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS — (Continued)
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, 2011 was 13.6% and 12.3% 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, 2011 and 2009, no impairment of our goodwill was recognized.
During the third quarter of 2010 and prior to our October 1 annual impairment test, we concluded that impairment indicators may have existed within the United States facilities services segment based upon the 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 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, 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, 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 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 annual testing was 3.0% for our domestic construction segments and 2.8% for our United States facilities services segment, 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. 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. The annual impairment review of our trade names for the year ended December 31, 2009 resulted in an $11.5 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 and United States mechanical construction and facilities services segments. The current year impairment primarily results from both lower forecasted revenues from and operating margins at specific companies within our United States facilities services segment.
50
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9— GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS — (Continued)
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 years ended December 31, 2011 and 2009. As a result of these reviews, 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 and a $2.0 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 mechanical construction and facilities services segment for the year ended December 31, 2009. For the year ended December 31, 2010 no impairment of our other identifiable intangible assets was recognized.
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 not achieved, or there is a rise in interest rates, we may be required, as we did in 2011, 2010 and 2009, to record 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 relates to customer relationships and $1.0 million relates 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.
The changes in the carrying amount of goodwill by reportable segments during the years ended December 31, 2011 and 2010 were as follows (in thousands):
| United
States electrical construction and facilities services segment |
United
States mechanical construction and facilities services segment |
United
States facilities services segment |
Total | |||||||||||||
| Gross balance at December 31, 2010 |
$ | 3,823 | $ | 175,175 | $ | 438,408 | $ | 617,406 | ||||||||
| Accumulated impairment charge |
— | — | (210,602 | ) | (210,602 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2010 |
3,823 | 175,175 | 227,806 | 406,804 | ||||||||||||
| Acquisitions, earn-out and purchase price adjustments |
— | 23,271 | 136,730 | 160,001 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2011 |
$ | 3,823 | $ | 198,446 | $ | 364,536 | $ | 566,805 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
During 2011 and 2010, pursuant to the purchase method of accounting, we recorded an aggregate of $1.9 million and $1.4 million, respectively, by reason of earn-out obligations in respect of prior acquisitions, which increased goodwill associated with these acquisitions.
51
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9— GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS — (Continued)
Identifiable intangible assets as of December 31, 2011 and 2010 consist of the following (in thousands):
| December 31, 2011 | ||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Accumulated Impairment Charge |
Total | |||||||||||||
| Contract backlog |
$ | 47,580 | $ | (41,505 | ) | $ | — | $ | 6,075 | |||||||
| Developed technology/Vendor network |
95,661 | (19,943 | ) | — | 75,718 | |||||||||||
| Customer relationships |
257,054 | (45,213 | ) | (4,834 | ) | 207,007 | ||||||||||
| Non-competition agreements |
8,269 | (7,386 | ) | — | 883 | |||||||||||
| Trade names (amortized) |
17,521 | (1,466 | ) | — | 16,055 | |||||||||||
| Trade names (unamortized) |
112,601 | — | (47,966 | ) | 64,635 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 538,686 | $ | (115,513 | ) | $ | (52,800 | ) | $ | 370,373 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2010 | ||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Accumulated Impairment Charge |
Total | |||||||||||||
| Contract backlog |
$ | 42,813 | $ | (35,835 | ) | $ | — | $ | 6,978 | |||||||
| Developed technology |
91,000 | (14,977 | ) | — | 76,023 | |||||||||||
| Customer relationships |
133,611 | (31,681 | ) | (2,029 | ) | 99,901 | ||||||||||
| Non-competition agreements |
8,807 | (6,670 | ) | — | 2,137 | |||||||||||
| Trade names (amortized) |
— | — | — | — | ||||||||||||
| Trade names (unamortized) |
107,026 | — | (46,976 | ) | 60,050 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 383,257 | $ | (89,163 | ) | $ | (49,005 | ) | $ | 245,089 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
Identifiable intangible assets attributable to companies acquired in 2011 have been valued at $158.1 million. Identifiable intangible assets attributable to companies acquired in 2010 have been valued at $29.4 million. See Note 3—Acquisitions of Businesses of the notes to consolidated financial statements for additional information. The identifiable intangible amounts are amortized on a straight-line basis. The weighted average amortization periods for the unamortized balances remaining are approximately 15 months for contract backlog, 15 years for developed technology/vendor network, 15 years for customer relationships, 2 years for non-competition agreements and 6.5 years for trade names.
Amortization expense related to identifiable intangible assets was $26.4 million, $16.4 million and $19.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. The following table presents the estimated future amortization expense of identifiable intangible assets in the following years (in thousands):
| 2012 |
$ | 29,544 | ||
| 2013 |
25,029 | |||
| 2014 |
23,738 | |||
| 2015 |
23,652 | |||
| 2016 |
22,985 | |||
| Thereafter |
180,790 | |||
|
|
|
|||
| $ | 305,738 | |||
|
|
|
52
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10— DEBT
Credit Facilities
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 is 0.25% of the unused amount as of December 31, 2011. Borrowings under the 2011 Revolving Credit Facility bear interest at (1) a rate which is the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at December 31, 2011) plus 0.50% to 1.00%, based on certain financial tests or (2) United States dollar LIBOR (0.30% at December 31, 2011) plus 1.50% to 2.00%, based on certain financial tests. The interest rate in effect at December 31, 2011 was 1.80%. 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 $4.1 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, 2011 and December 31, 2010, we had approximately $83.1 million and $82.4 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, 2011, which may remain outstanding at our discretion until the 2011 Revolving Credit Facility expires.
Term Loan
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.
53
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10— DEBT — (Continued)
Long-term debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2011 and 2010 (in thousands):
| 2011 | 2010 | |||||||
| 2011 Revolving Credit Facility |
$ | 150,000 | $ | — | ||||
| 2010 Revolving Credit Facility |
— | 150,000 | ||||||
| Capitalized Lease Obligations, at weighted average interest rates from 0.8% to 13.8% payable in varying amounts through 2015 |
4,857 | 1,649 | ||||||
| Other |
— | 24 | ||||||
|
|
|
|
|
|||||
| 154,857 | 151,673 | |||||||
| Less: current maturities |
1,522 | 489 | ||||||
|
|
|
|
|
|||||
| $ | 153,335 | $ | 151,184 | |||||
|
|
|
|
|
|||||
Capitalized Lease Obligations
See Note 17—Commitments and Contingencies of the notes to consolidated financial statements for additional information.
Other Long-Term Debt
As of December 31, 2010, other long-term debt consisted primarily of loans for various field equipment.
NOTE 11— DERIVATIVE INSTRUMENT AND HEDGING ACTIVITY
On January 27, 2009, we entered into an interest rate swap agreement (the “Swap Agreement”), which hedged the interest rate risk on our variable rate debt. The Swap Agreement matured in October 2010 and was used to manage the variable interest rate of our borrowings and related overall cost of borrowing.
We paid a fixed rate on the Swap Agreement of 2.225% and received a floating rate of 30 day LIBOR on the notional amount. A portion of the interest rate swap had been designated as an effective cash flow hedge, whereby changes in the cash flows from the swap perfectly offset the changes in the cash flows associated with the floating rate of interest. See Note 10—Debt of the notes to consolidated financial statements for additional information. The fair value of the interest rate swap at December 31, 2009 was a net liability of $1.2 million. This liability reflected the interest rate swap’s termination value as the credit value adjustment for counterparty nonperformance was immaterial. We had no obligation to post any collateral related to this derivative. The fair value of the interest swap was based upon the valuation technique known as the market standard methodology of netting the discounted future fixed cash flows and the discounted expected variable cash flows. The variable cash flows were based on an expectation of future interest rates (forward curves) derived from observable interest rate curves. In addition, we had incorporated a credit valuation adjustment into our calculation of fair value of the interest rate swap. This adjustment recognized both our nonperformance risk and the counterparty’s nonperformance risk. The net liability was included in “Other accrued expenses and liabilities” on our Consolidated Balance Sheet. Accumulated other comprehensive loss at December 31, 2009 included the accumulated loss, net of income taxes, on the cash flow hedge, of $0.6 million.
On December 1, 2009, we de-designated $45.5 million of the interest rate swap as it was determined that it was no longer probable that the future estimated cash flows were going to occur as originally estimated. We discontinued the application of hedge accounting associated with this portion of the interest rate swap, and recognized $0.2 million of income and $0.3 million of expense as part of interest expense, and removed from Accumulated other comprehensive loss, for the years ended December 31, 2010 and 2009, respectively.
54
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11— DERIVATIVE INSTRUMENT AND HEDGING ACTIVITY — (Continued)
As of December 31, 2009, the fair value of our derivative was $1.2 million and was in a net liability position reflecting the interest rate swap’s termination value as the credit value adjustment for counterparty nonperformance was immaterial. As of December 31, 2011 and 2010, we have no derivatives and/or hedging instruments outstanding.
NOTE 12— FAIR VALUE MEASUREMENTS
We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:
Level 1—Unadjusted quoted market prices in active markets for identical assets and liabilities.
Level 2—Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3—Prices or valuations that require inputs that are both significant to the measurement and unobservable.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2011 and 2010 (in thousands):
| Assets at Fair Value as of December 31, 2011 | ||||||||||||||||
| Asset Category |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash and cash equivalents (1) |
$ | 511,322 | $ | — | $ | — | $ | 511,322 | ||||||||
| Restricted cash (2) |
5,928 | — | — | 5,928 | ||||||||||||
| Short-term investments (2) |
17,096 | — | — | 17,096 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 534,346 | $ | — | $ | — | $ | 534,346 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Assets at Fair Value as of December 31, 2010 | ||||||||||||||||
| Asset Category |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash and cash equivalents (1) |
$ | 710,836 | $ | — | $ | — | $ | 710,836 | ||||||||
| Restricted cash (2) |
1,326 | — | — | 1,326 | ||||||||||||
| Short-term investments (2) |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 712,162 | $ | — | $ | — | $ | 712,162 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, which are Level 1 assets. At December 31, 2011 and 2010, we had $373.1 million and $623.4 million, respectively, in money market funds. |
| (2) | Restricted cash and short-term investments with original maturities greater than 90 days are classified as “Prepaid expenses and other” on our consolidated balance sheets. |
We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our 2011 Revolving Credit Facility approximates the fair value due to the variable rate on such debt.
At December 31, 2011 and 2010, we had certain assets, specifically $0.9 million of indefinite lived intangible assets and $256.1 million of indefinite lived intangible assets and goodwill, which were accounted for at fair market value on a non-recurring basis. We have determined that the fair value measurements of these non-financial assets are Level 3 in the fair value hierarchy. See Note 9—Goodwill and Identifiable Intangible Assets for a further discussion.
55
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13— INCOME TAXES
Our 2011 income tax provision from continuing operations was $76.8 million compared to $53.7 million for 2010 and $92.6 million for 2009 based on effective income tax rates, before the tax effect of non-cash impairment charges, of approximately 38.7%, 37.2% and 37.8%, respectively. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to non-controlling interests, for the years ended December 31, 2011, 2010 and 2009, inclusive of non-cash impairment charges, were 38.7%, (167.2)% and 37.8%, respectively. The increase in the 2011 income tax provision 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 allocation 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 is deductible for income tax purposes. The remaining $176.6 million of this impairment is not deductible for income tax purposes. This non-deductible portion had a significant impact on the effective tax rate for 2010.
We file income tax returns with the Internal Revenue Service and various state, local and foreign jurisdictions. The Company is currently under examination by various taxing authorities for the years 2007 through 2011. We are still subject to audit of our federal income tax returns by the Internal Revenue Service for the years 2008 through 2010.
As of December 31, 2011 and 2010, the amount of unrecognized income tax benefits was $5.7 million and $6.5 million (of which $3.1 million and $4.2 million, if recognized, would favorably affect our effective income tax rate), respectively. At both December 31, 2011 and 2010, we had an accrual of $2.3 million for the payment of interest related to unrecognized income tax benefits included on the Consolidated Balance Sheets. During the years ended December 31, 2011 and 2010, we recognized approximately $0.02 million in interest income and $0.1 million in interest expense related to our unrecognized income tax benefits, respectively. As of December 31, 2011 and 2010, we had total income tax reserves included in “Other long-term liabilities” of $8.0 million and $8.8 million, respectively.
A reconciliation of the beginning and end of year unrecognized income tax benefits is as follows (in thousands):
| 2011 | 2010 | |||||||
| Balance at beginning of year |
$ | 6,513 | $ | 7,534 | ||||
| Additions based on tax positions related to the current year |
1,298 | 865 | ||||||
| Additions based on tax positions related to prior years |
395 | 328 | ||||||
| Reductions for tax positions of prior years |
(1,074 | ) | (915 | ) | ||||
| Reductions for expired statute of limitations |
(1,471 | ) | (1,299 | ) | ||||
|
|
|
|
|
|||||
| Balance at end of year |
$ | 5,661 | $ | 6,513 | ||||
|
|
|
|
|
|||||
It is possible that approximately $0.3 million of unrecognized income tax benefits at December 31, 2011, primarily relating to uncertain tax positions attributable to certain intercompany transactions and compensation related accruals, will become recognized income tax benefits in the next twelve months due to the expiration of applicable statutes of limitations.
The income tax provision (benefit) in the accompanying Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 consisted of the following (in thousands):
| 2011 | 2010 | 2009 | ||||||||||
| Current: |
||||||||||||
| Federal provision |
$ | 54,033 | $ | 55,878 | $ | 73,262 | ||||||
| State and local provisions |
14,735 | 14,079 | 17,526 | |||||||||
| Foreign (benefit) provision |
(350 | ) | 1,771 | 3,757 | ||||||||
|
|
|
|
|
|
|
|||||||
| 68,418 | 71,728 | 94,545 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Deferred |
8,346 | (18,017 | ) | (1,992 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| $ | 76,764 | $ | 53,711 | $ | 92,553 | |||||||
|
|
|
|
|
|
|
|||||||
56
EMCOR Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13— INCOME TAXES — (Continued)
Factors accounting for the variation from U.S. statutory income tax rates from continuing operations for the years ended December 31, 2011, 2010 and 2009 were as follows (in thousands):
| 2011 | 2010 | 2009 | ||||||||||
| Federal income taxes at the statutory rate |
$ | 70,471 | $ | (9,843 | ) | $ | 86,435 | |||||
| Noncontrolling interests |
(996 | ) | (1,403 | ) | (812 | ) | ||||||
| State and local income taxes, net of federal tax benefits |
9,600 | 6,374 | 10,279 | |||||||||
| Permanent differences |
(1,580 | ) | (1,401 | ) | (1,201 | ) | ||||||
| Goodwill impairment |
— | |||||||||||