e10vk
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
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
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For the fiscal year ended December 31,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
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For the Transition Period
from to
Commission file Number 1-8267
EMCOR GROUP, INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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11-2125338
(I.R.S. Employer
Identification No.)
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301 Merritt Seven
Norwalk, Connecticut
(Address of Principal Executive Offices)
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06851-1092
(Zip Code)
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Registrants telephone number, including area code:
(203) 849-7800
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a wellknown
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
x
No o
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 o
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 o
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 o
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 registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. Large accelerated
filer x Accelerated
filer o Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No x
The aggregate market value of the common stock held by
non-affiliates of the registrant was approximately
$1,292,000,000 as of the last business day of the
registrants 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 registrants common stock
outstanding as of the close of business on February 22,
2011: 66,683,968 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for
the 2011 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.
TABLE OF
CONTENTS
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PAGE
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PART I
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Item 1.
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Business
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General
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1
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Operations
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Competition
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Employees
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5
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Backlog
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5
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Available Information
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5
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff Comments
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11
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Item 2.
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Properties
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12
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Item 3.
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Legal Proceedings
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Item 4.
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(Removed and Reserved)
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16
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Executive Officers of the Registrant
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17
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PART II
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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18
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Item 6.
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Selected Financial Data
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20
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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36
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Item 8.
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Financial Statements and Supplementary Data
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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Item 9A.
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Controls and Procedures
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Item 9B.
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Other Information
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73
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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Item 11.
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Executive Compensation
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74
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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74
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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74
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Item 14.
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Principal Accounting Fees and Services
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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75
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[This Page Intentionally Left
Blank]
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 Managements 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, 2010, June 30,
2010 and September 30, 2010 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.
[This Page Intentionally Left
Blank]
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.
General
We are one of the largest electrical and mechanical construction
and facilities services firms in the United States, Canada,
the United Kingdom and in the world. In 2010, we had revenues of
approximately $5.1 billion. We provide services to a broad
range of commercial, industrial, utility and institutional
customers through over 70 operating subsidiaries and joint
venture entities. Our offices are located in the United States,
Canada 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:
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Electric power transmission and distribution systems;
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Premises electrical and lighting systems;
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Low-voltage systems, such as fire alarm, security and process
control systems;
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Voice and data communications systems;
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Roadway and transit lighting and fiber optic lines;
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Heating, ventilation, air conditioning, refrigeration and
clean-room process ventilation systems;
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Fire protection systems;
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Plumbing, process and high-purity piping systems;
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Water and wastewater treatment systems; and
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Central plant heating and cooling systems.
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Our facilities services operations, many of which support the
operation of a customers facilities, include:
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Industrial maintenance and services;
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Outage services to utilities and industrial plants;
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Commercial and government site-based operations and maintenance;
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Military base operations support services;
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Mobile maintenance and services;
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Facilities management;
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Installation and support for building systems;
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Program development, management and maintenance for energy
systems;
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Shop and
on-site
field services for refineries and petrochemical plants;
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Technical consulting and diagnostic services;
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Infrastructure and building projects for federal, state and
local governmental agencies and bodies;
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Small modification and retrofit projects; and
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Retrofit projects to comply with clean air laws.
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Facilities services are provided to a wide range of commercial,
industrial, utility and institutional facilities, including
those to which we also provide construction services and others
to which construction services are provided by others. Many of
our varied
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facilities services are often combined to provide integrated
service packages, which include operations and maintenance,
mobile mechanical services, energy management and facility
improvement programs.
We provide construction services and facilities services
directly to corporations, municipalities and other 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, 2010,
we had over 24,000 employees.
Our revenues are derived from many different customers in
numerous industries, which have operations in several different
geographical areas. Of our 2010 revenues, approximately 86% were
generated in the United States and approximately 14% were
generated internationally. In 2010, approximately 42% of
revenues were derived from new construction projects, 19% were
derived from renovation and retrofit of customers existing
facilities, and 39% 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, Canada, the United
Kingdom and all other foreign countries, see
Note 18 Segment Information of the notes to
consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data.
Operations
The electrical and mechanical construction services industry has
grown over the years due principally to the increased content,
complexity and sophistication of electrical and mechanical
systems, as well as the installation of more technologically
advanced voice and data communications, lighting and
environmental control systems in all types of facilities in
large part due to the integration of digital processing and
information technology 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 of:
(a) electric power transmission and distribution systems,
including power cables, conduits, distribution panels,
transformers, generators, uninterruptible power supply systems
and related switch gear and controls; (b) premises
electrical and lighting systems, including fixtures and
controls; (c) low-voltage systems, such as fire alarm,
security and process control systems; (d) voice and data
communications systems, including fiber-optic and low-voltage
cabling; (e) roadway and transit lighting and fiber-optic
lines; (f) heating, ventilation, air conditioning,
refrigeration and clean-room process ventilation systems;
(g) fire protection systems; (h) plumbing, process and
high-purity piping systems; (i) water and wastewater
treatment systems; and (j) central plant heating and
cooling systems.
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 facilities or the fit-out of
large blocks of space within commercial buildings and
(b) smaller installation projects typically involving
fit-out, renovation and retrofit work.
Our United States electrical and mechanical construction
services operations accounted for about 52% of our 2010
revenues, of which revenues of approximately 68% were related to
new construction and approximately 32% were related to
renovation and retrofit projects. Our United Kingdom and Canada
electrical and mechanical construction services operations
accounted for approximately 9% of our 2010 revenues, of which
revenues of approximately 71% were related to new construction
and approximately 29% 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
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occasionally exceeding $150.0 million and are frequently
multi-year projects, represented approximately 39% of our
construction services revenues in 2010.
Our projects of less than $10.0 million accounted for
approximately 61% of our 2010 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, trading floors in financial services businesses, new
production lines in manufacturing plants and office arrangements
in existing office buildings. They are not usually dependent
upon the new construction market. Demand for these projects and
types of services is often prompted by the expiration of leases,
changes in technology, or changes in the customers plant
or office layout in the normal course of a customers
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
and institutional facilities, including both those for which we
have provided construction services and those for which
construction services were provided by others. Facilities
services are frequently bundled to provide integrated service
packages and are provided on a mobile basis or by our employees
based at customer sites. Through a recent acquisition of a
government infrastructure project company headquartered in
Jacksonville, Florida, we now offer diversified prime
contracting services to federal and state government agencies
and local municipalities.
These facilities services, which generated approximately 39% of
our 2010 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 2010 facilities services revenues, approximately
86% were generated in the United States and approximately 14%
were generated internationally.
Our facilities services operations have built on our traditional
electrical and mechanical services operations, facilities
services activities at 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 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
maintenance and services, facilities management, installation
and support for building systems, program development,
management and maintenance of 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
customers 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.
In Washington D.C., 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 Department of Veteran Affairs, and the Department of
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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, which, among other
facilities, includes the Bethesda Naval Hospital, the Naval
Research Laboratory and the Washington Navy Yard. We are also
involved in joint ventures providing facilities services to the
Navy, including one providing facilities services to the Naval
Submarine Base in Bangor, Washington and the Naval Hospital in
Bremerton, 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.
Our facilities services operations also provide aftermarket
maintenance and repair services, replacement parts and
fabrication services for highly engineered shell and tube heat
exchangers for refineries and the petrochemical industry. We
provide in-shop repairs and customized design and manufacturing
for heat exchangers, as well as related equipment on the
U.S. Gulf Coast and at a facility in the Los Angeles,
California area and provide cleaning services for heat
exchangers at one of our Texas facilities. In addition, we
provide aftermarket maintenance of shell and tube heat
exchangers in the field. These services are tailored to meet
customer needs for scheduled turnarounds or specialty callout
service. We also have embedded multi-year contracts with
refineries pursuant to which our crews and equipment are located
at customers plants, allowing our employees to perform
specialty services for heat exchangers and related equipment on
a daily basis.
We currently provide facilities services in a majority of the
states in the United States 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) diagnostic and solution
engineering for building systems and their components;
(e) maintenance and support services to manufacturers and
power producers; and (f) shop and
on-site
field services for refineries and petrochemical plants.
Our facilities services operations also provide energy services,
which include the design, construction and operation of energy
related projects and facilities on a turnkey basis. Currently,
we operate several central heating and cooling plants/power and
cogeneration facilities and provide maintenance services for
high-voltage and boiler systems under multi-year contracts. In
addition, we provide consulting and national program energy
management services under multi-year agreements and energy
efficiency system retrofits.
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.
We believe that our electrical and mechanical construction
services and facilities services operations are complementary,
permitting us to offer customers a comprehensive package of
services. Our ability to offer construction services and
facilities services enhances our competitive position with
customers. Furthermore, our revenues from our facilities
services operations tend to be less cyclical than our
construction operations because facilities services are more
responsive to the needs of an industrys operational
requirements rather than its construction requirements.
Competition
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. We also 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. However, there are a few United States based public
companies focused on providing either electrical or mechanical
construction services, such as Integrated Electrical Services,
Inc. and Comfort Systems USA, Inc. A majority of our revenues
are derived from projects requiring competitive bids; however,
an invitation to bid is often conditioned upon prior experience,
technical capability and financial strength. Because we have
total assets, annual revenues, net worth, access to bank credit
and surety bonding and expertise significantly greater than most
of our competitors, we believe we have a significant competitive
advantage over our competitors in providing electrical and
mechanical construction services. Competitive factors in the
electrical and mechanical construction services business
include: (a) the availability of qualified
and/or
licensed personnel; (b) reputation for integrity and
quality; (c) safety record; (d) cost structure;
(e) relationships with customers; (f) geographic
diversity; (g) the ability to control project costs;
(h) experience in specialized markets; (i) the ability
to obtain surety bonding; (j) adequate working capital;
(k) access to bank credit; and (l) price. However, there
are relatively few significant barriers to entry to several
types of our construction services business.
While the facilities services business is also highly fragmented
with most competitors operating in a specific geographic region,
a number of large United States based corporations such as
Johnson Controls, Inc., Fluor Corp., UNICCO Service Company, the
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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. With respect
to our industrial services operations, we are the leading North
American provider of aftermarket maintenance and repair
services, replacement parts and fabrication 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.
Employees
At December 31, 2010, we employed over 24,000 people,
approximately 65% 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.
Backlog
We had backlog as of December 31, 2010 of approximately
$3.42 billion, compared with backlog of approximately
$3.15 billion as of December 31, 2009. 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.
Available
Information
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission, which we refer to as the SEC. These
filings are available to the public over the internet at the
SECs web site at
http://www.sec.gov.
You may also read and copy any document we file at the
SECs 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 on or 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.
In addition, 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.
5
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, Managements 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 construction services. Negative conditions in the credit
markets may continue to adversely impact our ability to operate
our business. The level of demand for construction
services from our clients 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 capital 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. During 2009 and
continued in 2010, the availability of credit tightened in spite
of governmental efforts to increase liquidity and reduce
interest rates. This situation 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 or
relative construction costs. 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 may result in their
curtailment of future spending on government infrastructure
projects
and/or
expenditures, from which expenditures some of our businesses
derive a significant portion of revenue.
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.
Most of our 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
6
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,
the United Kingdom and Canada. 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 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, achievement of certain
performance standards or performance of our services at a
certain standard of quality. If we subsequently fail to meet
such guarantees, we may be held responsible for costs resulting
from such failures. Such a failure could result in our payment
of liquidated or other damages. To the extent that any of these
events occur, the total costs of a project could exceed the
original estimated costs, and we would experience reduced
profits or, in some cases, a loss.
Many of our contracts, especially our facilities services
contracts, 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:
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customers cancel a significant number of contracts;
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we fail to win a significant number of our existing contracts
upon re-bid;
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we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
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we fail to reduce operating and overhead expenses consistent
with any decrease in our revenues.
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We may be unsuccessful in generating internal growth. Our
ability to generate internal growth will be affected by, among
other factors, our ability to:
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expand the range of services offered to customers to address
their evolving needs;
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attract new customers; and
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increase the number of projects performed for existing customers.
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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
7
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. As of December 31, 2010, approximately
65% 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 many
multi-employer union pension funds based upon wages paid to our
union employees. Under the Employee Retirement Income Security
Act, we may become liable for our proportionate share of a
multi-employer pension plans 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 15Retirement Plans of the
notes to consolidated financial statements for additional
information regarding multi-employer pension plans.
Fluctuating foreign currency exchange rates impact our
financial results. We have significant foreign
operations in Canada and the United Kingdom, which in 2010
accounted, in the aggregate, for 14% 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 international 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
8
customers, including governmental entities. See Item 3.
Legal Proceedings, for more information regarding certain 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,
managements 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
contractors 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.
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.
9
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. Future acquisitions may expose us to
operational challenges and risks, including the diversion of
managements 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, 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, as we were in the second and third quarters
of 2010 and in the fourth quarter of 2009, 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, 2011 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.
An interim impairment review of our goodwill in the third
quarter of 2010 resulted in a $210.6 million non-cash
goodwill impairment charge within our United States facilities
services segment. An interim impairment review of our indefinite
lived intangible assets in the second and third quarters of 2010
resulted in an additional $35.5 million non-cash impairment
charge as a result of a change in the fair value of various
trade names associated with certain prior year acquisitions
reported within our United States facilities services segment.
Additionally, we performed our annual impairment test as of
October 1, and no additional impairment of our goodwill,
trade names and/or other identifiable intangible assets was
recognized for any of our reporting segments in the fourth
quarter of 2010.
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
10
current economic slowdown. The risk of contracts in backlog
being cancelled or suspended generally increase 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. Managements 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
managements reasonable assumptions and experience, but are
only estimates. Variations of actual results from assumptions on
an unusually large project or on a number of average size
projects could be material. We are also required to immediately
recognize the full amount of the estimated loss on a contract
when estimates indicate such a loss. Such adjustments and
accrued losses could result in reduced profitability, which
could negatively impact our cash flow from operations.
The loss of one or a few customers could have an adverse
effect on us. A few clients have in the past and may in
the future account for a significant portion of our revenues in
any one year or over a period of several consecutive years.
Although we have long-standing relationships with many of our
significant clients, our clients may unilaterally reduce 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.
11
Our operations are conducted primarily in leased properties. The
following table lists facilities over 25,000 square feet,
both leased and owned, and identifies the business segment that
is the principal user of each such facility.
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Approximate
|
|
Expiration Date,
|
|
|
Square Feet
|
|
Unless Owned
|
|
Corporate Headquarters
|
|
|
|
|
301 Merritt Seven
Norwalk, Connecticut
|
|
38,650
|
|
6/30/18
|
Operating Facilities
|
|
|
|
|
4050 Cotton Center Boulevard
Phoenix, Arizona (a)
|
|
30,603
|
|
10/31/15
|
1200 North Sickles Drive
Tempe, Arizona (b)
|
|
29,000
|
|
Owned
|
601 South Vincent Avenue
Azusa, California (c)
|
|
36,456
|
|
10/31/11
|
20545 Belshaw Avenue
Carson, California (a)
|
|
29,227
|
|
8/31/12
|
1168 Fesler Street
El Cajon, California (b)
|
|
67,560
|
|
8/31/20
|
17925 South Broadway
Gardena, California (b)
|
|
27,040
|
|
6/3/11
|
24041 Amador Street
Hayward, California (b)
|
|
40,000
|
|
10/31/11
|
25601 Clawiter Road
Hayward, California (b)
|
|
34,800
|
|
6/30/14
|
2 Cromwell
Irvine, California (a)
|
|
49,503
|
|
4/30/18
|
4462 Corporate Center Drive
Los Alamitos, California (c)
|
|
57,863
|
|
9/30/14
|
825 Howe Road
Martinez, California (c)
|
|
109,795
|
|
12/31/12
|
19800 Normandie Avenue
Torrance, California (a)
|
|
36,264
|
|
3/31/14
|
8670 Younger Creek Drive
Sacramento, California (b)
|
|
54,135
|
|
1/13/12
|
940 Remillard Court
San Jose, California (a)
|
|
119,560
|
|
7/31/17
|
5525 Gaines Street
San Diego, California (c)
|
|
27,000
|
|
12/31/11
|
9505 and 9525 Chesapeake Drive
San Diego, California (c)
|
|
25,124
|
|
12/31/11
|
4405 and 4420 Race Street
Denver, Colorado (b)
|
|
31,340
|
|
9/30/16
|
345 Sheridan Boulevard
Lakewood, Colorado (c)
|
|
63,000
|
|
Owned
|
166 Tunnel Road
Vernon, Connecticut (a)
|
|
27,000
|
|
12/31/18
|
9820 Satellite Boulevard
Orlando, Florida (a)
|
|
49,440
|
|
12/31/15
|
3145 Northwoods Parkway
Norcross, Georgia (c)
|
|
25,808
|
|
1/31/12
|
12
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Approximate
|
|
Expiration Date,
|
|
|
Square Feet
|
|
Unless Owned
|
|
400 Lake Ridge Drive
Smyrna, Georgia (a)
|
|
30,000
|
|
9/30/12
|
3100 Woodcreek Drive
Downers Grove, Illinois (c)
|
|
55,551
|
|
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 Street
Highland, Indiana (c)
|
|
57,765
|
|
6/30/14
|
3100 and 3116 Brinkerhoff Road
Kansas City, Kansas (b)
|
|
44,840
|
|
11/30/11
|
631 Pecan Circle
Manhattan, Kansas (b)
|
|
34,719
|
|
8/31/13
|
4250 Highway 30
St. Gabriel, Louisiana (a)
|
|
90,000
|
|
Owned
|
1750 Swisco Road
Sulphur, Louisiana (a)
|
|
112,000
|
|
Owned
|
4530 Hollins Ferry Road
Baltimore, Maryland (b)
|
|
26,792
|
|
Owned
|
1999-2000
Halethorpe Avenue
Halethorpe, Maryland (b)
|
|
48,000
|
|
1/20/12
|
80 Hawes Way
Stoughton, Massachusetts (a)(b)
|
|
36,621
|
|
6/10/13
|
Tax Assessor Parcel:
162-30-801-006,007
Clark County, Nevada (b)
|
|
83,635
|
|
5/14/11
|
3555 West Oquendo Road
Las Vegas, Nevada (c)
|
|
90,000
|
|
11/30/11
|
206 McGaw Drive
Edison, New Jersey (c)
|
|
39,344
|
|
4/30/20
|
348 New County Road
Secaucus, New Jersey (b)
|
|
37,905
|
|
12/31/12
|
301 and 305 Suburban Avenue
Deer Park, New York (b)
|
|
33,535
|
|
4/30/11
|
569-573
Brook Avenue
Deer Park, New York (b)
|
|
50,000
|
|
Month-To-Month
|
111-01
14th Avenue
College Point, New York (c)
|
|
253,291
|
|
2/28/21
|
Two Penn Plaza
New York, New York (c)
|
|
54,570
|
|
1/31/16
|
704 Clinton Avenue South
Rochester, New York (a)
|
|
30,000
|
|
7/31/11
|
2900 Newpark Drive
Barberton, Ohio (b)
|
|
91,831
|
|
11/1/17
|
200 Smally Road
Cincinnati, Ohio (a)
|
|
28,040
|
|
6/30/15
|
3976 Southern Avenue
Cincinnati, Ohio (b)
|
|
44,815
|
|
3/31/18
|
10,15,17 and 21 West Voorhees Street
Cincinnati, Ohio (a)
|
|
31,118
|
|
9/30/11
|
13
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Approximate
|
|
Expiration Date,
|
|
|
Square Feet
|
|
Unless Owned
|
|
2300 International Street
Columbus, Ohio (c)
|
|
25,500
|
|
10/31/12
|
5711-5805
South West Hood Avenue
Portland, Oregon (c)
|
|
29,158
|
|
12/31/15
|
91 Mayview Road
Lawrence, Pennsylvania (a)
|
|
44,468
|
|
2/7/15
|
9815 Roosevelt Boulevard
Philadelphia, Pennsylvania (a)
|
|
33,405
|
|
11/30/21
|
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
|
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
|
2800 Crystal Drive
Arlington, Virginia (a)
|
|
28,554
|
|
7/31/17
|
109 Executive Drive
Dulles, Virginia (c)
|
|
41,007
|
|
8/31/16
|
22930 Shaw Road
Dulles, Virginia (c)
|
|
32,616
|
|
2/28/15
|
3280 Formex Road
Richmond, Virginia (b)
|
|
30,640
|
|
7/31/13
|
8657 South 190th Street
Kent, Washington (b)
|
|
46,125
|
|
7/30/13
|
6950 Gisholt Drive
Madison, Wisconsin (b)
|
|
32,020
|
|
5/31/12
|
615 South 89th Street
Milwaukee, Wisconsin and
9100 West Conrad Street
West Allis, Wisconsin (b)
|
|
38,000
|
|
5/31/20
|
400 Parkdale Avenue North
Hamilton, Ontario, Canada (d)
|
|
48,826
|
|
5/24/11
|
14
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 16Commitments 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.
|
|
(d)
|
|
Principally used by a company
engaged in the Canada construction segment.
|
15
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
On March 14, 2003, John Mowlem Construction plc
(Mowlem) presented a claim in arbitration against
our United Kingdom subsidiary, EMCOR Group (UK) plc (formerly
named EMCOR Drake & Scull Group plc)
(D&S), in connection with a subcontract
D&S entered into with Mowlem with respect to a project for
the United Kingdom Ministry of Defence at Abbey Wood in Bristol,
U.K. Mowlem seeks damages arising out of alleged defects in the
D&S design and construction of the electrical and
mechanical engineering services for the project. Mowlems
claim is for 38.5 million British pounds sterling
(approximately $60.0 million), which includes costs
allegedly incurred by Mowlem in connection with rectification of
the alleged defects, overhead, legal fees, delay and disruption
costs related to such defects, and interest on such amounts. The
claim also includes amounts in respect of liabilities that
Mowlem accepted in connection with a settlement agreement it
entered into with the Ministry of Defence and which it claims
are attributable to D&S. D&S believes it has good and
meritorious defenses to the Mowlem claim. D&S has denied
liability and has asserted a counterclaim for approximately
11.6 million British pounds sterling (approximately
$18.1 million) for certain design, labor and delay and
disruption costs incurred by D&S in connection with its
subcontract with Mowlem for work performed through 1996.
We are involved in other 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.
|
(REMOVED
AND RESERVED)
|
16
EXECUTIVE
OFFICERS OF THE REGISTRANT
Anthony J. Guzzi, Age 46; 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 71; 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 52; Executive Vice
PresidentShared Services of the Company since December
2007 and Senior Vice PresidentShared 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 PresidentFinancial Services of the
Company from March 1993 to April 1996.
Mark A. Pompa, Age 46; 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 PresidentChief 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.
17
PART II
ITEM 5. MARKET
FOR REGISTRANTS 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:
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
23.64
|
|
|
$
|
13.44
|
|
Second Quarter
|
|
$
|
23.75
|
|
|
$
|
16.50
|
|
Third Quarter
|
|
$
|
26.38
|
|
|
$
|
17.88
|
|
Fourth Quarter
|
|
$
|
27.85
|
|
|
$
|
22.17
|
|
Holders. As of February 22, 2011, there were
approximately 102 stockholders of record and, as of that date,
we estimate there were approximately 42,257 beneficial owners
holding our common stock in nominee or street name.
Dividends. We did not pay dividends on our common
stock during 2010 or 2009, and we do not anticipate that we will
pay dividends on our common stock in the foreseeable future. Our
revolving credit facility limits the payment of dividends on our
common stock.
Securities Authorized for Issuance Under Equity Compensation
Plans. The following table summarizes, as of
December 31, 2010, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance under
|
|
|
|
Number of Securities to be
|
|
|
Weighted Average
|
|
|
Equity Compensation
|
|
|
|
Issued upon Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding Securities
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column A)
|
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
2,555,829
|
|
|
$
|
14.64
|
(1)
|
|
|
3,090,000
|
(2)
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
2,226,132
|
(3)
|
|
$
|
11.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,781,961
|
|
|
$
|
13.21
|
|
|
|
3,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included within this amount are
365,188 restricted stock units that will be issued pursuant to
our Long-Term Incentive Plan. The weighted average exercise
price would have been $17.09 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)
|
|
2,194,132 shares relate to
outstanding options to purchase shares of our common stock,
which were granted to our executive officers (the
Executive Options) and 32,000 shares relate to
outstanding options to purchase shares of our common stock,
which were granted to our Directors (the Director
Options).
|
18
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
2,088,132 of the Executive Options referred to in note
(2) 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 418,000 of such Executive
Options were granted on December 14, 2001 with an exercise
price of $10.43 per share, (ii) an aggregate of 392,800 of
such Executive Options were granted on January 2, 2002 with
an exercise price of $11.59 per share, (iii) an aggregate
of 507,740 of such Executive Options were granted on
January 2, 2003 with an exercise price of $13.69 per share,
(iv) 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 (v) 106,000 of such Executive Options were
granted to Mr. Guzzi on October 25, 2004 with an
exercise price of $9.67 per share. The Executive Options
referred to above in clause (i) were exercisable in full on
the grant date; the Executive Options referred to above in
clauses (ii), (iii) and (iv) provided that they were
exercisable as follows: one-fourth on the grant date, one-fourth
on the first anniversary of the grant date, one-fourth on the
second anniversary of the grant date and one-fourth on the last
business day of the calendar year immediately preceding the
third anniversary of the grant date. During 2004, the
out-of-the-money
Executive Options referred to in clauses (iii) and
(iv) were vested in full in anticipation of a change in
accounting rules requiring the expensing of stock options
beginning in January 2006. The options granted to Mr. Guzzi
became exercisable in three equal annual installments,
commencing with the first anniversary of the date of grant.
Each of the Executive Options granted have a term of ten years
from their respective grant dates and an exercise price per
share equal to the fair market value of a share of common stock
on their respective grant dates.
Director
Options
During 2002, each 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 has
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.
19
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 3Acquisitions of Businesses of the notes to
consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data for a discussion
regarding acquisitions. The results of operations for 2007 and
2006 reflect discontinued operations accounting due to the sale
of our interest in a consolidated joint venture in 2007 and the
sale of a subsidiary in 2006.
Income
Statement Data
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
5,121,285
|
|
|
$
|
5,547,942
|
|
|
$
|
6,785,242
|
|
|
$
|
5,927,152
|
|
|
$
|
4,901,783
|
|
Gross profit
|
|
|
719,544
|
|
|
|
824,900
|
|
|
|
886,651
|
|
|
|
702,822
|
|
|
|
552,400
|
|
Impairment loss on goodwill and identifiable intangible assets
|
|
|
246,081
|
|
|
|
13,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(28,686
|
)
|
|
|
262,425
|
|
|
|
302,577
|
|
|
|
199,825
|
|
|
|
111,772
|
|
Net (loss) income attributable to EMCOR Group, Inc.
|
|
$
|
(86,691
|
)
|
|
$
|
160,756
|
|
|
$
|
182,204
|
|
|
$
|
126,808
|
|
|
$
|
86,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.31
|
)
|
|
$
|
2.44
|
|
|
$
|
2.79
|
|
|
$
|
1.93
|
|
|
$
|
1.35
|
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.31
|
)
|
|
$
|
2.44
|
|
|
$
|
2.79
|
|
|
$
|
1.97
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.31
|
)
|
|
$
|
2.38
|
|
|
$
|
2.71
|
|
|
$
|
1.86
|
|
|
$
|
1.30
|
|
From discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.31
|
)
|
|
$
|
2.38
|
|
|
$
|
2.71
|
|
|
$
|
1.90
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Equity (1)
|
|
$
|
1,162,845
|
|
|
$
|
1,226,466
|
|
|
$
|
1,050,769
|
|
|
$
|
891,734
|
|
|
$
|
724,150
|
|
Total assets
|
|
$
|
2,755,542
|
|
|
$
|
2,981,894
|
|
|
$
|
3,030,443
|
|
|
$
|
2,887,000
|
|
|
$
|
2,089,023
|
|
Goodwill
|
|
$
|
406,804
|
|
|
$
|
593,628
|
|
|
$
|
582,714
|
|
|
$
|
563,918
|
|
|
$
|
288,165
|
|
Borrowings under revolving credit facility
|
|
$
|
150,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Term loan, including current maturities
|
|
$
|
|
|
|
$
|
194,750
|
|
|
$
|
197,750
|
|
|
$
|
225,000
|
|
|
$
|
|
|
Other long-term debt, including current maturities
|
|
$
|
24
|
|
|
$
|
|
|
|
$
|
41
|
|
|
$
|
93
|
|
|
$
|
332
|
|
Capital lease obligations, including current maturities
|
|
$
|
1,649
|
|
|
$
|
601
|
|
|
$
|
2,313
|
|
|
$
|
2,151
|
|
|
$
|
1,566
|
|
|
|
|
(1)
|
|
No cash dividends on the
Companys common stock have been declared or paid during
the past five years.
|
20
ITEM 7. MANAGEMENTS
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, Canada,
the United Kingdom and in the world. We provide services to a
broad range of commercial, industrial, utility and institutional
customers through over 70 operating subsidiaries and joint
venture entities. Our offices are located in the United States,
Canada and the United Kingdom. In the Middle East, we previously
carried on business through a joint venture. We sold our
interest in that joint venture in June 2010.
Overview
The following table presents selected financial data for the
fiscal years ended December 31, 2010, 2009 and 2008 (in
millions, except percentages and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Revenues
|
|
$
|
5,121.3
|
|
|
$
|
5,547.9
|
|
|
$
|
6,785.2
|
|
Revenues (decrease) increase from prior year
|
|
|
(7.7
|
)%
|
|
|
(18.2
|
)%
|
|
|
14.5
|
%
|
Impairment loss on goodwill and identifiable intangible assets
|
|
$
|
246.1
|
|
|
$
|
13.5
|
|
|
$
|
|
|
Operating (loss) income
|
|
$
|
(28.7
|
)
|
|
$
|
262.4
|
|
|
$
|
302.6
|
|
Operating (loss) income as a percentage of revenues
|
|
|
(0.6
|
)%
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
Net (loss) income attributable to EMCOR Group, Inc.
|
|
$
|
(86.7
|
)
|
|
$
|
160.8
|
|
|
$
|
182.2
|
|
Diluted (loss) earnings per common share
|
|
$
|
(1.31
|
)
|
|
$
|
2.38
|
|
|
$
|
2.71
|
|
Net cash provided by operating activities
|
|
$
|
68.7
|
|
|
$
|
359.1
|
|
|
$
|
335.0
|
|
Despite signs of a possible economic recovery, we continue to
see a hesitation by many of our customers to commit to capital
and maintenance projects particularly in the private
nonresidential building and refinery markets. In addition, we
continue to experience a very competitive marketplace where
there are a significant number of bidders willing to work at
extremely low margins on any given project. Consequently, we
tempered our expectations regarding the strength of a near term
recovery in our United States facilities services segment and
recorded a non-cash impairment charge of $246.1 million
during 2010. This non-cash impairment charge was comprised of
$210.6 million for goodwill and $35.5 million for
certain of our trade names. Because of these non-cash impairment
charges, lower margin work and a decline in demand, our 2010
results reflected an overall decline in our revenues and
operating results compared to 2009.
The decrease in revenues for 2010, when compared to 2009, was
primarily attributable to: (a) a decline in work performed
on domestic industrial construction projects and a continued
decline in work performed on commercial and hospitality
construction projects, generally as a result of the economic
slowdown, and our decision to only accept work that we believe
can be performed at reasonable margins, (b) continued lower
revenues from our international operations for similar reasons
and (c) a decline in organic revenues arising from our
United States facilities services segment due to the economic
slowdown. During 2010, companies we acquired in 2010 and 2009,
that are within our United States facilities services segment,
contributed $66.3 million to revenues and $1.3 million
to operating income (net of $2.3 million of amortization
expense attributable to identifiable intangible assets included
in cost of sales and selling, general and administrative
expenses).
The decrease in operating income and operating margin (operating
income as a percentage of revenues) for 2010, when compared to
2009, was primarily a result of: (a) the non-cash
impairment charge discussed above, (b) lower operating
income from our United States electrical construction and
facilities services segment, (c) an operating loss from
significant project write-downs at our Canadian operations and
(d) lower operating income from our United States
facilities services segment. This decrease in operating income
was partially offset by: (a) the favorable resolution of
uncertainties on certain construction projects at or nearing
completion within our domestic construction segments,
(b) the favorable resolution of an historical legal claim
on a healthcare construction project within our United States
mechanical construction and facilities services segment and
(c) reduced selling, general and administrative expenses
primarily as a result of a reduction in our provision for
doubtful accounts due to favorable settlements of amounts
previously determined to be uncollectible and lower employment
costs. Net cash provided by operating activities of $68.7
million in 2010 decreased, when compared to 2009, 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 a defined benefit
pension plan of our United Kingdom subsidiary.
We completed two acquisitions during 2010, each for an
immaterial amount. One company provides mobile mechanical
services and the other primarily performs government
infrastructure contracting services. Both companies have been
included in our
21
United States facilities services reporting segment and expand
our service capabilities into geographical areas
and/or
markets in which we have not previously operated. These
acquisitions are not material to our results of operations for
the years presented.
Operating
Segments
Our reportable segments reflect certain reclassifications of
prior year amounts from our United States mechanical
construction and facilities services segment to our United
States facilities services segment due to changes in our
internal reporting structure.
We have the following reportable segments which provide services
associated with the design, integration, installation,
start-up,
operation and maintenance of various systems: (a) United
States electrical construction and facilities services
(involving systems for electrical power transmission and
distribution; premises electrical and lighting systems;
low-voltage systems, such as fire alarm, security and process
control; voice and data communication; roadway and transit
lighting; and fiber optic lines); (b) United States
mechanical construction and facilities services (involving
systems for heating, ventilation, air conditioning,
refrigeration and clean-room process ventilation; fire
protection; plumbing, process and high-purity piping; water and
wastewater treatment; and central plant heating and cooling);
(c) United States facilities services; (d) Canada
construction; (e) United Kingdom construction and
facilities services; and (f) Other international
construction and facilities services. The segment United
States facilities services principally consists of those
operations which provide a portfolio of services needed to
support the operation and maintenance of customers
facilities (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; 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, as well as industrial
services operations, which primarily provide aftermarket
maintenance and repair services, replacement parts and
fabrication services for highly engineered shell and tube heat
exchangers for refineries and the petrochemical industry. The
Canada construction segment performs electrical construction and
mechanical construction. The United Kingdom and Other
international construction and facilities services segments
perform electrical construction, mechanical construction and
facilities services. Our Other international construction
and facilities services segment consisted of our equity
interest in a Middle East venture, which we sold in June 2010.
Discussion
and Analysis of Results of Operations
Revenues
As described in more detail below, revenues for 2010 were
$5.1 billion compared to $5.5 billion for 2009 and
$6.8 billion for 2008. The decrease in revenues for 2010
compared to 2009, excluding the effect of acquisitions, extended
across all of our business segments and was primarily
attributable to: (a) lower levels of work in both our
United States electrical construction and facilities services
segment and our United States mechanical construction and
facilities services segment, most notably with respect to
industrial construction projects and a continued decline in work
performed on commercial and hospitality construction projects,
(b) continued lower revenues from our international
operations, (c) lower revenues from our United States
facilities services segment, particularly within our industrial
services and our organic mobile mechanical services operations,
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
attributable to companies acquired in 2010 and 2009, which are
reported in our United States facilities services segment,
and the effect of favorable exchange rates for the Canadian
dollar versus the United States dollar. Revenues decreased in
2009 compared to 2008 primarily due to: (a) the economic
slowdown and restrictive credit markets, which resulted in
(i) lower levels of work in our United States electrical
construction and facilities services and mechanical construction
and facilities services segments, most notably on commercial and
hospitality construction projects, (ii) lower revenues from
our United States facilities services segment, most notably from
our mobile mechanical services and our industrial services
operations and (iii) lower revenues from our international
operations and (b) the effect of unfavorable exchange rates
for the British pound and Canadian dollar versus the United
States dollar. This decrease was partially offset by revenues of
$107.8 million attributable to companies acquired in 2009
and 2008, which are reported within our United States facilities
services and United States mechanical construction and
facilities services segments.
As of December 31, 2010, our backlog was
$3.42 billion, and as of December 31, 2009, our
backlog was $3.15 billion. Backlog increases with awards of
new contracts and decreases as we perform work on existing
contracts. The increase in backlog as of December 31, 2010,
compared to such backlog at December 31, 2009, was
attributable to our international and our United States
facilities services segments, offset by a decrease in backlog
attributable to our United States electrical construction and
facilities services and our United States mechanical
construction and facilities services segments. Backlog is not a
term recognized under
22
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
segments revenues were of total revenues for the years
ended December 31, 2010, 2009 and 2008 (in millions, except
for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2010
|
|
|
Total
|
|
|
2009
|
|
|
Total
|
|
|
2008
|
|
|
Total
|
|
|
Revenues from unrelated entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
|
$
|
1,158.9
|
|
|
|
23%
|
|
|
$
|
1,273.7
|
|
|
|
23%
|
|
|
$
|
1,700.5
|
|
|
|
25%
|
|
United States mechanical construction and facilities services
|
|
|
1,708.4
|
|
|
|
33%
|
|
|
|
1,959.9
|
|
|
|
35%
|
|
|
|
2,420.0
|
|
|
|
36%
|
|
United States facilities services
|
|
|
1,522.3
|
|
|
|
30%
|
|
|
|
1,493.6
|
|
|
|
27%
|
|
|
|
1,574.2
|
|
|
|
23%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States operations
|
|
|
4,389.6
|
|
|
|
86%
|
|
|
|
4,727.2
|
|
|
|
85%
|
|
|
|
5,694.7
|
|
|
|
84%
|
|
Canada construction
|
|
|
269.3
|
|
|
|
5%
|
|
|
|
320.2
|
|
|
|
6%
|
|
|
|
424.5
|
|
|
|
6%
|
|
United Kingdom construction and facilities services
|
|
|
462.4
|
|
|
|
9%
|
|
|
|
500.5
|
|
|
|
9%
|
|
|
|
666.0
|
|
|
|
10%
|
|
Other international construction and facilities services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total worldwide operations
|
|
$
|
5,121.3
|
|
|
|
100%
|
|
|
$
|
5,547.9
|
|
|
|
100%
|
|
|
$
|
6,785.2
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from 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 continued decline in work on hospitality
construction projects, principally in the Las Vegas market.
These decreases are a result of the current economic downturn
and our decision to only accept work that we believe can be
performed at reasonable margins. The decrease in revenues was
partially offset by an increase in revenues from
water/wastewater, healthcare and institutional construction
projects. Revenues were $1,273.7 million in 2009 compared
to $1,700.5 million in 2008. This decrease in 2009 was
primarily attributable to lower levels of work on commercial,
hospitality, industrial and institutional construction projects,
most notably in the New York, greater Chicago area (including
northern Indiana), Las Vegas, and Washington D.C. markets, as a
result of the economic downturn and tight credit markets.
Revenues from our United States mechanical construction and
facilities services segment for 2010 were $1,708.4 million,
a 12.8% decrease compared to revenues of $1,959.9 million
for 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 current
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 continued decline in work on hospitality
construction projects in the Las Vegas market. Revenues for 2009
decreased by $460.1 million compared to 2008. This decrease
in 2009 was primarily attributable to a decrease in work on
hospitality construction projects, most notably in the Las Vegas
market, and on commercial construction projects. The decrease in
revenues was partially offset by an increase in revenues from
work performed on industrial, institutional and healthcare
construction projects. Additionally, the decrease in revenues
was partially offset by revenues of $2.2 million from a
company acquired in 2008.
Our United States facilities services segment revenues were
$1,522.3 million in 2010 compared to $1,493.6 million
in 2009. The increase in revenues for 2010 compared to 2009 was
primarily attributable to revenues of $66.3 million from
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 was partially offset by a continued decline
in revenues from: (a) our industrial services operation,
which has 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) the
organic operations within our mobile mechanical services
operation, primarily as a result of fewer discretionary projects
attributable to economic conditions. Revenues from this segment
decreased by $80.6 million in 2009 compared to 2008. This
decrease was primarily attributable to lower revenues from
(a) our industrial services operations, (i) which
benefited in 2008 from a significant turnaround/expansion
contract at a refinery and (ii) which declined due to a
dramatic decline in the demand for refined
23
products which resulted in lower demand for our shop and field
refinery and petrochemical services and (b) our mobile
mechanical services operation as a result of lower revenues from
small discretionary projects, controls work and repair service
due to the economic downturn and the cooler than normal summer
in some of our major markets. This decrease in 2009 revenues was
partially offset by: (a) revenues of $105.6 million
from companies acquired in 2009 and 2008, which perform
maintenance services for utility and industrial plants and
perform mobile mechanical services and (b) increases in
revenues from our site-based government facilities services
operations.
Our Canada construction segment revenues were
$269.3 million in 2010 compared to $320.2 million in
2009. The decrease in revenues for 2010 was attributable to a
decrease in revenues from energy and commercial construction
projects due to the continued effect of the economic slowdown.
This decrease in revenues was partially offset by an increase of
$27.3 million relating to the effect of favorable exchange
rates for the Canadian dollar versus the United States dollar.
Revenues decreased by $104.3 million in 2009 compared to
2008. This decrease in 2009 was primarily attributable to fewer
energy and industrial (including automotive) construction
projects. In addition, $23.1 million of this decrease in
revenues was a result of the effect of unfavorable exchange
rates for the Canadian dollar versus the United States dollar.
The decrease in revenues was partially offset by more work on
commercial and healthcare construction projects.
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. Revenues were
$500.5 million in 2009 compared to $666.0 million in
2008. Approximately $92.0 million of this decrease in 2009
revenues was a result of the effect of unfavorable exchange
rates for the British pound versus the United States dollar. In
addition, this decrease in revenues was partially attributable
to (a) a decrease in revenues relating to rail contracts as
a result of the planned strategy to exit this market and
(b) a decline in our United Kingdoms construction
business, partially offset by an increase in revenues from our
United Kingdoms facilities services business.
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 our 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, 2010, 2009 and 2008 (in millions, except for
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Cost of sales
|
|
$
|
4,401.7
|
|
|
$
|
4,723.0
|
|
|
$
|
5,898.6
|
|
Gross profit
|
|
$
|
719.5
|
|
|
$
|
824.9
|
|
|
$
|
886.7
|
|
Gross profit margin
|
|
|
14.1
|
%
|
|
|
14.9
|
%
|
|
|
13.1
|
%
|
Our gross profit decreased by $105.4 million for 2010
compared to 2009. The decrease in gross profit was primarily
attributable to reduced organic volume across all of our
business segments and lower margins at: (a) our United
States electrical construction and facilities services segment,
(b) our industrial services and organic mobile mechanical
services operations within our United States facilities services
segment and (c) our Canada construction 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, (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, and (e) an
increase of $3.2 million relating to the effect of
favorable exchange rates for the Canadian dollar versus the
United States dollar. In addition, the decrease in gross profit
was partially offset by: (a) an increase in gross profit
contributed by our energy services operation 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, which gain is
classified as a component of Cost of sales on the
Consolidated Statements of Operations, and (b) gross profit
attributable to the termination of a contract within our United
Kingdom construction and facilities services segment.
24
Our gross profit margin was 14.1% for 2010 compared to 14.9% 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,
(b) lower gross profit margins at our industrial services
and organic mobile mechanical services operations within our
United States facilities services segment, (c) lower gross
profit margins at our Canadian operations due to significant
project write-downs and (d) 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 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.
Our gross profit decreased by $61.8 million for 2009
compared to 2008. The decrease in gross profit was primarily
attributable to a reduction in gross profit due to:
(a) lower levels of work from (i) our industrial
services and mobile mechanical operations within our United
States facilities services segment and (ii) our United
States electrical construction and facilities services and
mechanical construction and facilities services segments and
(b) the effect of unfavorable exchange rates for the
British pound and Canadian dollar versus the United States
dollar. The overall decrease in gross profit was partially
offset by: (a) a $7.0 million non-cash impairment
charge in 2008 related to an
other-than-temporary
decline in fair value of our investment in a venture in our
United States facilities services segment and (b) a
$4.2 million reduction in amortization expense recorded in
cost of sales associated with the intangible asset for contract
backlog in 2009 within our United States facilities services and
United States mechanical construction and facilities services
segments. For 2009, companies acquired in 2009 and 2008
contributed $10.4 million to gross profit, net of
amortization expense of $2.9 million.
Our gross profit margin was 14.9% for 2009 compared to 13.1% for
2008. The increase in the gross profit margin was primarily the
result of: (a) improved margins within our domestic
construction segments as a result of the favorable resolution of
uncertainties on projects at or nearing completion and improved
productivity, (b) the turnaround in the performance of one
of our operations, which had experienced large operating losses
in 2008 within our United States mechanical construction and
facilities services segment, (c) a $4.2 million
decrease of amortization expense recorded in cost of sales
associated with the intangible asset for contract backlog in
2009 within our United States facilities services and United
States mechanical construction and facilities services segments
and (d) the improved performance of our international
operations. In addition, the increase in the gross profit margin
was partially attributable to a charge to expense in 2008 of
$7.9 million in connection with a lawsuit (the UOSA
Action) within our United States mechanical construction
and facilities services segment. (The UOSA Action was concluded
in the third quarter of 2009, and as a consequence, we paid
approximately $0.7 million to the other party to the
litigation.) These increases were partially offset by lower
gross profit margin in our United States facilities services
segment, primarily as a result of lower margins in our
industrial services operations.
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,
2010, 2009 and 2008 (in millions, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Selling, general and administrative expenses
|
|
$
|
497.8
|
|
|
$
|
542.9
|
|
|
$
|
582.3
|
|
Selling, general and administrative expenses as a percentage of
revenues
|
|
|
9.7
|
%
|
|
|
9.8
|
%
|
|
|
8.6
|
%
|
Our selling, general and administrative expenses decreased by
$45.1 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: (a) $4.3 million of expenses
directly related to companies acquired in 2010 and 2009,
including amortization expense of $0.7 million and
(b) a $2.5 million increase due to the effect of
exchange rates for the Canadian dollar versus the United States
dollar. 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.
Our selling, general and administrative expenses decreased by
$39.4 million for 2009 compared to 2008 primarily due to:
(a) lower employee related costs, such as salaries and
employee benefits, as a result of downsizing of staff at
numerous locations, (b) lower incentive compensation
expense as a result of reduced earnings and lower staff levels
in 2009 compared to 2008, (c) lower discretionary spending,
such as travel and entertainment and marketing expenses,
(d) a $7.3 million and $1.8 million decrease due
to the effect of unfavorable exchange rates for the British
pound and Canadian dollar versus the United States dollar,
respectively, and
25
(e) a $4.5 million decrease in our provision for
doubtful accounts consistent with an overall reduction in
accounts receivable. These decreases in selling, general and
administrative expenses were partially offset by:
(a) $7.5 million of expenses directly related to
companies acquired in 2009 and 2008, including amortization
expense of $1.6 million and (b) an increase in legal
and rent expenses. In addition, in 2009 compared to 2008,
selling, general and administrative expenses were unfavorably
affected by changes in the value of our phantom stock units,
which vary with our stock price. Certain of the phantom stock
units were settled in cash during the first quarters of 2009 and
2008, and no units are currently outstanding. Selling, general
and administrative expenses as a percentage of revenues
increased in 2009 compared to 2008, primarily due to lower
revenues in 2009.
Restructuring
expenses
Restructuring expenses, primarily relating to employee severance
obligations and leased facilities, were $4.3 million,
$6.0 million and $1.8 million for 2010, 2009 and 2008,
respectively. The 2010 restructuring expenses were primarily
attributable to our Canadian operations and our United States
electrical construction and facilities services segment. The
2009 restructuring expenses were primarily related to our
Canadian and UK operations, while the 2008 restructuring
expenses were primarily related to our UK operations. As of
December 31, 2010, 2009 and 2008, the balance of our
severance obligations was $1.0 million, $1.7 million
and $0.5 million, respectively. The severance obligations
outstanding as of December 31, 2009 and 2008 were paid
during 2010 and 2009, respectively. The severance obligations
outstanding as of December 31, 2010 will be paid in 2011.
Impairment
loss on goodwill and identifiable intangible assets
During the third quarter of 2010 and prior to our October 1
annual impairment, 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
at that time. As a result of that conclusion, we performed the
applicable tests as prescribed by the accounting literature and
recognized a $226.2 million non-cash impairment charge in
2010. 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. The impairment primarily results from both lower
forecasted revenues from and operating margins at our United
States facilities services segment, which has been adversely
affected by industry conditions. These impairments did not have
any impact on our compliance with our debt covenants or on our
cash flows. Additionally, we performed our annual impairment
test as of October 1, and no additional impairment of our
goodwill, trade names
and/or other
identifiable intangible assets was recognized for any of our
reporting segments in the fourth quarter of 2010.
In conjunction with our 2009 annual impairment test on
October 1, we recognized a $13.5 million non-cash
impairment charge related to trade names and customer
relationships. 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. No impairment of goodwill was
recognized for the years ended December 31, 2009 and 2008.
Additionally, no impairment of trade names
and/or other
identifiable intangible assets was recognized for the year ended
December 31, 2008.
26
Operating
(loss) income
The following table presents our operating (loss) income (gross
profit less selling, general and administrative expenses,
restructuring expenses, and impairment loss on goodwill and
identifiable intangible assets) by segment, and each
segments operating (loss) income as a percentage of such
segments revenues from unrelated entities, for the years
ended December 31, 2010, 2009 and 2008 (in millions, except
for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
|
Segment
|
|
|
|
Segment
|
|
|
|
Segment
|
|
|
2010
|
|
Revenues
|
|
2009
|
|
Revenues
|
|
2008
|
|
Revenues
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
|
$
|
70.4
|
|
|
|
6.1
|
%
|
|
$
|
114.5
|
|
|
|
9.0
|
%
|
|
$
|
114.4
|
|
|
|
6.7
|
%
|
United States mechanical construction and facilities services
|
|
|
131.3
|
|
|
|
7.7
|
%
|
|
|
129.7
|
|
|
|
6.6
|
%
|
|
|
127.6
|
|
|
|
5.3
|
%
|
United States facilities services
|
|
|
60.0
|
|
|
|
3.9
|
%
|
|
|
73.7
|
|
|
|
4.9
|
%
|
|
|
103.7
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States operations
|
|
|
261.7
|
|
|
|
6.0
|
%
|
|
|
317.9
|
|
|
|
6.7
|
%
|
|
|
345.7
|
|
|
|
6.1
|
%
|
Canada construction
|
|
|
0.3
|
|
|
|
0.1
|
%
|
|
|
15.4
|
|
|
|
4.8
|
%
|
|
|
10.9
|
|
|
|
2.6
|
%
|
United Kingdom construction and facilities services
|
|
|
15.7
|
|
|
|
3.4
|
%
|
|
|
12.0
|
|
|
|
2.4
|
%
|
|
|
14.4
|
|
|
|
2.2
|
%
|
Other international construction and facilities services
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
Corporate administration
|
|
|
(55.9
|
)
|
|
|
|
|
|
|
(63.3
|
)
|
|
|
|
|
|
|
(65.9
|
)
|
|
|
|
|
Restructuring expenses
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
Impairment loss on goodwill and identifiable intangible assets
|
|
|
(246.1
|
)
|
|
|
|
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total worldwide operations
|
|
|
(28.7
|
)
|
|
|
(0.6
|
)%
|
|
|
262.4
|
|
|
|
4.7
|
%
|
|
|
302.6
|
|
|
|
4.5
|
%
|
Other corporate items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
|
|
Interest income
|
|
|
2.7
|
|
|
|
|
|
|
|
4.7
|
|
|
|
|
|
|
|
9.9
|
|
|
|
|
|
Gain on sale of equity investment
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(30.3
|
)
|
|
|
|
|
|
$
|
259.3
|
|
|
|
|
|
|
$
|
300.7
|
|
|
|
|
|
As described in more detail below, we experienced an operating
loss of $28.7 million for 2010, compared to operating
income of $262.4 million for 2009 and $302.6 million
for 2008. The 2010 operating loss was due to the impairment loss
on goodwill and identifiable intangible assets of
$246.1 million.
Our United States electrical construction and facilities
services segment operating income 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 current 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. Operating income improved by
$0.1 million for 2009 compared to 2008. The increase in
operating income in 2009 compared to 2008 was primarily the
result of an increase in gross profit from industrial and
transportation construction projects as a result of the
favorable resolution of uncertainties on projects at or nearing
completion. This increase was offset by lower gross profit from
commercial, hospitality and institutional construction projects.
Selling, general and administrative expenses also decreased for
2009 compared to 2008 principally due to lower employee costs,
such as salaries and employee benefits, primarily as a result of
downsizing of staff at numerous locations and a decrease in the
provision for doubtful accounts consistent with a reduction in
accounts receivable, partially offset by an increase in legal
expenses associated with the resolution of construction claims.
The increase in the operating margin for 2009 is primarily the
result of increased gross profit margin.
Our United States mechanical construction and facilities
services segment operating income for 2010 was
$131.3 million, a $1.6 million increase 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
27
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
current 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 for 2009 increased by $2.1 million compared to 2008.
The increase in operating income in 2009 compared to 2008 was
primarily due to: (a) increased gross profits from
industrial, healthcare and institutional construction projects
and the turnaround in the performance of one of our operations,
which had experienced large operating losses in 2008, (b) a
charge to expense in 2008 of $7.9 million in connection
with the UOSA Action and (c) a $1.0 million reduction
in amortization expense associated with identifiable intangible
assets in 2009 compared to 2008. This increase was partially
offset by notably lower gross profit due to a decline in
commercial and hospitality construction projects, primarily in
the Las Vegas market, as a result of the current economic
slowdown. Selling, general and administrative expenses were
lower primarily due to lower employee costs, such as salaries,
employee benefits, and incentive compensation, primarily as a
result of downsizing of staff at numerous locations, lower
discretionary spending, such as travel and entertainment and
professional fees, and a decrease in the provision for doubtful
accounts consistent with a reduction in accounts receivable. The
increase in operating margin for 2009 is primarily the result of
increased gross profit margin.
Our United States facilities services segment operating income
for 2010 was $60.0 million, a $13.7 million decrease
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 has been
adversely affected by a 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) our organic mobile mechanical services
operation as a result of fewer discretionary projects due to the
continued effects of the economic slowdown and lower gross
profit margins, primarily as a result of lower margins on
recently acquired 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. 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, which gain is classified as a
component of Cost of sales on the Consolidated
Statements of Operations. 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.
Operating income for 2009 was $73.7 million compared to
$103.7 million for 2008. The decrease in operating income
for 2009 compared to 2008 was primarily due to lower operating
income from (a) our industrial service operations,
(i) which benefited in 2008 from a significant
turnaround/expansion contract at a refinery and (ii) which
declined due to a dramatic decline in the demand for refined
products which resulted in lower demand for our shop and field
refinery and petrochemical services and (b) our mobile
mechanical services operation as a result of reduced small
discretionary projects, controls work and repair services due to
the economic downturn and the cooler than normal summer in some
of our major markets. The decrease in operating income in 2009
was partially offset by: (a) operating income from
companies acquired in 2009 and 2008, which contributed
$3.0 million of operating income, net of amortization
expense of $4.4 million, and which perform maintenance
services at utility and industrial plants and perform mobile
mechanical services, (b) a $3.4 million reduction in
amortization expense associated with identifiable intangible
assets in 2009 and (c) an increase in operating income from
our site-based government facilities services operations.
Selling, general and administrative expenses decreased by
$10.7 million in 2009 compared to 2008, excluding the
increase of $7.3 million of selling, general and
administrative expenses associated with the companies acquired
in 2009 and 2008, including amortization expense of
$1.6 million, due to lower incentive compensation expense
and professional fees and a decrease in the provision for
doubtful accounts consistent with a reduction in accounts
receivable. Negatively impacting operating income in 2008 was a
$7.0 million impairment charge related to an
other-than-temporary
decline in fair value of our investment in a venture, which has
been reflected as a component of Cost of sales on
the Consolidated Statements of Operations.
Our Canada construction segment operating income for 2010 was
$0.3 million compared to operating income of
$15.4 million in 2009. The decrease in operating income for
2010 compared to 2009 was primarily attributable to:
(a) significant project write-downs on a construction
project and (b) a decrease in gross profit from industrial
(including automotive) and energy construction
28
projects. The decrease in operating income for 2010 was
partially offset by an increase in gross profit from healthcare
construction projects. The decrease in operating margin for 2010
was primarily the result of a reduction in gross profit margin
and an increase in the ratio of selling, general and
administrative expense to revenues. Operating income improved by
$4.5 million for 2009 compared to 2008. The operating
income improvement for 2009 compared to 2008 was primarily due
to the improved results from energy and industrial (including
automotive) construction projects and reduced selling, general
and administrative expenses as a result of a reduction in
employees. These increases were partially offset by reduced
operating income from healthcare construction projects and a
$1.3 million decrease relating to the effect of unfavorable
exchange rates for the Canadian dollar versus the United States
dollar. Despite the reduction in selling, general and
administrative expenses in 2009, these expenses, as a percentage
of revenues, increased year over year due to lower revenues in
2009.
Our United Kingdom construction and facilities services segment
operating income for 2010 increased by $3.7 million
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 termination 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. Operating income for 2009 was $12.0 million
compared to $14.4 million in 2008. The decrease in
operating income for 2009 compared to 2008 was primarily
attributable to: (a) a decrease of $2.2 million
relating to the effect of unfavorable exchange rates for the
British pound versus the United States dollar and (b) an
increase in the actuarially determined pension costs associated
with our United Kingdom defined pension plan. These decreases
were partially offset by an increase in operating income at the
United Kingdoms construction business and as a result of
the wind down of the rail division in 2009 as compared to 2008.
The Other international construction and facilities services
segment operating loss was approximately $0.1 million,
$0.1 million and $0.7 million for 2010, 2009 and 2008,
respectively. In June 2010, we sold our equity interest in our
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.
Our corporate administration expenses were $55.9 million
for 2010 compared to $63.3 million in 2009. The decrease in
expenses for 2010 compared to 2009 was primarily attributable to
a continued decrease in incentive compensation, marketing and
advertising expenses, as well as lower professional fees. Our
corporate administration expenses for 2009 decreased by
$2.6 million compared to 2008. The decrease in expenses for
2009 compared to 2008 was primarily attributable to: (a) a
decrease in marketing and advertising expenses, (b) lower
incentive compensation expense and (c) a decrease in
expenses related to meetings and conferences. In addition, our
corporate administration costs in 2009 compared to 2008 were
unfavorably impacted by the changes in the value of our phantom
stock units, which vary with our stock price. Certain of the
phantom stock units were settled in cash during the first
quarters of 2009 and 2008, and no units are currently
outstanding.
Non-operating
items
Interest expense was $12.2 million, $7.9 million and
$11.8 million for 2010, 2009 and 2008, respectively. 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 a revolving credit facility. The
$3.9 million decrease in interest expense for 2009 compared
to 2008 was related to the reduction in long-term indebtedness
and lower interest rates as compared to 2008.
Interest income was $2.7 million, $4.7 million and
$9.9 million for 2010, 2009 and 2008, respectively. The
decreases in interest income were primarily related to lower
interest rates earned on our invested cash balances.
The $7.9 million Gain on sale of equity
investment in 2010 was attributable to the June 2010 sale
of our equity interest in our 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 2010 income tax provision was $52.4 million compared to
$96.2 million for 2009 and $116.6 million for 2008
based on effective income tax rates, before the tax effect of
non-cash impairment charges, of approximately 36.8%, 37.4% and
39.0%,
29
respectively. The actual income tax rates for the year ended
December 31, 2010, 2009 and 2008, inclusive of non-cash
impairment charges, were (152.8)%, 37.4% and 39.0%, respectively.
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. As shown
above, this non-deductible portion significantly impacts the
effective income tax rate for 2010.
Our 2009 income tax provision was $96.2 million. The
decrease in our 2009 income tax provision was primarily due to
reduced income before income taxes compared to 2008. Our 2008
income tax provision was $116.6 million.
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, 2010 and 2009
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Net cash provided by operating activities
|
|
$
|
68.7
|
|
|
$
|
359.1
|
|
Net cash used in investing activities
|
|
$
|
(32.7
|
)
|
|
$
|
(52.6
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(47.2
|
)
|
|
$
|
1.7
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
(4.9
|
)
|
|
$
|
12.9
|
|
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 $68.7 million,
compared to $359.1 million in 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 a defined benefit pension
plan of our United Kingdom subsidiary. 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 of
$47.2 million, compared to net cash provided by financing
activities for 2009 of $1.7 million, was 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.
Our consolidated cash and cash equivalents balance increased by
approximately $321.1 million from $405.9 million at
December 31, 2008 to $727.0 million at
December 31, 2009. The $359.1 million in net cash
provided by operating activities for 2009 increased by
$24.1 million compared to the $335.0 million in cash
provided by operating activities in 2008, primarily due to a
reduction in our accounts receivable balances and other changes
in our working capital. Net cash used in investing activities of
$52.6 million for 2009 decreased $71.6 million
compared to $124.1 million used in investing activities for
2008 primarily due to a $67.7 million decrease in payments
for acquisitions of businesses, identifiable intangible assets
and payments pursuant to related earn-out agreements. Net cash
provided by financing activities of $1.7 million for 2009
compared to $25.0 million used in financing activities in
2008 was primarily due to repayment of a portion of our
long-term indebtedness in 2008.
The following is a summary of material contractual obligations
and other commercial commitments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Revolving Credit Facility (including interest at 3.01%) (1)
|
|
$
|
159.6
|
|
|
$
|
4.6
|
|
|
$
|
155.0
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
1.9
|
|
|
|
0.6
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
|
|
Operating leases
|
|
|
191.9
|
|
|
|
51.6
|
|
|
|
67.8
|
|
|
|
41.7
|
|
|
|
30.8
|
|
Open purchase obligations (2)
|
|
|
780.9
|
|
|
|
642.8
|
|
|
|
125.3
|
|
|
|
12.8
|
|
|
|
|
|
Other long-term obligations, including current portion (3)
|
|
|
213.5
|
|
|
|
31.9
|
|
|
|
167.7
|
|
|
|
13.9
|
|
|
|
|
|
Liabilities related to uncertain income tax positions
|
|
|
8.8
|
|
|
|
6.7
|
|
|
|
1.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
1,356.6
|
|
|
$
|
738.2
|
|
|
$
|
518.5
|
|
|
$
|
69.1
|
|
|
$
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expirations by Period
|
|
|
|
Total
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
Other Commercial Commitments
|
|
Committed
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Letters of credit
|
|
$
|
82.4
|
|
|
$
|
82.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
2010 Revolving Credit Facility expires in February 2013. As of
December 31, 2010, there were borrowings of
$150.0 million outstanding under the 2010 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
EMCORs 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 pension 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 February 4, 2010, we had a revolving credit agreement
(the Old Revolving Credit Facility) as amended,
which provided for a credit facility of $375.0 million.
Effective February 4, 2010, we replaced the Old Revolving
Credit Facility that was due to expire October 17, 2010
with an amended and restated $550.0 million revolving
credit facility (the 2010 Revolving Credit
Facility). The 2010 Revolving Credit Facility expires in
February 2013. It permits us to increase our borrowing to
$650.0 million if additional lenders are identified
and/or
existing lenders are willing to increase their current
commitments. We may allocate up to $175.0 million of the
borrowing capacity under the 2010 Revolving Credit Facility to
letters of credit, which amount compares to $125.0 million
under the Old Revolving Credit Facility. The 2010 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
2010 Revolving Credit Facility contains various covenants
requiring, among other things, maintenance of certain financial
ratios and certain restrictions with respect to payment of
dividends, common stock repurchases, investments, acquisitions,
indebtedness and capital expenditures. A commitment fee is
payable on the average daily unused amount of the 2010 Revolving
Credit Facility. The fee is 0.5% of the unused amount.
Borrowings under the 2010 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, 2010) plus 1.75% to 2.25%,
based on certain financial tests or (2) United States
dollar LIBOR (0.26% at December 31, 2010) plus 2.75%
to 3.25%, based on certain financial tests. The interest rate in
effect at December 31, 2010 was 3.01%. Letter of credit
fees issued under this facility range from 2.75% to 3.25% of the
respective face amounts of the letters of credit issued and are
charged based on certain financial tests. We capitalized
approximately $6.0 million of debt issuance costs
associated with the 2010 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 Old Revolving Credit Facility, less than
$0.1 million attributable to the acceleration of expense
for debt issuance costs was recorded as part of interest
expense. As of December 31, 2010 and December 31,
2009, we had approximately $82.4 million and
$68.9 million of letters of credit outstanding,
respectively. There were no borrowings under the Old Revolving
Credit Facility as of December 31, 2009. We have borrowings
of $150.0 million outstanding under the 2010 Revolving
Credit Facility at December 31, 2010, which remains
outstanding at our discretion until the 2010 Revolving Credit
Facility expires. Based on the $150.0 million borrowings
outstanding on the 2010 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 proceeded to borrow
$150.0 million under this facility and used the proceeds
along with cash on hand to prepay on February 4, 2010 all
indebtedness outstanding under the Term Loan. 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
31
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.
The terms of our construction contracts frequently require that
we obtain from surety companies (Surety Companies)
and provide to our customers payment and performance bonds
(Surety Bonds) as a condition to the award of such
contracts. The Surety Bonds secure our payment and performance
obligations under such contracts, and we have agreed to
indemnify the Surety Companies for amounts, if any, paid by them
in respect of Surety Bonds issued on our behalf. In addition, at
the request of labor unions representing certain of our
employees, Surety Bonds are sometimes provided to secure
obligations for wages and benefits payable to or for such
employees. Public sector contracts require Surety Bonds more
frequently than private sector contracts, and accordingly, our
bonding requirements typically increase as the amount of public
sector work increases. As of December 31, 2010, 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 $1.4 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.
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 2010 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 $368.4 million and $436.2 million as of
December 31, 2010 and 2009, respectively.
Long-term liquidity requirements can be expected to be met
through cash generated from operating activities and our 2010
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-
32
residential construction services, which is influenced by
macroeconomic trends including interest rates and governmental
economic policy. In addition, our ability to perform work is
critical to meeting long-term liquidity requirements.
We believe that current cash balances and our borrowing capacity
available under the 2010 Revolving Credit Facility or other
forms of financing available to us through borrowings, combined
with cash expected to be generated from operations, will be
sufficient to provide our short-term and foreseeable long-term
liquidity needs and meet our expected capital expenditure
requirements. However, we are a party to lawsuits and other
proceedings in which other parties seek to recover from us
amounts ranging from a few thousand dollars to over
$60.0 million. If we were required to pay damages in one or
more such proceedings, such payments could have a material
adverse effect on our financial position, results of operations
and/or cash
flows.
Certain
Insurance Matters
As of December 31, 2010 and 2009, we utilized approximately
$82.2 million and $66.5 million, respectively, of
letters of credit obtained under our 2010 Revolving Credit
Facility and the Old 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 2Summary
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 2Summary 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 RecognitionConstruction-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 and our Canadian subsidiary measure
percentage-of-completion
by the percentage of labor costs incurred to date for each
contract to the estimated total labor costs for such contract.
Provisions for the entirety of estimated losses on uncompleted
contracts are made in the period in which such losses are
determined. Application of
percentage-of-completion
accounting results in the recognition of costs and estimated
earnings in excess of billings on uncompleted contracts in our
Consolidated Balance Sheets. Costs and estimated earnings in
excess of billings on uncompleted contracts reflected in the
Consolidated Balance Sheets arise when revenues have been
recognized but the amounts cannot be billed under the terms of
contracts. Such amounts are recoverable from customers based
upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion
of a contract.
Costs and estimated earnings in excess of billings on
uncompleted contracts also include amounts we seek or will seek
to collect from customers or others for errors or changes in
contract specifications or design, contract change orders in
dispute or unapproved as to both scope and price or other
customer-related causes of unanticipated additional contract
costs (claims and unapproved change orders). Such amounts are
recorded at estimated net realizable value and take into account
factors that may affect our ability to bill unbilled revenues
and collect amounts after billing. The profit associated with
claim amounts is not recognized until the claim has been settled
and payment has been received. As of December 31, 2010 and
2009, costs and estimated earnings in excess of billings on
uncompleted contracts included unbilled revenues for unapproved
change orders of approximately $9.3 million and
$11.2 million,
33
respectively, and claims of approximately $6.3 million and
$4.9 million, respectively. In addition, accounts
receivable as of December 31, 2010 and 2009 included claims
of approximately $1.8 million and $2.5 million,
respectively, plus unapproved change orders and contractually
billed amounts related to such contracts of approximately
$42.7 million and $29.6 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. Revenues related to the engineering,
manufacturing and repairing of shell and tube heat exchangers
are recognized when the product is shipped and all other revenue
recognition criteria have been met. Costs related to this work
are included in inventory until the product is shipped. These
costs include all direct material, labor and subcontracting
costs and indirect costs related to performance such as
supplies, tools and repairs.
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 doubtful accounts during
2010 decreased by $12.3 million compared to 2009. This
decrease was due to the recovery of amounts previously
determined to be uncollectible and a reduction in the 2010
provision. The provision for doubtful accounts during 2009 and
2008 amounted to approximately $7.2 million and
$11.7 million, respectively. At December 31, 2010 and
2009, our accounts receivable of $1,090.9 million and
$1,057.2 million, respectively, included allowances for
doubtful accounts of $17.3 million and $36.2 million,
respectively. The decrease in our allowances for doubtful
accounts was due to the recovery of amounts previously
determined to be uncollectible and the write-off of accounts
receivable against the allowances 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 assets at December 31, 2010
of $5.2 million and net deferred income tax liabilities of
$6.8 million at December 31, 2009, primarily resulting
from differences between the carrying value and income tax basis
of certain depreciable fixed assets and identifiable intangible
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, 2010 and 2009, the
total valuation allowance on gross deferred income tax assets
was approximately $0.8 million and $4.0 million,
respectively.
Goodwill
and Identifiable Intangible Assets
As of December 31, 2010, we had $406.8 million and
$245.1 million, respectively, of goodwill and net
identifiable intangible assets (primarily consisting of our
contract backlog, developed technology, customer relationships,
non-competition agreements and trade names), primarily arising
out of the acquisition of companies. As of December 31,
2009, goodwill and net identifiable intangible assets were
$593.6 million and $264.5 million, respectively. The
changes to goodwill and net identifiable intangible assets (net
of accumulated amortization) since December 31, 2009 were
related to: (a) a non-cash impairment charge related to
goodwill
34
and trade names associated with certain prior year acquisitions,
(b) the acquisition of two companies during 2010 and
(c) earn-outs paid and/or accrued related to previous
acquisitions. During 2010, the purchase price accounting for one
of the acquisitions 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, IntangiblesGoodwill 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.
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 units 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 units
goodwill is greater than the implied fair value of that
reporting units 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. For the years ended December 31,
2009 and 2008, no impairment of our goodwill was recognized. As
of December 31, 2010, we had $406.8 million of
goodwill on our balance sheet and, of this amount, approximately
56.0% relates to our United States facilities services segment,
approximately 43.1% relates to our United States mechanical
construction and facilities services segment and approximately
0.9% relates to our United States electrical construction and
facilities services segment. As of the date of our latest
impairment test, the fair values of our United States facilities
services, United States mechanical construction and facilities
services and United States electrical construction and
facilities services segments exceeded their carrying values by
approximately $50.6 million, $301.6 million and
$337.8 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, 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.
As a result of the continued assessment of the fair value of
trade names previously impaired and the interim impairment
testing performed during the second and third quarters of 2010,
we recorded an additional $35.5 million non-cash impairment
charge of trade names associated with certain prior year
acquisitions. These trade names are reported within our United
States facilities services segment. The current year impairment
primarily results from both lower forecasted revenues from and
operating margins at our United States facilities services
segment, which has been adversely affected by industry
conditions. Additionally, we performed our annual impairment
test as of October 1, and no additional impairment of our
trade names was recognized in the fourth quarter of 2010. For
the year ended December 31, 2008, no impairment of our
trade names was recognized.
35
In addition, we review for the impairment of other identifiable
intangible assets that are being amortized whenever facts and
circumstances indicate that their carrying values may not be
fully recoverable. This test compares their carrying values to
the undiscounted pre-tax cash flows expected to result from the
use of the assets. If the assets are impaired, the assets are
written down to their fair values, generally determined based on
their future discounted cash flows. Based on facts and
circumstances that indicated an impairment may exist, we
performed an impairment review of our other identifiable
intangible assets for the year ended December 31, 2009,
which resulted in 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 years ended
December 31, 2010 and 2008, 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 were in the second and third quarters
of 2010 and in the fourth quarter of 2009, to record further
goodwill
and/or
identifiable intangible asset impairment charges in future
periods.
During 2010, we recognized a $246.1 million non-cash
impairment charge as discussed above. Of this amount,
$210.6 million relates to goodwill and $35.5 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, 2010
and 2009, 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 2010 Revolving Credit Facility and were
exposed to market risk as it related to the interest rate swap.
Borrowings under the 2010 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. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. As of December 31, 2010, there were borrowings
of $150.0 million outstanding under the 2010 Revolving
Credit Facility. 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. Managements 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.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
710,836
|
|
|
$
|
726,975
|
|
Accounts receivable, less allowance for doubtful accounts of
$17,287 and $36,188, respectively
|
|
|
1,090,927
|
|
|
|
1,057,171
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
88,253
|
|
|
|
90,049
|
|
Inventories
|
|
|
32,778
|
|
|
|
34,468
|
|
Prepaid expenses and other
|
|
|
57,373
|
|
|
|
68,702
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,980,167
|
|
|
|
1,977,365
|
|
Investments, notes and other long-term receivables
|
|
|
6,211
|
|
|
|
19,287
|
|
Property, plant and equipment, net
|
|
|
88,615
|
|
|
|
92,057
|
|
Goodwill
|
|
|
406,804
|
|
|
|
593,628
|
|
Identifiable intangible assets, net
|
|
|
245,089
|
|
|
|
264,522
|
|
Other assets
|
|
|
28,656
|
|
|
|
35,035
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,755,542
|
|
|
$
|
2,981,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
Current maturities of long-term debt and capital lease
obligations
|
|
|
489
|
|
|
|
45,100
|
|
Accounts payable
|
|
|
416,715
|
|
|
|
379,764
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
456,690
|
|
|
|
526,241
|
|
Accrued payroll and benefits
|
|
|
192,407
|
|
|
|
215,967
|
|
Other accrued expenses and liabilities
|
|
|
166,398
|
|
|
|
167,533
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,232,699
|
|
|
|
1,334,605
|
|
Borrowings under revolving credit facility
|
|
|
150,000
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
1,184
|
|
|
|
150,251
|
|
Other long-term obligations
|
|
|
208,814
|
|
|
|
270,572
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,592,697
|
|
|
|
1,755,428
|
|
|
|
|
|
|
|
|
|
|
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, 68,954,426 and 68,675,223 shares issued, respectively
|
|
|
690
|
|
|
|
687
|
|
Capital surplus
|
|
|
427,613
|
|
|
|
416,267
|
|
Accumulated other comprehensive loss
|
|
|
(42,411
|
)
|
|
|
(52,699
|
)
|
Retained earnings
|
|
|
782,576
|
|
|
|
869,267
|
|
Treasury stock, at cost 2,293,875 and 2,487,879 shares,
respectively
|
|
|
(15,525
|
)
|
|
|
(15,451
|
)
|
|
|
|
|
|
|
|
|
|
Total EMCOR Group, Inc. stockholders equity
|
|
|
1,152,943
|
|
|
|
1,218,071
|
|
Noncontrolling interests
|
|
|
9,902
|
|
|
|
8,395
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,162,845
|
|
|
|
1,226,466
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,755,542
|
|
|
$
|
2,981,894
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
5,121,285
|
|
|
$
|
5,547,942
|
|
|
$
|
6,785,242
|
|
Cost of sales
|
|
|
4,401,741
|
|
|
|
4,723,042
|
|
|
|
5,898,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
719,544
|
|
|
|
824,900
|
|
|
|
886,651
|
|
Selling, general and administrative expenses
|
|
|
497,808
|
|
|
|
542,949
|
|
|
|
582,317
|
|
Restructuring expenses
|
|
|
4,341
|
|
|
|
6,000
|
|
|
|
1,757
|
|
Impairment loss on goodwill and identifiable intangible assets
|
|
|
246,081
|
|
|
|
13,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(28,686
|
)
|
|
|
262,425
|
|
|
|
302,577
|
|
Interest expense
|
|
|
(12,204
|
)
|
|
|
(7,890
|
)
|
|
|
(11,764
|
)
|
Interest income
|
|
|
2,701
|
|
|
|
4,735
|
|
|
|
9,910
|
|
Gain on sale of equity investment
|
|
|
7,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(30,289
|
)
|
|
|
259,270
|
|
|
|
300,723
|
|
Income tax provision
|
|
|
52,395
|
|
|
|
96,193
|
|
|
|
116,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income including noncontrolling interests
|
|
|
(82,684
|
)
|
|
|
163,077
|
|
|
|
184,135
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(4,007
|
)
|
|
|
(2,321
|
)
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc.
|
|
$
|
(86,691
|
)
|
|
$
|
160,756
|
|
|
$
|
182,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc. common
stockholders
|
|
$
|
(1.31
|
)
|
|
$
|
2.44
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc. common
stockholders
|
|
$
|
(1.31
|
)
|
|
$
|
2.38
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income including noncontrolling interests
|
|
$
|
(82,684
|
)
|
|
$
|
163,077
|
|
|
$
|
184,135
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,498
|
|
|
|
26,768
|
|
|
|
25,160
|
|
Amortization of identifiable intangible assets
|
|
|
16,417
|
|
|
|
18,977
|
|
|
|
23,357
|
|
(Recovery of) provision for doubtful accounts
|
|
|
(5,126
|
)
|
|
|
7,178
|
|
|
|
11,671
|
|
Deferred income taxes
|
|
|
(15,390
|
)
|
|
|
2,922
|
|
|
|
(9,492
|
)
|
Gain on sale of equity investments
|
|
|
(12,409
|
)
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of property, plant and equipment
|
|
|
127
|
|
|
|
387
|
|
|
|
(495
|
)
|
Excess tax benefits from share-based compensation
|
|
|
(1,474
|
)
|
|
|
(2,203
|
)
|
|
|
(1,232
|
)
|
Equity income from unconsolidated entities
|
|
|
(843
|
)
|
|
|
(2,706
|
)
|
|
|
(3,300
|
)
|
Non-cash expense for impairment of equity investment
|
|
|
|
|
|
|
|
|
|
|
6,967
|
|
Non-cash expense for amortization of debt issuance costs
|
|
|
2,703
|
|
|
|
1,530
|
|
|
|
1,815
|
|
Non-cash expense for impairment of goodwill and identifiable
intangible assets
|
|
|
246,081
|
|
|
|
13,526
|
|
|
|
|
|
Non-cash compensation expense
|
|
|
5,742
|
|
|
|
7,454
|
|
|
|
5,905
|
|
Supplemental defined benefit plan contribution
|
|
|
(25,916
|
)
|
|
|
|
|
|
|
|
|
Distributions from unconsolidated entities
|
|
|
958
|
|
|
|
6,177
|
|
|
|
5,542
|
|
Changes in operating assets and liabilities excluding effect of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(8,342
|
)
|
|
|
354,206
|
|
|
|
57,246
|
|
Decrease (increase) in inventories
|
|
|
2,118
|
|
|
|
20,135
|
|
|
|
(601
|
)
|
Decrease in costs and estimated earnings in excess of billings
on uncompleted contracts
|
|
|
8,757
|
|
|
|
18,472
|
|
|
|
51,280
|
|
Increase (decrease) in accounts payable
|
|
|
16,992
|
|
|
|
(135,107
|
)
|
|
|
(43,740
|
)
|
(Decrease) increase in billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
(73,714
|
)
|
|
|
(87,645
|
)
|
|
|
22,117
|
|
Decrease in accrued payroll and benefits and other accrued
expenses and liabilities
|
|
|
(43,908
|
)
|
|
|
(20,977
|
)
|
|
|
(13,069
|
)
|
Changes in other assets and liabilities, net
|
|
|
13,065
|
|
|
|
(33,059
|
)
|
|
|
11,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
68,652
|
|
|
|
359,112
|
|
|
|
335,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions of businesses, net of cash acquired,
identifiable intangible assets and related earn-out agreements
|
|
|
(39,902
|
)
|
|
|
(21,686
|
)
|
|
|
(89,359
|
)
|
Proceeds from sale of equity investments
|
|
|
25,570
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
2,462
|
|
Proceeds from sale of property, plant and equipment
|
|
|
1,032
|
|
|
|
1,215
|
|
|
|
1,381
|
|
Purchase of property, plant and equipment
|
|
|
(19,359
|
)
|
|
|
(24,100
|
)
|
|
|
(37,514
|
)
|
Investment in and advances to unconsolidated entities and joint
ventures
|
|
|
(65
|
)
|
|
|
(8,000
|
)
|
|
|
(800
|
)
|
Net disbursements for other investments
|
|
|
|
|
|
|
|
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,724
|
)
|
|
|
(52,571
|
)
|
|
|
(124,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
153,000
|
|
|
|
|
|
|
|
58,500
|
|
Repayments of revolving credit facility
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
(58,500
|
)
|
Repayments for long-term debt and debt issuance costs
|
|
|
(200,828
|
)
|
|
|
(3,041
|
)
|
|
|
(28,101
|
)
|
Repayments for capital lease obligations
|
|
|
(430
|
)
|
|
|
(1,085
|
)
|
|
|
(916
|
)
|
Proceeds from exercise of stock options
|
|
|
2,818
|
|
|
|
2,801
|
|
|
|
2,408
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
2,305
|
|
|
|
2,165
|
|
|
|
379
|
|
Distributions to noncontrolling interests
|
|
|
(2,500
|
)
|
|
|
(1,350
|
)
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
1,474
|
|
|
|
2,203
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(47,161
|
)
|
|
|
1,693
|
|
|
|
(24,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(4,906
|
)
|
|
|
12,872
|
|
|
|
(31,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(16,139
|
)
|
|
|
321,106
|
|
|
|
154,232
|
|
Cash and cash equivalents at beginning of year
|
|
|
726,975
|
|
|
|
405,869
|
|
|
|
251,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
710,836
|
|
|
$
|
726,975
|
|
|
$
|
405,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (LOSS) INCOME
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMCOR Group, Inc. Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common
|
|
|
Capital
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
|
Total
|
|
|
(loss) income
|
|
|
stock
|
|
|
surplus
|
|
|
(loss) income (1)
|
|
|
earnings
|
|
|
stock
|
|
|
interests
|
|
|
Balance, December 31, 2007
|
|
$
|
891,734
|
|
|
|
|
|
|
$
|
678
|
|
|
$
|
387,288
|
|
|
$
|
(15,102
|
)
|
|
$
|
526,307
|
|
|
$
|
(14,130
|
)
|
|
$
|
6,693
|
|
Net income including noncontrolling interests
|
|
|
184,135
|
|
|
$
|
184,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,204
|
|
|
|
|
|
|
|
1,931
|
|
Foreign currency translation adjustments
|
|
|
(15,558
|
)
|
|
|
(15,558
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension adjustment, net of tax of $7.4 million
|
|
|
(18,658
|
)
|
|
|
(18,658
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
149,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to EMCOR
|
|
|
|
|
|
$
|
147,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock for restricted stock units (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
Treasury stock, at cost (3)
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
|
|
|
|
Common stock issued under share-based compensation plans, net (4)
|
|
|
4,525
|
|
|
|
|
|
|
|
3
|
|
|
|
4,431
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
Common stock issued under employee stock purchase plan
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interests
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,200
|
)
|
Share-based compensation expense
|
|
|
5,905
|
|
|
|
|
|
|
|
|
|
|
|
5,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension 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 (3)
|
|
|
(1,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,660
|
)
|
|
|
|
|
Common stock issued under share-based compensation plans (4)
|
|
|
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 (5)
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
1,226,466
|
|
|
|
|
|
|
$
|
687
|
|
|
$
|
416,267
|
|
|
$
|
(52,699
|
)
|
|
$
|
869,267
|
|
|
$
|
(15,451
|
)
|
|
$
|
8,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
EMCOR
Group, Inc.
and Subsidiaries
CONSOLIDATED
STATEMENTS OF EQUITY AND
COMPREHENSIVE (LOSS) INCOME (Continued)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMCOR Group, Inc. Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common
|
|
|
Capital
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
|
Total
|
|
|
(loss) income
|
|
|
stock
|
|
|
surplus
|
|
|
(loss) income (1)
|
|
|
earnings
|
|
|
stock
|
|
|
interests
|
|
|
Balance, December 31, 2009
|
|
$
|
1,226,466
|
|
|
|
|
|
|
$
|
687
|
|
|
$
|
416,267
|
|
|
$
|
(52,699
|
)
|
|
$
|
869,267
|
|
|
$
|
(15,451
|
)
|
|
$
|
8,395
|
|
Net (loss) income including noncontrolling interests
|
|
|
(82,684
|
)
|
|
$
|
(82,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,691
|
)
|
|
|
|
|
|
|
4,007
|
|
Foreign currency translation adjustments
|
|
|
3,196
|
|
|
|
3,196
|
|
|
|
|
|
|
|
|
|
|
|
3,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension 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 (3)
|
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(875
|
)
|
|
|
|
|
Common stock issued under share-based compensation plans (4)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2010,
represents cumulative foreign currency translation and pension
liability adjustments of $19.8 million and
$(62.2) million, respectively. As of December 31,
2009, represents cumulative foreign currency translation,
pension liability adjustments and deferred loss on interest rate
swap of $16.6 million, $(68.7) million and
$(0.6) million, respectively. As of December 31, 2008,
represents cumulative foreign currency translation and pension
liability adjustments of $10.8 million and
$(60.1) million, respectively.
|
(2)
|
|
Represents common stock transferred
at cost from treasury stock upon the vesting of restricted stock
units.
|
(3)
|
|
Represents value of shares of
common stock withheld by EMCOR for income tax withholding
requirements upon the issuance of shares in respect of
restricted stock units.
|
(4)
|
|
Includes the tax benefit associated
with share-based compensation of $2.0 million in 2010,
$2.2 million in 2009 and $1.8 million in 2008.
|
(5)
|
|
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.
|
The accompanying notes to consolidated financial statements are
an integral part of these statements.
41
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, Canada,
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. We
design, integrate, install,
start-up,
operate and maintain various electrical and mechanical systems,
including: (a) electric power transmission and distribution
systems; (b) premises electrical and lighting systems;
(c) low-voltage systems, such as fire alarm, security and
process control systems; (d) voice and data communication
systems; (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) water and wastewater
treatment systems; and (j) central plant heating and
cooling systems. We provide electrical and mechanical
construction services and facilities services directly to
corporations, municipalities and other governmental entities,
owners/developers and tenants of buildings. We also provide
these services indirectly by acting as a subcontractor to
general contractors, systems suppliers and other subcontractors.
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 facilities or the fit-out of
large blocks of space within commercial buildings and
(b) smaller installation projects typically involving
fit-out, renovation and retrofit work. Our facilities services
operations, which support the operation of a customers
facilities, include: (a) industrial maintenance and
services; (b) outage services to utilities and industrial
plants; (c) commercial and government site-based operations
and maintenance; (d) military base operations support
services; (e) mobile maintenance and services;
(f) facilities management; (g) installation and
support for building systems; (h) program development,
management and maintenance for energy systems; (i) shop and
on-site
field services for refineries and petrochemical plants;
(j) technical consulting and diagnostic services;
(k) infrastructure and building projects for federal, state
and local governmental agencies and bodies; (l) small
modification and retrofit projects; and (m) retrofit
projects to comply with clean air laws. These services are
provided to a wide range of commercial, industrial, utility and
institutional facilities including those at which we provided
construction 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
42
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
materially differ from those estimates.
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 RecognitionConstruction-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 and our Canadian subsidiary 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 generally on a
pro-rata basis over the life of the contractual arrangement.
Expenses related to all services arrangements are recognized as
incurred. Revenues related to the engineering, manufacturing and
repairing of shell and tube heat exchangers are recognized when
the product is shipped and all other revenue recognition
criteria have been met. Costs related to this work are included
in inventory until the product is shipped. These costs include
all direct material, labor and subcontracting costs and indirect
costs related to performance such as supplies, tools and
repairs. Provisions for the entirety of estimated losses on
uncompleted contracts are made in the period in which such
losses are determined. 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.
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 managements 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.
43
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Costs and estimated earnings on uncompleted contracts and
related amounts billed as of December 31, 2010 and 2009
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
7,274,211
|
|
|
$
|
8,156,428
|
|
Estimated earnings, thereon
|
|
|
811,651
|
|
|
|
795,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,085,862
|
|
|
|
8,951,835
|
|
Less: billings to date
|
|
|
8,454,299
|
|
|
|
9,388,027
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(368,437
|
)
|
|
$
|
(436,192
|
)
|
|
|
|
|
|
|
|
|
|
Such amounts were included in the accompanying Consolidated
Balance Sheets at December 31, 2010 and 2009 under the
following captions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
88,253
|
|
|
$
|
90,049
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(456,690
|
)
|
|
|
(526,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(368,437
|
)
|
|
$
|
(436,192
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, costs and estimated
earnings in excess of billings on uncompleted contracts included
unbilled revenues for unapproved change orders of approximately
$9.3 million and $11.2 million, respectively, and
claims of approximately $6.3 million and $4.9 million,
respectively. In addition, accounts receivable as of
December 31, 2010 and 2009 included claims of approximately
$1.8 million and $2.5 million, respectively, plus
contractually billed amounts related to such contracts of
$42.7 million and $29.6 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, 2010 and 2009
included $212.9 million and $221.0 million,
respectively, of retainage billed under terms of these
contracts. We estimate that approximately 81% of retainage
recorded at December 31, 2010 will be collected during
2011. Accounts payable at December 31, 2010 and 2009
included $36.5 million and $38.6 million,
respectively, of retainage withheld under terms of the
contracts. We estimate that approximately 82% of retainage
withheld at December 31, 2010 will be paid during 2011.
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
44
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
inability to meet the financial obligation, as well as
historical collection and write-off experience. These amounts
are reevaluated 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, 2010 and 2009, our accounts receivable of
$1,090.9 million and $1,057.2 million, respectively,
included allowances for doubtful accounts of $17.3 million
and $36.2 million, respectively. The (recovery of)
provision for doubtful accounts during 2010, 2009 and 2008
amounted to approximately $(5.1) million, $7.2 million
and $11.7 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 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, 2010, 2009 and 2008, 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 8Goodwill 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, 2010 and 2009, the estimated
current portion of undiscounted insurance liabilities of
$21.8 million and $20.5 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, 2010 and 2009 were $98.5 million and
$93.6 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.
45
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
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 14Share-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, CompensationStock
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 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, 2010, we adopted the accounting pronouncement
regarding the consolidation of variable interest entities, which
changes the consolidation guidance related to a variable
interest entity (VIE). It also amends the guidance
governing the determination of whether or not an enterprise is
the primary beneficiary of a VIE and, if so, is therefore
required to consolidate an entity, by requiring a qualitative
analysis rather than a quantitative analysis. The qualitative
analysis will include, among other things, consideration of who
has the power to direct the activities of the entity that most
significantly impact the entitys economic performance and
who has the obligation to absorb the losses or the right to
receive the benefits of the VIE that could potentially be
significant to the VIE. This statement also requires periodic
reassessments of whether an enterprise is the primary
beneficiary of a VIE. We were previously required to reconsider
whether an enterprise is the primary beneficiary of a VIE only
when specific events had occurred. This pronouncement also
requires enhanced disclosures about an enterprises
involvement with a VIE. The adoption of this pronouncement did
not have any effect on our consolidated financial statements.
In October 2009, an accounting pronouncement was issued to
update 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 current requirements. Additional disclosures
discussing the nature of multiple element arrangements, the
types of deliverables under the arrangements, the general timing
of their delivery, and significant factors and estimates used to
determine estimated selling prices are required. This
pronouncement is effective prospectively for revenue
arrangements entered into or modified after annual periods
beginning on or after June 15, 2010, but early adoption is
permitted. We have adopted this pronouncement as of
January 1, 2011, and we will review new
and/or
modified revenue arrangements after the adoption date to ensure
compliance with this update. We have
46
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
not determined the effect, if any, that the adoption of the
pronouncement may have on our financial position
and/or
results of operations.
In December 2010, an accounting pronouncement was issued to
update 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. The guidance is effective prospectively for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2010. Early adoption is permitted. We
have adopted this pronouncement as of January 1, 2011, and
we will consider the guidance in conjunction with future
acquisitions.
In December 2010, an accounting pronouncement was issued to
update 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. The guidance is effective for fiscal years
beginning after December 15, 2010. We have adopted this
pronouncement as of January 1, 2011, and we will consider
the guidance in conjunction with our future goodwill impairment
testing.
|
|
NOTE 3
|
ACQUISITIONS
OF BUSINESSES
|
We acquired two companies during 2010 and a company in 2009,
each for an immaterial amount. 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. All of
these companies have been included in our United States
facilities services reporting segment.
During 2008, we acquired five companies, which were not material
individually or in the aggregate, for an aggregate of
$82.7 million. One of the companies primarily provides
industrial services to refineries, another primarily provides
industrial maintenance services, and two others primarily
perform mobile mechanical services. The results of these four
companies have been included in our United States facilities
services reporting segment. The fifth company is a fire
protection company that has been included in our United States
mechanical construction and facilities services reporting
segment. Goodwill and identifiable intangible assets
attributable to these five companies were valued at an aggregate
of $15.0 million and $48.8 million, respectively,
representing the excess of the aggregate purchase price over the
fair value amounts assigned to their net tangible assets. See
Note 8Goodwill and Identifiable Intangible Assets of
the notes to consolidated financial statements for additional
information.
We believe the aforementioned acquisitions further our goal of
service and geographic diversification
and/or
expansion of our facilities services operations and our
mechanical construction and facilities services operation in our
fire protection offerings. Additionally, these acquisitions
create more opportunities for our subsidiaries to collaborate on
national facilities services contracts.
The purchase price allocation for one of our 2010 acquired
companies is subject to the finalization of valuation of
acquired identifiable intangible assets. The purchase price
accounting for the other 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 purchase method in 2008 and by the acquisition method in
2010 and 2009, 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.
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.
47
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
EARNINGS
PER SHARE
|
The following tables summarize our calculation of Basic and
Diluted (Loss) Earnings per Common Share (EPS) for
the years ended December 31, 2010, 2009 and 2008 (in
thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc. available to
common stockholders
|
|
$
|
(86,691
|
)
|
|
$
|
160,756
|
|
|
$
|
182,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used to compute basic (loss)
earnings per common share
|
|
|
66,393,782
|
|
|
|
65,910,793
|
|
|
|
65,373,483
|
|
Effect of diluted securitiesShare-based awards
|
|
|
|
|
|
|
1,534,492
|
|
|
|
1,743,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted (loss) earnings per common share
|
|
|
66,393,782
|
|
|
|
67,445,285
|
|
|
|
67,117,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc. common
stockholders
|
|
$
|
(1.31
|
)
|
|
$
|
2.44
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to EMCOR Group, Inc. common
stockholders
|
|
$
|
(1.31
|
)
|
|
$
|
2.38
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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, 2009 and 2008 because they would be
anti-dilutive were 516,386 and 295,624, respectively.
Inventories as of December 31, 2010 and 2009 consist of the
following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw materials and construction materials
|
|
$
|
17,749
|
|
|
$
|
16,735
|
|
Work in process
|
|
|
15,029
|
|
|
|
17,733
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,778
|
|
|
$
|
34,468
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
INVESTMENTS,
NOTES AND OTHER LONG-TERM RECEIVABLES
|
Investments, notes and other long-term receivables were
$6.2 million and $19.3 million at December 31,
2010 and 2009, respectively. Included as investments, notes and
other long-term receivables was an investment accounted for
using the equity method of accounting of $13.1 million as
of December 31, 2009 relating to a venture with Baltimore
Gas & Electric (a subsidiary of Constellation Energy).
This venture designs, constructs, owns, operates, leases and
maintains facilities to produce chilled water for sale to
customers for use in air conditioning commercial properties. As
a result of our discounted cash flow analysis, an impairment
charge of $7.0 million was recognized in 2008, to
write-down the carrying value of this investment to its
estimated fair value. We recorded this
other-than-temporary
decline in fair value as a component of Cost of
Sales on the Consolidated Statements of Operations. 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 $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.
48
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
INVESTMENTS,
NOTES AND OTHER LONG-TERM
RECEIVABLES (Continued)
|
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 7
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment in the accompanying Consolidated
Balance Sheets consisted of the following amounts as of
December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
83,500
|
|
|
$
|
77,544
|
|
Vehicles
|
|
|
35,027
|
|
|
|
37,456
|
|
Furniture and fixtures
|
|
|
18,344
|
|
|
|
19,664
|
|
Computer hardware/software
|
|
|
77,016
|
|
|
|
74,794
|
|
Land, buildings and leasehold improvements
|
|
|
68,691
|
|
|
|
67,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,578
|
|
|
|
277,251
|
|
Accumulated depreciation and amortization
|
|
|
(193,963
|
)
|
|
|
(185,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,615
|
|
|
$
|
92,057
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant
and equipment was $25.5 million, $26.8 million and
$25.2 million for the years ended December 31, 2010,
2009 and 2008, respectively.
|
|
NOTE 8
|
GOODWILL
AND IDENTIFIABLE INTANGIBLE ASSETS
|
Goodwill at December 31, 2010 and 2009 was approximately
$406.8 million and $593.6 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 2010 has been preliminarily valued at
$22.4 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, IntangiblesGoodwill 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, 2010, approximately 56.0%
of our goodwill relates to our United States facilities services
segment, approximately 43.1% relates to our United States
mechanical construction and facilities services segment and
approximately 0.9% relates to our United States electrical
construction and facilities services segment.
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 units 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
49
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
GOODWILL
AND IDENTIFIABLE INTANGIBLE
ASSETS (Continued)
|
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 units goodwill is greater
than the implied fair value of that reporting units
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.
For the years ended December 31, 2009 and 2008, no
impairment of our goodwill was recognized.
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, 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.
As a result of the continued assessment of the fair value of
trade names previously impaired and the interim impairment
testing performed during the second and third quarters of 2010,
we recorded an additional $35.5 million non-cash impairment
charge of trade names associated with certain prior year
acquisitions. These trade names are reported within our United
States facilities services segment. The current year impairment
primarily results from both lower forecasted revenues from and
operating margins at our United States facilities services
segment, which has been adversely affected by industry
conditions. Additionally, we performed our annual impairment
test as of October 1, and no additional impairment of our
trade names was recognized for any of our reporting segments in
the fourth quarter of 2010. For the year ended December 31,
2008, no impairment of our trade names was recognized.
In addition, we review for the impairment of other identifiable
intangible assets that are being amortized whenever facts and
circumstances indicate that their carrying values may not be
fully recoverable. This test compares their carrying values to
the undiscounted pre-tax cash flows expected to result from the
use of the assets. If the assets are impaired, the assets are
written down to their fair values, generally determined based on
their future discounted cash flows. Based on facts and
circumstances that indicated an impairment may exist, we
performed an impairment review of our other identifiable
intangible assets for the year ended December 31, 2009,
which resulted in 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 years ended
December 31, 2010 and 2008, 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 were in the second and third quarters
of 2010 and in the fourth quarter of 2009, to record goodwill
and/or
identifiable intangible asset impairment charges in future
periods.
During 2010, we recognized a $246.1 million non-cash
impairment charge as discussed above. Of this amount,
$210.6 million relates to goodwill and $35.5 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.
50
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
GOODWILL
AND IDENTIFIABLE INTANGIBLE
ASSETS (Continued)
|
The changes in the carrying amount of goodwill by reportable
segments during the years ended December 31, 2010 and 2009
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
electrical
|
|
|
mechanical
|
|
|
|
|
|
|
|
|
|
construction
|
|
|
construction
|
|
|
United States
|
|
|
|
|
|
|
and facilities
|
|
|
and facilities
|
|
|
facilities
|
|
|
|
|
|
|
services segment
|
|
|
services segment
|
|
|
services segment
|
|
|
Total
|
|
|
Balance at December 31, 2009
|
|
$
|
3,823
|
|
|
$
|
177,740
|
|
|
$
|
412,065
|
|
|
$
|
593,628
|
|
Acquisitions, earn-outs and purchase price adjustments
|
|
|
|
|
|
|
|
|
|
|
23,778
|
|
|
|
23,778
|
|
Transfers
|
|
|
|
|
|
|
(2,565
|
)
|
|
|
2,565
|
|
|
|
|
|
Impairments
|
|
|
|
|
|
|
|
|
|
|
(210,602
|
)
|
|
|
(210,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
3,823
|
|
|
$
|
175,175
|
|
|
$
|
227,806
|
|
|
$
|
406,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There may be contingent payments associated with the future
performance of certain acquired entities, which may result in an
increase to goodwill. During 2010 and 2009, pursuant to the
purchase method of accounting, we recorded an aggregate of
$1.4 million and $9.1 million, respectively, by reason
of earn-out obligations in respect of prior acquisitions, which
increased goodwill associated with these acquisitions.
Identifiable intangible assets as of December 31, 2010 and
2009 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
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 (unamortized)
|
|
|
107,026
|
|
|
|
|
|
|
|
(46,976
|
)
|
|
|
60,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
383,257
|
|
|
$
|
(89,163
|
)
|
|
$
|
(49,005
|
)
|
|
$
|
245,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Charge
|
|
|
Total
|
|
|
Contract backlog
|
|
$
|
34,505
|
|
|
$
|
(33,294
|
)
|
|
$
|
|
|
|
$
|
1,211
|
|
Developed technology
|
|
|
91,000
|
|
|
|
(10,427
|
)
|
|
|
|
|
|
|
80,573
|
|
Customer relationships
|
|
|
117,684
|
|
|
|
(24,021
|
)
|
|
|
(2,029
|
)
|
|
|
91,634
|
|
Non-competition agreements
|
|
|
7,243
|
|
|
|
(5,004
|
)
|
|
|
|
|
|
|
2,239
|
|
Trade names (unamortized)
|
|
|
100,362
|
|
|
|
|
|
|
|
(11,497
|
)
|
|
|
88,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
350,794
|
|
|
$
|
(72,746
|
)
|
|
$
|
(13,526
|
)
|
|
$
|
264,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets attributable to companies
acquired in 2010 and 2009 have been preliminarily valued at
$32.5 million and $4.0 million, respectively. See
Note 3Acquisitions of Businesses of the notes to
consolidated financial statements for additional information.
The identifiable intangible amounts are amortized on a
straight-line basis. The amortization periods range from
17 months to 21 months for contract backlog,
20 years for developed technology, 5 to 20 years for
customer relationships, and 3 to 7 years for
non-competition agreements.
51
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
GOODWILL
AND IDENTIFIABLE INTANGIBLE
ASSETS (Continued)
|
Amortization expense related to identifiable intangible assets
was $16.4 million, $19.0 million and
$23.4 million for the years ended December 31, 2010,
2009 and 2008, respectively. The following table presents the
estimated future amortization expense of identifiable intangible
assets in the following years (in thousands):
|
|
|
|
|
2011
|
|
$
|
18,744
|
|
2012
|
|
|
15,535
|
|
2013
|
|
|
12,864
|
|
2014
|
|
|
12,326
|
|
2015
|
|
|
12,326
|
|
Thereafter
|
|
|
113,244
|
|
|
|
|
|
|
|
|
$
|
185,039
|
|
|
|
|
|
|
Credit
Facilities
Until February 4, 2010, we had a revolving credit agreement
(the Old Revolving Credit Facility) as amended,
which provided for a credit facility of $375.0 million.
Effective February 4, 2010, we replaced the Old Revolving
Credit Facility that was due to expire October 17, 2010
with an amended and restated $550.0 million revolving
credit facility (the 2010 Revolving Credit
Facility). The 2010 Revolving Credit Facility expires in
February 2013. It permits us to increase our borrowing to
$650.0 million if additional lenders are identified
and/or
existing lenders are willing to increase their current
commitments. We may allocate up to $175.0 million of the
borrowing capacity under the 2010 Revolving Credit Facility to
letters of credit, which amount compares to $125.0 million
under the Old Revolving Credit Facility. The 2010 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
2010 Revolving Credit Facility contains various covenants
requiring, among other things, maintenance of certain financial
ratios and certain restrictions with respect to payment of
dividends, common stock repurchases, investments, acquisitions,
indebtedness and capital expenditures. A commitment fee is
payable on the average daily unused amount of the 2010 Revolving
Credit Facility. The fee is 0.5% of the unused amount.
Borrowings under the 2010 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, 2010) plus 1.75% to 2.25%,
based on certain financial tests or (2) United States
dollar LIBOR (0.26% at December 31, 2010) plus 2.75%
to 3.25%, based on certain financial tests. The interest rate in
effect at December 31, 2010 was 3.01%. Letter of credit
fees issued under this facility range from 2.75% to 3.25% of the
respective face amounts of the letters of credit issued and are
charged based on certain financial tests. We capitalized
approximately $6.0 million of debt issuance costs
associated with the 2010 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 Old Revolving Credit Facility, less than
$0.1 million attributable to the acceleration of expense
for debt issuance costs was recorded as part of interest
expense. As of December 31, 2010 and December 31,
2009, we had approximately $82.4 million and
$68.9 million of letters of credit outstanding,
respectively. There were no borrowings under the Old Revolving
Credit Facility as of December 31, 2009. We have borrowings
of $150.0 million outstanding under the 2010 Revolving
Credit Facility at December 31, 2010, which may remain
outstanding at our discretion until the 2010 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 proceeded to borrow
$150.0 million under this facility and used the proceeds
along with cash on hand to prepay on February 4, 2010 all
indebtedness outstanding under the Term Loan. In
52
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
DEBT (Continued)
|
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.
Long-term debt in the accompanying Consolidated Balance Sheets
consisted of the following amounts as of December 31, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010 Revolving Credit Facility
|
|
$
|
150,000
|
|
|
$
|
|
|
Term Loan, interest payable in varying amounts through 2010
|
|
|
|
|
|
|
194,750
|
|
Capitalized Lease Obligations, at weighted average interest
rates from 5.0% to 9.3% payable in varying amounts through 2014
|
|
|
1,649
|
|
|
|
601
|
|
Other, payable through 2012
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,673
|
|
|
|
195,351
|
|
Less: current maturities
|
|
|
489
|
|
|
|
45,100
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151,184
|
|
|
$
|
150,251
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Lease Obligations
See Note 16Commitments 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 10
|
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 mitigated the risk of counterparty nonperformance
by choosing as our counterparty a major reputable financial
institution with an investment grade credit rating.
The derivative was recognized as either an asset or liability on
our Consolidated Balance Sheets with measurement at fair value,
and changes in the fair value of the derivative instrument were
reported in either net income, included as part of interest
expense, or other comprehensive income, depending on the
designated use of the derivative and whether or not it met the
criteria for hedge accounting. The fair value of this instrument
reflected the net amount required to settle the position. The
accounting for gains and losses associated with changes in fair
value of the derivative and the related effects on the
consolidated financial statements was subject to their hedge
designation and whether they met effectiveness standards.
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 9Debt 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
swaps 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
53
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DERIVATIVE
INSTRUMENT AND HEDGING
ACTIVITY (Continued)
|
the counterpartys 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 $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.
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 swaps termination value as
the credit value adjustment for counterparty nonperformance was
immaterial. As of December 31, 2010, we have no derivatives
and/or
hedging instruments outstanding.
|
|
NOTE 11
|
FAIR
VALUE MEASUREMENTS
|
In 2008, we adopted the provisions of ASC 820 Fair
Value Measurements and Disclosures, which provides
guidance to (i) all applicable financial assets and
liabilities and (ii) non-financial assets and liabilities
that are recognized or disclosed at fair value in our financial
statements on a recurring basis. In January 2009, we adopted an
accounting standard update related to ASC 820, which
applies this guidance to all remaining assets and liabilities
measured on a non-recurring basis at fair value. 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 1Unadjusted quoted market prices in active
markets for identical assets and liabilities.
Level 2Observable 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 3Prices or valuations that require inputs that
are both significant to the measurement and unobservable.
At December 31, 2010 and 2009, we had $95.7 million
and $30.2 million, respectively, in money market funds,
included within Cash and cash equivalents in the accompanying
Consolidated Balance Sheets, which are Level 1 assets.
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 2010 Revolving
Credit Facility approximates the fair value due to the variable
rate on such debt.
We measured the fair value of our derivative instrument on a
recurring basis. At December 31, 2009, the
$1.2 million fair value of the interest rate swap was
determined using Level 2 inputs. There are no derivatives
outstanding as of December 31, 2010.
At December 31, 2010 and 2009, we had certain assets,
specifically $257.9 million and $60.6 million,
respectively, of goodwill
and/or
indefinite lived intangible assets, 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 8Goodwill and Identifiable Intangible Assets for
a further discussion.
Our 2010 income tax provision was $52.4 million compared to
$96.2 million for 2009 and $116.6 million for 2008
based on effective income tax rates, before the tax effect of
non-cash impairment charges, of approximately 36.8%, 37.4% and
39.0%, respectively. The actual income tax rates for the year
ended December 31, 2010, 2009 and 2008, inclusive of
non-cash impairment charges, were (152.8)%, 37.4% and 39.0%,
respectively. The decrease in the 2010 income tax provision was
primarily due to reduced income before income taxes and a change
in the allocation of earnings among various jurisdictions.
54
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
INCOME
TAXES (Continued)
|
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 significantly impacts the effective tax
rate for 2010.
Our 2009 income tax provision was $96.2 million. The
decrease in our 2009 income tax provision was primarily due to
reduced income before income taxes compared to 2008. Our 2008
income tax provision was $116.6 million.
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 states for the years 2004
through 2009. The Internal Revenue Service has completed its
audit of our federal income tax returns for the years 2005
through 2007. We agreed to and paid an assessment proposed by
the Internal Revenue Service pursuant to such audit. We recorded
a charge of approximately $2.0 million, inclusive of
interest, as a result of this audit in 2009.
As of December 31, 2010 and 2009, the amount of
unrecognized income tax benefits was $6.5 million and
$7.5 million (of which $4.2 million and
$5.4 million, if recognized, would favorably affect our
effective income tax rate), respectively. At December 31, 2010
and 2009, we had an accrual of $2.3 million and
$2.2 million, respectively, for the payment of interest
related to unrecognized income tax benefits included on the
Consolidated Balance Sheets. During the years ended
December 31, 2010 and 2009, we recognized approximately
$0.1 million in interest expense and $1.5 million in
interest income related to our unrecognized income tax benefits,
respectively. As of December 31, 2010 and 2009, we had
total income tax reserves of $8.8 million
($8.8 million included in Other long-term
obligations) and $9.7 million ($9.0 million
included in Other long-term obligations and
$0.7 million included in Prepaid expenses and
other), respectively.
A reconciliation of the beginning and end of year unrecognized
income tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
7,534
|
|
|
$
|
9,574
|
|
Additions based on tax positions related to the current year
|
|
|
865
|
|
|
|
623
|
|
Additions based on tax positions related to prior years
|
|
|
328
|
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
(915
|
)
|
|
|
(1,321
|
)
|
Reductions for expired statute of limitations
|
|
|
(1,299
|
)
|
|
|
(1,342
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6,513
|
|
|
$
|
7,534
|
|
|
|
|
|
|
|
|
|
|
It is possible that approximately $4.7 million of
unrecognized income tax benefits at December 31, 2010,
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 and anticipated settlements of audits.
The income tax provision (benefit) in the accompanying
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal provision
|
|
$
|
55,878
|
|
|
$
|
73,262
|
|
|
$
|
94,171
|
|
State and local provisions
|
|
|
14,079
|
|
|
|
17,526
|
|
|
|
22,036
|
|
Foreign (benefit) provision
|
|
|
(2,217
|
)
|
|
|
2,483
|
|
|
|
9,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,740
|
|
|
|
93,271
|
|
|
|
126,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(15,345
|
)
|
|
|
2,922
|
|
|
|
(9,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,395
|
|
|
$
|
96,193
|
|
|
$
|
116,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
INCOME
TAXES (Continued)
|
Factors accounting for the variation from U.S. statutory
income tax rates for the years ended December 31, 2010,
2009 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal income taxes at the statutory rate
|
|
$
|
(10,601
|
)
|
|
$
|
90,745
|
|
|
$
|
105,253
|
|
Noncontrolling interests
|
|
|
(1,403
|
)
|
|
|
(812
|
)
|
|
|
(676
|
)
|
State and local income taxes, net of federal tax benefits
|
|
|
6,374
|
|
|
|
10,279
|
|
|
|
13,421
|
|
Permanent differences
|
|
|
(1,401
|
)
|
|
|
(1,201
|
)
|
|
|
1,126
|
|
Goodwill impairment
|
|
|
61,827
|
|
|
|
|
|
|
|
|
|
Foreign income taxes
|
|
|
(1,065
|
)
|
|
|
(923
|
)
|
|
|
(1,269
|
)
|
Adjustments to valuation allowance for deferred tax assets
|
|
|
(2,812
|
)
|
|
|
(151
|
)
|
|
|
(3,395
|
)
|
Federal tax reserves
|
|
|
(1,153
|
)
|
|
|
(1,600
|
)
|
|
|
1,509
|
|
Other
|
|
|
2,629
|
|
|
|
(144
|
)
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,395
|
|
|
$
|
96,193
|
|
|
$
|
116,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred income tax asset are included
in Prepaid expenses and other of $25.0 million,
Other assets of $17.0 million, Other
accrued expenses and liabilities of $3.9 million and
Other long-term obligations of $32.9 million at
December 31, 2010, and the components of net deferred
income tax liability are included in Prepaid expenses and
other of $40.8 million, Other assets of
$25.2 million, Other accrued expenses and
liabilities of $1.0 million and Other long-term
obligations of $71.8 million at December 31,
2009 in the accompanying Consolidated Balance Sheets.
The amounts recorded for the years ended December 31, 2010
and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Excess of amounts expensed for financial statement purposes over
amounts deducted for income tax purposes:
|
|
|
|
|
|
|
|
|
Insurance liabilities
|
|
$
|
46,711
|
|
|
$
|
42,500
|
|
Pension liability
|
|
|
15,310
|
|
|
|
22,186
|
|
Other liabilities and reserves
|
|
|
80,308
|
|
|
|
65,396
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
142,329
|
|
|
|
130,082
|
|
Valuation allowance for deferred tax assets
|
|
|
(783
|
)
|
|
|
(3,984
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
141,546
|
|
|
|
126,098
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Costs capitalized for financial statement purposes and deducted
for income tax purposes:
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets
|
|
|
(118,886
|
)
|
|
|
(118,754
|
)
|
Other, primarily depreciation of property, plant and equipment
|
|
|
(17,488
|
)
|
|
|
(14,129
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(136,374
|
)
|
|
|
(132,883
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
5,172
|
|
|
$
|
(6,785
|
)
|
|
|
|
|
|
|
|
|
|
We file a consolidated federal income tax return including all
of our U.S. subsidiaries. As of December 31, 2010 and
2009, the total valuation allowance on net deferred income tax
assets was approximately $0.8 million and
$4.0 million, respectively. The reason for the decrease in
the valuation allowance for 2010 was related to the utilization
of capital loss carryforwards. Realization of the deferred
income tax assets is dependent on our generating sufficient
taxable income. We believe that the deferred income tax assets
will be realized through the future reversal of existing taxable
temporary differences and projected future income. Although
56
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
INCOME
TAXES (Continued)
|
realization is not assured, we believe it is more likely than
not that the deferred income tax asset, net of the valuation
allowance discussed above, will be realized. The amount of the
deferred income tax asset considered realizable, however, could
be reduced if estimates of future income are reduced.
Income (loss) before income taxes for the years ended
December 31, 2010, 2009 and 2008 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
(46,115
|
)
|
|
$
|
235,381
|
|
|
$
|
271,006
|
|
Foreign
|
|
|
15,826
|
|
|
|
23,889
|
|
|
|
29,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(30,289
|
)
|
|
$
|
259,270
|
|
|
$
|
300,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not recorded deferred income taxes on the undistributed
earnings of our foreign subsidiaries because of our intent to
indefinitely reinvest such earnings. Upon distribution of these
earnings in the form of dividends or otherwise, we may be
subject to U.S. income taxes and foreign withholding taxes.
It is not practical, however, to estimate the amount of taxes
that may be payable if such earnings or invested capital was
repatriated to the United States.
As of December 31, 2010 and 2009, 66,660,551 and
66,187,344 shares of our common stock were outstanding,
respectively.
|
|
NOTE 14
|
SHARE-BASED
COMPENSATION PLANS
|
We have an incentive plan under which stock options, stock
awards, stock units and other share-based compensation may be
granted to officers, non-employee directors and key employees of
the Company. Under the terms of this plan, 3,250,000 shares
were authorized and 3,090,000 shares are available for
grant or issuance as of December 31, 2010. Any issuances
under this plan are valued at the fair market value of the
common stock on the grant date. The vesting and expiration of
any stock option grants and the vesting of any stock awards or
stock units are determined by the Compensation Committee at the
time of the grant. Additionally, we have outstanding stock
options and stock units that were issued under other plans, and
no further grants may be made under these plans.
57
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 14
|
SHARE-BASED
COMPENSATION PLANS (Continued)
|
The following table summarizes activity regarding our stock
options and awards of shares and stock units since
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Balance, December 31, 2007
|
|
|
4,788,086
|
|
|
$
|
11.93
|
|
|
Balance, December 31, 2007
|
|
|
447,224
|
|
|
$
|
20.20
|
|
Granted
|
|
|
199,998
|
|
|
$
|
26.33
|
|
|
Granted
|
|
|
135,337
|
|
|
$
|
23.01
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(249,736
|
)
|
|
$
|
9.64
|
|
|
Issued
|
|
|
(78,133
|
)
|
|
$
|
14.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
4,738,348
|
|
|
$
|
12.66
|
|
|
Balance, December 31, 2008
|
|
|
504,428
|
|
|
$
|
21.81
|
|
Granted
|
|
|
210,764
|
|
|
$
|
21.08
|
|
|
Granted
|
|
|
128,563
|
|
|
$
|
23.17
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(413,938
|
)
|
|
$
|
6.77
|
|
|
Issued
|
|
|
(258,102
|
)
|
|
$
|
18.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
4,535,174
|
|
|
$
|
13.59
|
|
|
Balance, December 31, 2009
|
|
|
374,889
|
|
|
$
|
24.71
|
|
Granted
|
|
|
175,723
|
|
|
$
|
24.78
|
|
|
Granted
|
|
|
110,335
|
|
|
$
|
27.88
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(294,124
|
)
|
|
$
|
9.58
|
|
|
Issued
|
|
|
(120,036
|
)
|
|
$
|
28.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
4,416,773
|
|
|
$
|
14.31
|
|
|
Balance, December 31, 2010
|
|
|
365,188
|
|
|
$
|
24.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, 8,610, 2,071 and 2,096 shares were granted to
certain non-employee directors pursuant to annual retainer
arrangements during the years ended December 31, 2010, 2009
and 2008, respectively. The shares awarded to non-employee
directors and stock units awarded to employees were pursuant to
incentive plans for which $3.6 million, $3.5 million
and $3.9 million of compensation expense was recognized for
the years ended December 31, 2010, 2009 and 2008,
respectively. We have $1.6 million of compensation expense,
net of income taxes, which will be recognized over the remaining
vesting period related to the stock units awarded to employees.
We had outstanding phantom equity units, which were settled in
cash based upon the value of our stock price, for which
$1.4 million, $0.1 million and $1.2 million of
income was recognized for the years ended December 31,
2010, 2009 and 2008, respectively. These variations were due to
changes in the market price of our common stock from the award
date. There were no phantom equity units outstanding as of
December 31, 2010.
Compensation expense of $2.1 million, $2.0 million and
$2.0 million for the years ended December 31, 2010,
2009 and 2008, respectively, was recognized due to the vesting
of stock option grants. All outstanding stock options were fully
vested as of December 31, 2010. As a result of stock option
exercises, $2.8 million, $2.8 million and
$2.4 million of proceeds were received during the years
ended December 31, 2010, 2009 and 2008, respectively. The
income tax benefit derived in 2010, 2009 and 2008 as a result of
such exercises and share-based compensation was
$2.0 million, $2.2 million and $1.8 million,
respectively, of which $1.5 million, $2.2 million and
$1.2 million, respectively, represented excess tax benefits.
The total intrinsic value of options (the amounts by which the
stock price exceeded the exercise price of the option on the
date of exercise) that was exercised during 2010, 2009 and 2008
was $5.2 million, $7.3 million and $4.1 million,
respectively.
At December 31, 2010, 2009 and 2008, 4,416,773, 4,535,174
and 4,738,348 options were exercisable, respectively. The
weighted average exercise price of exercisable options at
December 31, 2010, 2009 and 2008 was approximately $14.31,
$13.59 and $12.66, respectively.
58
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 14
|
SHARE-BASED
COMPENSATION PLANS (Continued)
|
The following table summarizes information about our stock
options as of December 31, 2010:
|
|
|
|
|
|
|
Stock Options Outstanding and Exercisable
|
Range of
|
|
|
|
Weighted Average
|
|
Weighted Average
|
Exercise Prices
|
|
Number
|
|
Remaining Life
|
|
Exercise Price
|
|
$9.67 - $10.58
|
|
561,332
|
|
1.52 Years
|
|
$10.29
|
$10.96 - $13.20
|
|
2,425,592
|
|
3.14 Years
|
|
$11.36
|
$13.68 - $22.90
|
|
907,738
|
|
3.25 Years
|
|
$16.64
|
$23.17 - $28.13
|
|
402,111
|
|
6.38 Years
|
|
$25.92
|
$36.03
|
|
120,000
|
|
4.47 Years
|
|
$36.03
|
The total aggregate intrinsic value of options outstanding and
exercisable as of December 31, 2010, 2009 and 2008 were
approximately $64.8 million, $60.4 million and
$46.3 million, respectively.
The fair value on the date of grant was calculated using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
45.7
|
%
|
|
|
46.9
|
%
|
|
|
34.2
|
%
|
Risk-free interest rate
|
|
|
2.6
|
%
|
|
|
2.5
|
%
|
|
|
3.4
|
%
|
Expected life of options in years
|
|
|
6.7
|
|
|
|
5.1
|
|
|
|
5.0
|
|
Weighted average grant date fair value
|
|
$
|
12.18
|
|
|
$
|
9.18
|
|
|
$
|
9.51
|
|
Forfeitures of stock options have been historically
insignificant to the calculation and are estimated to be zero in
all periods presented.
We have an employee stock purchase plan. Under the terms of this
plan, the maximum number of shares of our common stock that may
be purchased is 3,000,000 shares. Generally, our employees
and non-union employees of our United States and Canadian
subsidiaries are eligible to participate in this plan. Employees
covered by collective bargaining agreements generally are not
eligible to participate in this plan.
|
|
NOTE 15
|
RETIREMENT
PLANS
|
Defined
Benefit Plans
Our United Kingdom subsidiary has a defined benefit pension plan
covering all eligible employees (the UK Plan). On
October 31, 2001, the UK Plan was closed to new entrants.
As a result, employees joining the subsidiary after this date
were not eligible to participate in the plan. On May 31,
2010, we curtailed the future accrual of benefits for active
employees participating in this plan. As a result of this
curtailment, we recognized a reduction of the projected benefit
obligation and recorded a curtailment gain of $6.4 million,
which will be amortized in the future through net periodic
pension cost. This defined pension plan was replaced by a
defined contribution plan. The benefits under the UK Plan are
based on wages and years of service with the subsidiary up to
the date of the curtailment. Our policy is to fund at least the
minimum amount required by law, but we have agreed with the UK
Plan Trustees to fund additional amounts and in conjunction with
the curtailment, we made a one-time contribution of
$25.9 million to the UK Plan. The measurement date of the
UK Plan is December 31 of each year.
We account for our UK Plan and other defined benefit plans in
accordance with ASC 715, CompensationRetirement
Benefits (ASC 715). ASC 715 requires that
(a) the funded status, which is measured as the difference
between the fair value of
59
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RETIREMENT
PLANS (Continued)
|
plan assets and the projected benefit obligations, be recorded
in our balance sheet with a corresponding adjustment to
accumulated other comprehensive income (loss) and (b) gains
and losses for the differences between actuarial assumptions and
actual results, and unrecognized service costs, be recognized
through accumulated other comprehensive income (loss). These
amounts will be subsequently recognized as net periodic pension
cost.
The change in benefit obligations and assets of the UK Plan for
the years ended December 31, 2010 and 2009 consisted of the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change in pension benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
253,730
|
|
|
$
|
192,419
|
|
Service cost
|
|
|
1,458
|
|
|
|
3,152
|
|
Interest cost
|
|
|
13,399
|
|
|
|
11,982
|
|
Plan participants contributions
|
|
|
523
|
|
|
|
1,530
|
|
Actuarial loss
|
|
|
8,445
|
|
|
|
33,088
|
|
Curtailment gain
|
|
|
(6,374
|
)
|
|
|
|
|
Benefits paid
|
|
|
(12,052
|
)
|
|
|
(10,411
|
)
|
Foreign currency exchange rate changes
|
|
|
(9,281
|
)
|
|
|
21,970
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
249,848
|
|
|
|
253,730
|
|
|
|
|
|
|
|
|
|
|
Change in pension plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
174,426
|
|
|
|
133,259
|
|
Actual return on plan assets
|
|
|
20,679
|
|
|
|
26,681
|
|
Employer contributions
|
|
|
33,135
|
|
|
|
8,192
|
|
Plan participants contributions
|
|
|
523
|
|
|
|
1,530
|
|
Benefits paid
|
|
|
(12,052
|
)
|
|
|
(10,411
|
)
|
Foreign currency exchange rate changes
|
|
|
(3,778
|
)
|
|
|
15,175
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
212,933
|
|
|
|
174,426
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(36,915
|
)
|
|
$
|
(79,304
|
)
|
|
|
|
|
|
|
|
|
|
Amounts not yet reflected in net periodic benefit cost and
included in Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Unrecognized losses
|
|
$
|
68,955
|
|
|
$
|
81,639
|
|
|
|
|
|
|
|
|
|
|
The underfunded status of the UK Plan of $36.9 million and
$79.3 million at December 31, 2010 and 2009,
respectively, is included in Other long-term
obligations in the accompanying Consolidated Balance
Sheets. No plan assets are expected to be returned to us during
the year ended December 31, 2011.
The weighted-average assumptions used to determine benefit
obligations as of December 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Discount rate
|
|
|
5.3
|
%
|
|
|
5.7
|
%
|
Annual rate of salary provision
|
|
|
|
|
|
|
4.5
|
%
|
60
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RETIREMENT
PLANS (Continued)
|
The weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31, 2010, 2009
and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate
|
|
|
5.6
|
%
|
|
|
5.8
|
%
|
|
|
5.6
|
%
|
Annual rate of salary provision
|
|
|
|
|
|
|
3.8
|
%
|
|
|
4.2
|
%
|
Annual rate of return on plan assets
|
|
|
7.0
|
%
|
|
|
6.8
|
%
|
|
|
6.8
|
%
|
The annual rate of return on plan assets is based on the yield
of risk-free bonds, plus an estimated equity-risk premium, at
each years measurement date. This annual rate approximates
the historical annual return on plan assets and considers the
expected asset allocation between equity and debt securities.
For measurement purposes of the liability, the annual rates of
inflation of covered pension benefits assumed for 2010 and 2009
were 3.4% and 3.5%, respectively.
The components of net periodic pension benefit cost for the
years ended December 31, 2010, 2009 and 2008 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
1,458
|
|
|
$
|
3,152
|
|
|
$
|
4,361
|
|
Interest cost
|
|
|
13,399
|
|
|
|
11,982
|
|
|
|
14,283
|
|
Expected return on plan assets
|
|
|
(12,245
|
)
|
|
|
(9,744
|
)
|
|
|
(14,305
|
)
|
Amortization of unrecognized loss
|
|
|
2,914
|
|
|
|
4,229
|
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost
|
|
$
|
5,526
|
|
|
$
|
9,619
|
|
|
$
|
6,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated unrecognized loss for the UK Plan that will be
amortized from Accumulated other comprehensive loss into net
periodic benefit cost over the next year is approximately
$1.5 million.
UK Plan
Assets
The weighted average asset allocations and weighted average
target allocations at December 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
December 31,
|
|
|
December 31,
|
|
Asset Category
|
|
Allocation
|
|
|
2010
|
|
|
2009
|
|
|
Equity securities
|
|
|
65.0
|
%
|
|
|
67.4
|
%
|
|
|
71.0
|
%
|
Debt securities
|
|
|
35.0
|
|
|
|
32.5
|
|
|
|
28.5
|
|
Cash
|
|
|
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets of our UK Plan are invested in marketable equity and
equity like securities through various funds. These funds invest
in a diverse geographical range of investments, including the
United Kingdom, the United States and other international
locations, such as Asia-Pacific and other European locations.
Debt securities are invested in funds that invest in UK
corporate bonds and UK government bonds.
61
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RETIREMENT
PLANS (Continued)
|
The following tables set forth by level, within the fair value
hierarchy discussed in Note 11Fair Value
Measurements, the assets of the UK Plan at fair value as of
December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2010
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Equity and equity like investments
|
|
$
|
|
|
|
$
|
138,372
|
|
|
$
|
5,003
|
|
|
$
|
143,375
|
|
Corporate bonds
|
|
|
|
|
|
|
47,469
|
|
|
|
|
|
|
|
47,469
|
|
Government bonds
|
|
|
|
|
|
|
21,800
|
|
|
|
|
|
|
|
21,800
|
|
Cash
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
289
|
|
|
$
|
207,641
|
|
|
$
|
5,003
|
|
|
$
|
212,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2009
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Equity and equity like investments
|
|
$
|
|
|
|
$
|
120,304
|
|
|
$
|
3,569
|
|
|
$
|
123,873
|
|
Corporate bonds
|
|
|
|
|
|
|
28,122
|
|
|
|
|
|
|
|
28,122
|
|
Government bonds
|
|
|
|
|
|
|
21,503
|
|
|
|
|
|
|
|
21,503
|
|
Cash
|
|
|
928
|
|
|
|
|
|
|
|
|
|
|
|
928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
928
|
|
|
$
|
169,929
|
|
|
$
|
3,569
|
|
|
$
|
174,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In regards to the plan assets of our UK Plan, investment amounts
have been allocated within the fair value hierarchy across all
three levels. The characteristics of the assets that sit within
each level are summarized as follows:
Level 1This asset represents cash.
Level 2These assets are a combination of the
following:
|
|
|
|
(a)
|
Assets that are not exchange traded but have a unit price that
is based on the net asset value of the fund. The unit prices are
not quoted but the underlying assets held by the fund are either:
|
(i) held in a variety of listed investments
|
|
|
|
(ii)
|
held in UK treasury bonds or corporate bonds with the asset
value being based on fixed income streams. Some of the
underlying bonds are also listed on regulated markets.
|
It is the value of the underlying assets that have been used to
calculate the unit price of the fund.
|
|
|
|
(b)
|
Assets that are not exchange traded but have a unit price that
is based on the net asset value of the fund. The unit prices are
quoted. The underlying assets within these funds comprise cash
or assets that are listed on a regulated market (i.e. the values
are based on observable market data) and it is these values that
are used to calculate the unit price of the fund.
|
Level 3Assets that are not exchange traded but have a
unit price that is based on the net asset value of the fund. The
unit prices are not quoted and are not available on any market.
62
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RETIREMENT
PLANS (Continued)
|
The table below sets forth a summary of changes in the fair
value of the UK Plans Level 3 assets for the years
ended December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
Equity and Equity Like Investments
|
|
2010
|
|
|
2009
|
|
|
Start of year balance
|
|
$
|
3,569
|
|
|
$
|
2,851
|
|
Actual return on plan assets, relating to assets still held at
reporting date
|
|
|
405
|
|
|
|
398
|
|
Purchases, sales and settlements, net
|
|
|
1,139
|
|
|
|
|
|
Change due to exchange rate changes
|
|
|
(110
|
)
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
End of year balance
|
|
$
|
5,003
|
|
|
$
|
3,569
|
|
|
|
|
|
|
|
|
|
|
The investment policies and strategies for the plan assets are
established by the plan trustees (who are independent from the
company) to achieve a reasonable balance between risk, likely
return and administration expense, as well as to maintain funds
at a level to meet minimum funding requirements. In order to
ensure that an appropriate investment strategy is in place, an
analysis of the UK Plans assets and liabilities is
completed periodically.
Cash
Flows:
Contributions
Our United Kingdom subsidiary expects to contribute
approximately $5.4 million to its UK Plan in 2011.
Estimated
Future Benefit Payments
The following estimated benefit payments, which reflect expected
future service, as appropriate, are expected to be paid in the
following years (in thousands):
|
|
|
|
|
|
|
Pension
|
|
|
Benefits
|
|
2011
|
|
$
|
10,682
|
|
2012
|
|
|
10,812
|
|
2013
|
|
|
11,372
|
|
2014
|
|
|
11,900
|
|
2015
|
|
|
13,216
|
|
Succeeding five years
|
|
|
76,546
|
|
The following table shows certain information for the UK Plan
where the accumulated benefit obligation is in excess of plan
assets as of December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Projected benefit obligation
|
|
$
|
249,848
|
|
|
$
|
253,730
|
|
Accumulated benefit obligation
|
|
$
|
249,848
|
|
|
$
|
225,855
|
|
Fair value of plan assets
|
|
$
|
212,933
|
|
|
$
|
174,426
|
|
We also sponsor two domestic defined benefit plans in which
participation by new individuals is frozen. The benefit
obligation associated with these plans as of December 31,
2010 and 2009 was approximately $6.1 million and
$5.4 million, respectively. The estimated fair value of the
plan assets as of December 31, 2010 and 2009 was
approximately $5.0 million and $4.7 million, respectively.
The plan assets are considered Level 1 assets within the
fair value hierarchy and are predominantly invested in cash,
63
EMCOR
Group, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RETIREMENT
PLANS (Continued)
|
equities, and equity and bond funds. The pension liability
balances as of December 31, 2010 and 2009 are classified as
Other long-term obligations on the accompanying
Consolidated Balance Sheets. The measurement date for these two
plans is December 31 of each year. The major assumptions used in
the actuarial valuations to determine benefit obligations as of
December 31, 2010 and 2009 included discount rates of 5.25%
and 5.00% for the 2010 period and a discount rate of 6.0% for
the 2009 period for both plans. Also, included was an expected
rate of return of 7.5% for the 2010 and 2009 periods for both
plans. The estimated loss for these plans that will be amortized
from Accumulated other comprehensive loss into net periodic
benefit cost over the next year is approximately
$0.2 million. The future estimated benefit payments
expected to be paid from the plans for the next ten years is
approximately $0.4 million per year.
Multi-Employer
Pension Plans
We participate in numerous multi-employer pension plans
(MEPPs) that provide retirement benefits to certain
union employees in accordance with various collective bargaining
agreements. As one of a multitude of participating employers in
these MEPPs, we are jointly responsible for any plan
underfunding. Our contributions to a particular MEPP are
established by the applicable collective bargaining agreements;
however, our required contributions may increase based on the
funded status of an MEPP and legal requirements of the Pension
Protection Act, which requires substantially underfunded MEPPs
to implement rehabilitation plans to improve their funded
status. Factors that could impact funded status of an MEPP
include, without limitation, investment performance, changes in
the participant demographics, decline in the number of
contributing employers and changes in actuarial assumptions. In
addition, we could be obligated to make additional contributions
if we either cease to have an obligation to contribute to an
MEPP or significantly reduce our contributions to an MEPP
because we reduce the number of employees contributing to the
MEPP by reason of layoffs or closure of a subsidiary, and the
MEPP has unfunded vested benefits. The amount of such additional
contributions (known as a withdrawal liability) would equal our
proportionate share of the MEPPs unfunded vested benefits.
We believe that certain of the MEPPs in which we participate may
have unfunded vested benefits. Due to uncertainty regarding
future factors that could trigger withdrawal liability, as well
as the absence of specific information regarding the MEPPs
current financial situation, we are unable to determine
(a) the amount and timing of our future withdrawal
liability, if any, and (b) whether our participation in
these MEPPs could have a material adverse impact on our
financial condition, results of operations or liquidity. Our
regular scheduled contributions to the MEPPs approximated
$176.2 million, $188.2 million and $221.1 million
for the years ended December 31, 2010, 2009 and 2008,
respectively. We have not recognized any withdrawal liabilities
for the years ended December 31, 2010 and 2008. We recorded
approximately $1.0 million for withdrawal liabilities for
the year ended December 31, 2009.
Defined
Contribution Plans
We have defined contribution retirement and savings plans that
cover eligible employees in the United States. Contributions to
these plans are based on a percentage of the employees
base compensation. The expenses recognized for the years ended
December 31, 2010, 2009 and 2008 for these plans were
$11.0 million, $9.7 million and $9.3 million,
respectively. At our discretion, we may make additional
supplemental matching contributions to a defined contribution
retirement and savings plan. The supplemental contributions for
the years ended December 31, 2010, 2009 and 2008 were
$6.2 million, $7.6 million and $5.6 million,
respectively.
Our United Kingdom subsidiary has defined contribution
retirement plans. The expense recognized for the years ended
December 31, 2010, 2009 and 2008 was $5.1 million,
$3.3 million and $3.7 million, respectively. The
increase in the expense recognized for 2010 compared to 2009 was
primarily due to the UK Plan being curtailed and replaced by a
defined contribution plan.
Our Canadian subsidiary has a defined contribution retirement
plan. The expense recognized was $0.3 million for the years
ended December 31, 2010, 2009 and 2008, respective