FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------------------------------------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ - -------------------------------------------------------------------------------- Commission file number 0-2315 ------ EMCOR Group, Inc. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2125338 - -------------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer Identification or organization) Identification Number) 101 Merritt Seven Corporate Park Norwalk, Connecticut 06851-1060 - -------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (203) 849-7800 - -------------------------------------- (Registrant's telephone number) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No __ Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on April 25, 2002: 14,862,917 shares.
EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of March 31, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Operations - three months ended March 31, 2002 and 2001 3 Condensed Consolidated Statements of Cash Flows - three months ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - three months ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 13 PART II - Other Information Item 1 Legal Proceedings 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 6 Exhibits and Reports on Form 8-K 20
12 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- March 31, December 31, 2002 2001 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 142,517 $ 189,766 Accounts receivable, net 868,527 777,102 Costs and estimated earnings in excess of billings on uncompleted contracts 209,460 221,272 Inventories 9,008 7,158 Prepaid expenses and other 20,838 22,026 ---------- ---------- Total current assets 1,250,350 1,217,324 Investments, notes and other long-term receivables 10,698 16,817 Property, plant and equipment, net 54,402 42,548 Goodwill, net 169,603 56,011 Other assets 18,151 16,964 ---------- ---------- Total assets $1,503,204 $1,349,664 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) - -------------------------------------------------------------------------------- March 31, December 31, 2002 2001 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under working capital credit line $ 50,000 $ -- Current maturities of long-term debt and capital lease obligations 630 947 Accounts payable Billings in excess of costs and estimated 327,026 313,227 earnings on uncompleted contracts 358,973 319,165 Accrued payroll and benefits 141,406 121,196 Other accrued expenses and liabilities 94,489 99,726 ---------- ---------- Total current liabilities 972,524 854,261 Long-term debt and capital lease obligations 22,635 848 Other long-term obligations 76,413 72,622 ---------- ---------- Total liabilities 1,071,572 927,731 ---------- ---------- Stockholders' equity: Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 14,849,174 and 14,815,007 shares issued and outstanding, respectively 159 159 Capital surplus 310,831 307,636 Accumulated other comprehensive loss (6,171) (5,424) Retained earnings 143,649 136,398 Treasury stock, at cost 1,131,985 shares (16,836) (16,836) ---------- ---------- Total stockholders' equity 431,632 421,933 ---------- ---------- Total liabilities and stockholders' equity $1,503,204 $1,349,664 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) - -------------------------------------------------------------------------------- Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------- Revenues $810,299 $837,555 Cost of sales 720,913 757,036 -------- -------- Gross profit 89,386 80,519 Amortization of goodwill -- 1,321 Selling, general and administrative expenses 76,855 68,352 -------- -------- Operating income 12,531 10,846 Interest income (expense), net 417 (742) -------- -------- Income before income taxes 12,948 10,104 Income tax provision 5,697 4,447 -------- -------- Net income $ 7,251 $ 5,657 ======== ======== Basic earnings per share $ 0.49 $ 0.54 ======== ======== Diluted earnings per share $ 0.47 $ 0.44 ======== ======== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) - -------------------------------------------------------------------------------- Three months ended March 31, 2002 2001 - -------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 7,251 $ 5,657 Depreciation and amortization 3,377 3,015 Amortization of goodwill -- 1,321 Other non-cash expenses 1,617 4,460 Changes in operating assets and liabilities, excluding the effect of business acquired 41,266 (77) -------- ------- Net cash provided by operating activities 53,511 14,376 -------- ------- Cash flows from investing activities: Payments for acquisitions of businesses, net of cash acquired, and related earn-out agreements (152,825) -- Proceeds from sale of assets 280 1,162 Purchase of property, plant and equipment (4,157) (4,227) Net proceeds (disbursements) from other investments 6,264 (746) -------- ------- Net cash used in investing activities (150,438) (3,811) -------- ------- Cash flows from financing activities: Borrowings under working capital credit lines, net 50,000 -- Net repayments of long-term debt and capital lease obligations (681) (123) Net proceeds from exercise of stock options 359 543 -------- ------- Net cash provided by financing activities 49,678 420 -------- ------- (Decrease) increase in cash and cash equivalents (47,249) 10,985 Cash and cash equivalents at beginning of year 189,766 137,685 -------- ------- Cash and cash equivalents at end of period $142,517 $148,670 ======== ======== Supplemental cash flow information: Cash paid for: Interest $ 72 $ 97 Income taxes $ 2,966 $ 1,623 Non-cash financing activities: Debt assumed in acquisition $ 22,115 -- See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands) (Unaudited) - ----------------------------- ----------- ----------- ------------ ---------------- ------------- ---------- ----------------- Accumulated other Common Capital comprehensive Retained Treasury Comprehensive Total stock surplus loss (1) earnings stock income - ----------------------------- ----------- ----------- ------------ ---------------- ------------- ---------- ----------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 $233,503 $117 $167,742 $(3,906) $ 86,386 $(16,836) Net income 5,657 -- -- -- 5,657 -- $5,657 Foreign currency translation adjustments (2,481) -- -- (2,481) -- -- (2,481) ------ Comprehensive income -- -- -- -- -- -- $3,176 ====== Provision in lieu of income taxes 3,260 -- 3,260 -- -- -- Common stock issued under stock option plans 543 -- 543 -- -- -- Value of Restricted Stock Units (2) 1,737 -- 1,737 -- -- -- -------- ---- -------- ------- -------- -------- Balance, March 31, 2001 $242,219 $117 $173,282 $(6,387) $ 92,043 $(16,836) ======== ==== ======== ======= ======== ======== Balance, January 1, 2002 $421,933 $159 $307,636 $(5,424) $136,398 $(16,836) Net income 7,251 -- -- -- 7,251 -- $7,251 Foreign currency translation adjustments (747) -- -- (747) -- -- (747) ------ Comprehensive income -- -- -- -- -- -- $6,504 ====== Common stock issued under stock option plans 359 -- 359 -- -- -- Value of Restricted Stock Units (2) 2,836 -- 2,836 -- -- -- -------- ---- -------- --------- -------- -------- Balance, March 31, 2002 $431,632 $159 $310,831 $(6,171) $143,649 $(16,836) ======== ==== ======== ======== ======== ======== </TABLE> (1) Represents cumulative foreign currency translation adjustments. (2) Shares of common stock will be issued in respect of restricted stock units. This amount represents the value of restricted stock units at the date of grant plus the related compensation expense in the current year due to an increase in market value of the underlying common stock. See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A Basis of Presentation The accompanying condensed consolidated financial statements have been prepared by EMCOR Group, Inc. and Subsidiaries ("EMCOR"), without audit, pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Readers of this report should refer to the consolidated financial statements and the notes thereto included in EMCOR's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of EMCOR, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary to present fairly the financial position of EMCOR and the results of its operations. The results of operations for the three month period ended March 31, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B Acquisition of Businesses On March 1, 2002, EMCOR acquired nineteen subsidiaries of Comfort Systems USA, Inc. ("Comfort"). Accordingly, the Consolidated Results of Operations for EMCOR for the three months ended March 31, 2002 include the results of operations for Comfort for the month of March 2002. The purchase price paid for a 100% voting interest was $186.25 million and was comprised of $164.15 million in cash and $22.1 million for the assumption of Comfort's notes payable to former owners of certain of the acquired companies. The acquisition was funded with $114.15 million of cash and $50.0 million of borrowings under EMCOR's working capital credit line. The acquired companies, which are based predominantly in the Midwest United States and New Jersey, are active in the installation and maintenance of mechanical systems and the design and installation of process and fire protection systems. Services are provided to a wide variety of industries, including the food processing, pharmaceutical and manufacturing/distribution sectors. EMCOR's motivation for the acquisition was to increase shareholder value. Management believes the addition of these companies in geographic markets where it did not have significant presence, will further its goal of market and geographic diversification. Additionally, the acquisition creates more opportunities for EMCOR companies to collaborate on national facilities services contracts. These factors contributed to the goodwill preliminarily recorded of $113.6 million, which represents the excess of purchase price paid to the estimated fair value of the net assets at date of acquisition. The Comfort acquisition is being accounted for in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 is discussed further in Note C Significant Accounting Policies. The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. EMCOR is currently evaluating the fair value of these assets and liabilities and is in the process of obtaining a third-party valuation of tangible and intangible assets; therefore, the allocation of the purchase price is subject to adjustment.
NOTE B Acquisition of Businesses - (Continued) The following table summarizes the preliminary purchase price allocation related to the Comfort acquisition (in thousands): At March 31, 2002 ----------------- Current assets $149,864 Property, plant and equipment 11,354 Goodwill and other intangible assets 113,592 Other assets 1,038 -------- Total assets acquired 275,848 -------- Current liabilities 100,614 Long-term obligations 294 -------- Total liabilities assumed 100,908 -------- Net assets acquired 174,940 Notes payable assumed 22,115 -------- Cash purchase price, net of cash acquired $152,825 ======== The goodwill of $113.6 million was allocated primarily to the United States mechanical construction and facilities services operating segment. It is expected that most of the goodwill associated with the acquisition will be deductible for tax purposes. Pending the third-party valuation being performed, certain identifiable intangible assets may be determined to exist and therefore a reallocation of goodwill may occur. In accordance with SFAS 141, any remaining goodwill will not be amortized while identifiable intangibles will be subject to amortization over their useful lives. NOTE C Significant Accounting Policies EMCOR has adopted the following accounting standards issued by the Financial Accounting Standards Board ("FASB"): SFAS 141 and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangibles assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. All companies have six months subsequent to the date of adoption to complete the initial goodwill impairment test. EMCOR has not yet determined if SFAS 142 will have any further impact on its existing goodwill.
NOTE C Significant Accounting Policies - (Continued) The following table provides a reconciliation of the prior year's reported net income to adjusted net income had SFAS 142 been applied as of the beginning of fiscal 2001. <TABLE> <CAPTION> For the three months ended March 31, 2001 ----------------------------------------------------------------- Basic Diluted ------------------------------ ------------------------------ Income available Income available to common Earnings to common Earnings stockholders per share stockholders per share ------------------ --------- ----------------- ---------- <S> <C> <C> <C> <C> Reported net income attributed to EMCOR common stock $5,657,000 $0.54 $6,632,615 $0.44 Add back amortization of goodwill, net of income tax 738,640 0.07 738,640 0.05 --------- ----- --------- ----- Adjusted net income attributed to EMCOR common stock $6,395,640 $0.61 $7,371,255 $0.49 ========== ===== ========== ===== </TABLE> The changes in the carrying amount of Goodwill during the three months ended March 31, 2002 were as follows (in thousands): For the three months ended March 31, 2002 -------------------- Balance at beginning of period $ 56,011 Goodwill for acquisition of businesses 113,592 -------- Balance at end of period $169,603 ======== As of March 31, 2002, the purchase accounting related to the acquisition of the Comfort companies was preliminary. As such, the allocation of goodwill to operating segments has not been finalized. Preliminarily, however, the goodwill of $113.6 million has been allocated primarily to the United States mechanical construction and facilities services segment. The FASB has issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 provides accounting guidance for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the disposal of a segment of a business. The adoption of SFAS 144, which was effective January 1, 2002, did not have a material impact on EMCOR's results of operations, financial position or cash flows.
NOTE D Pro Forma Results of Operations The following tables present pro forma results of operations including the acquired Comfort companies. The results of operations presented assume the acquisition had occurred at the beginning of fiscal 2001. The unaudited pro forma results of operations are not necessarily indicative of the results of operations had the acquisition actually occurred at the beginning of fiscal 2001, nor is it necessarily indicative of future operating results (in thousands, except per share data): Pro Forma Results of Operations For the three months ended -------------------------- March 31, 2002 March 31, 2001 -------------- -------------- Revenues $904,287 $1,001,096 Operating income $ 11,980 $ 18,602 Interest (expense)/income, net $ 328 $ (1,125) Income before income taxes $ 12,308 $ 17,477 Net income $ 6,892 $ 9,786 Basic earnings per share $ 0.46 $ 0.94 Diluted earnings per share $ 0.45 $ 0.72 The pro forma results of operations, for segment information, is included in Note G Segment Information.
NOTE E Earnings Per Share The following tables summarize EMCOR's calculation of Basic and Diluted Earnings per Share ("EPS") for the three month periods ended March 31, 2002 and 2001: Three months ended March 31, 2002 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------- Basic EPS Income available to common stockholders $7,251,000 14,828,537 $0.49 ===== Effect of Dilutive Securities Options -- 582,203 ---------- ---------- Diluted EPS $7,251,000 15,410,740 $0.47 ========== ========== ===== Three months ended March 31, 2001 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------ Basic EPS Income available to common stockholders $5,657,000 10,448,610 $0.54 ===== Effect of Dilutive Securities: Convertible Subordinated Notes, including assumed interest savings, net of tax 975,615 4,206,291 Options -- 391,514 ---------- ---------- Diluted EPS $6,632,615 15,046,415 $0.44 ========== ========== ===== There were no anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three month periods ended March 31, 2002 and 2001. NOTE F Long-Term Debt Long-term debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands): March 31, December 31, 2002 2001 --------- ------------ Notes assumed in the acquisition $22,115 $ -- Note Payable -- 573 Capitalized lease obligations 249 249 Other 901 973 ------- ------ 23,265 1,795 Less: current maturities 630 947 ------- ------ $22,635 $ 848 ======= ====== The notes assumed in the Comfort acquisition represent payments due to certain former owners of the acquired companies. The $573,000 Note Payable was paid in January 2002.
NOTE G Segment Information EMCOR has the following reportable segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segments (i) United States other services primarily represents those operations which principally provide consulting and maintenance services and (ii) Other international construction and facilities services represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily South Africa, the Middle East and Europe performing electrical construction, mechanical construction and facilities services. The proforma information includes the results of operations for the acquired Comfort companies as if they were consolidated with EMCOR effective January 1, 2001. The following presents information about industry segments and geographic areas (in thousands): <TABLE> <CAPTION> For the three months ended March 31, As Reported Pro Forma ----------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Revenues from unrelated entities: <S> <C> <C> <C> <C> United States electrical construction and facilities services $287,698 $331,830 $289,347 $ 334,868 United States mechanical construction and facilities services 308,269 295,867 400,608 456,370 United States other services 50,745 45,466 50,745 45,466 -------- -------- -------- --------- Total United States operations 646,712 673,163 740,700 836,704 Canada construction and facilities services 54,519 37,885 54,519 37,885 United Kingdom construction and facilities services 109,001 125,555 109,001 125,555 Other international construction and facilities services 67 952 67 952 -------- -------- -------- ---------- Total worldwide operations $810,299 $837,555 $904,287 $1,001,096 ======== ======== ======== ========== </TABLE> <TABLE> <CAPTION> Total revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $290,299 $338,888 $291,948 $ 341,926 United States mechanical construction and facilities services 311,056 302,161 403,395 462,664 United States other services 51,203 46,433 51,203 46,433 Less intersegment revenues (5,846) (14,319) (5,846) (14,319) -------- ------- -------- --------- Total United States operations 646,712 673,163 740,700 836,704 Canada construction and facilities services 54,519 37,885 54,519 37,885 United Kingdom construction and facilities services 109,001 125,555 109,001 125,555 Other international construction and facilities services 67 952 67 952 -------- -------- -------- ---------- Total worldwide operations $810,299 $837,555 $904,287 $1,001,096 ======== ======== ======== ========== </TABLE>
NOTE G Segment Information - (Continued) <TABLE> <CAPTION> For the three months ended As Reported Pro Forma ----------------------- ------------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $16,252 $14,648 $16,492 $15,159 United States mechanical construction and facilities services 6,613 4,613 5,822 11,858 United States other services (918) (1,916) (918) (1,916) ------- ------- ------- ------- Total United States operations 21,947 17,345 21,396 25,101 Canada construction and facilities services (458) 627 (458) 627 United Kingdom construction and facilities services (1,024) (29) (1,024) (29) Other international construction and facilities services (275) (575) (275) (575) Corporate administration (7,659) (6,522) (7,659) (6,522) ------- ------- ------- ------- Total worldwide operations 12,531 10,846 11,980 18,602 Other corporate items: Interest expense (517) (2,219) (606) (2,602) Interest income 934 1,477 934 1,477 ------- ------- ------- ------- Income before income taxes $12,948 $10,104 $12,308 $17,477 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> For the three months ended As Reported -------------------------- March 31, Dec. 31, 2002 2001 --------- -------- Total assets: <S> <C> <C> United States electrical construction and facilities services $ 466,562 $ 417,678 United States mechanical construction and facilities services 597,132 457,596 United States other services 57,905 60,965 ---------- ---------- Total United States operations 1,121,599 936,239 Canada construction and facilities services 58,427 62,234 United Kingdom construction and facilities services 156,008 152,981 Other international construction and facilities services 7,431 11,497 Corporate administration 159,739 186,713 ---------- ---------- Total worldwide operations $1,503,204 $1,349,664 ========== ========== </TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Unaudited) Highlights EMCOR Group, Inc.'s ("EMCOR") revenues for the three months ended March 31, 2002 and 2001 were $810.3 million and $837.6 million, respectively. Net income for the three months ended March 31, 2002 was $7.3 million compared to net income of $5.7 million for the three months ended March 31, 2001. Diluted Earnings Per Share ("Diluted EPS") were $0.47 per share for the three months ended March 31, 2002 compared to Diluted EPS of $0.44 per share in the year earlier period. The results of operations for the three months ended March 31, 2002 include results for the companies acquired from Comfort Systems USA, Inc., ("Comfort") from the acquisition date of March 1, 2002. Operating Segments EMCOR has the following reportable segments: United States electrical construction and facilities services, United States mechanical construction and facilities services, United States other services, Canada construction and facilities services, United Kingdom construction and facilities services and Other international construction and facilities services. The segments (i) United States other services primarily represents those operations which principally provide consulting and maintenance services and (ii) Other international construction and facilities services represents EMCOR's operations outside of the United States, Canada, and the United Kingdom, primarily South Africa, the Middle East and Europe performing electrical construction, mechanical construction and facilities services. Results of Operations Revenues The following table presents EMCOR's operating segment revenues and their respective percentage of total revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended March 31, ------------------------------------ % of % of 2002 Total 2001 Total ---- ----- ---- ----- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $287,698 36% $331,830 40% United States mechanical construction and facilities services 308,269 38% 295,867 35% United States other services ............................. 50,745 6% 45,466 5% -------- -------- Total United States operations ........................... 646,712 80% 673,163 80% Canada construction and facilities services .............. 54,519 7% 37,885 5% United Kingdom construction and facilities services ...... 109,001 13% 125,555 15% Other international construction and facilities services.. 67 -- 952 -- -------- -------- Total worldwide operations ............................... $810,299 100% $837,555 100% ======== ======== </TABLE>
EMCOR's revenues decreased $27.3 million for the three months ended March 31, 2002 compared to the first quarter of 2001, primarily due to a decrease in revenues versus the prior year for the EMCOR subsidiaries, partially offset by one month of revenues for Comfort of $48.8 million derived from the companies acquired. The decrease is principally due to a decrease in fast-track type jobs, an increase in longer-term jobs which results in revenue recognition over a longer time period and a planned reduction of most work in the North and South Carolina markets. Revenues of United States electrical construction and facilities services business units for the three months ended March 31, 2002 were $287.7 million compared to $331.8 million for the three months ended March 31, 2001. The revenues decrease of $44.1 million for the three months ended March 31, 2002 compared to the same period in 2001 was due to a reduction in fast track telecom projects in the current year compared to the prior year across most markets in this segment. Power plant and transportation infrastructure work, however, remained steady in this segment compared to the prior year. Revenues of United States mechanical construction and facilities services business units for the three months ended March 31, 2002 were $308.3 million compared to $295.9 million for the three months ended March 31, 2001. The revenues increase of $12.4 million was primarily derived from revenues from the acquired Comfort companies of $48.0 million and increased revenues for the northern California and Detroit markets. These increases were offset by the planned reduction of most work in North and South Carolina markets and a decrease in the number of fast track jobs since the prior year. United States other services revenues of $50.7 million for the three months ended March 31, 2002, which include those operations which principally provide consulting and maintenance services, increased by $5.2 million compared to $45.5 million for the same three months in 2001. The increase in revenues for the three month period was primarily attributable to an increase in on-site building maintenance services provided to customers. Revenues of Canada construction and facilities services for the three months ended March 31, 2002 were $54.5 million compared to $37.9 million for the three months ended March 31, 2001. The increase in revenues for the three month period was primarily attributable to the start-up of work on certain long-term jobs, partially offset by a reduced number of fast-track type jobs when compared to the same period in the prior year. Revenues of United Kingdom construction and facilities services business units for the three months ended March 31, 2002 were $109.0 million compared to $125.6 million for the three months ended March 31, 2001. The decrease in revenues was principally attributable to fewer bid opportunities within the construction market, offset partially by growth in the facilities services market. Other international construction and facilities services revenues primarily consists of EMCOR's operations in the Middle East, South Africa and Europe. Revenues for the three months ended March 31, 2002 decreased by $0.9 million compared to the three months ended March 31, 2001. Substantially all of the current projects in this operating segment are being performed by joint ventures. The results of these operations are accounted for under the equity method of accounting because EMCOR has less than majority ownership in foreign joint ventures, and accordingly, revenues attributable to such joint ventures are not reflected as revenues in the consolidated financial statements. EMCOR continues to pursue new business selectively in these markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East.
Cost of sales and Gross profit The following table presents EMCOR's cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages): For the three months ended March 31, ------------------------------------ 2002 2001 ---- ---- Cost of sales ................................ $720,913 $757,036 Gross profit.................................. $ 89,386 $ 80,519 Gross profit, as a percentage of revenues..... 11.0% 9.6% Gross profit (revenues less cost of sales) increased $8.9 million for the three months ended March 31, 2002 to $89.4 million compared to $80.5 million for the three months ended March 31, 2001. As a percentage of revenues, gross profit increased to 11.0% from 9.6% for the three months ended March 31, 2002 and 2001, respectively. The dollar increase in gross profit, as well as the increase in gross profit as a percentage of revenues, were primarily due to gross profit of $7.5 million earned by the acquired Comfort companies, and additional gross profits of $1.4 million attributable to other subsidiaries due to the type and location of construction and facilities services contracts performed. Selling, general and administrative expenses The following table presents EMCOR's selling, general and administrative expenses, and selling, general and administrative expenses as a percentage of revenues (in thousands, except for percentages): For the three months ended March 31, ------------------------------------ 2002 2001 ---- ---- Selling, general and administrative expenses $76,855 $68,352 Selling, general and administrative expenses, as a percentage of revenues 9.5% 8.2% Selling, general and administrative expenses for the three months ended March 31, 2002 increased $8.5 million. Selling, general and administrative expenses as a percentage of revenues were 9.5% for the three months ended March 31, 2002, compared to 8.2% for the three months ended March 31, 2001. For the three month period ended March 31, 2002, the increase in selling, general and administrative expense dollars and as a percentage of revenues compared to the prior year was attributable to $5.7 million of expenses of the acquired Comfort companies, to $1.1 million of expense for the increase in market value of the Restricted Stock Units and to incremental overhead expenses associated with the Comfort acquisition. The Restricted Stock Units represent units granted under a stock bonus plan, whereby the units correspond to shares of EMCOR common stock. Beginning in 2002, the amortization of goodwill is no longer required per Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Amortization expense for the three months ended March 31, 2001 was $1.3 million.
Operating income The following table presents EMCOR's operating income, and operating income as a percentage of segment revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended March 31, ------------------------------------ % of % of Segment Segment 2002 Revenues 2001 Revenues ---- -------- ---- ------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $16,252 5.6% $14,648 4.4% United States mechanical construction and facilities services 6,613 2.1% 4,613 1.6% United States other services (918) (1,916) ------- ------- Total United States operations 21,947 3.4% 17,345 2.6% Canada construction and facilities services (458) 627 1.7% United Kingdom construction and facilities services (1,024) (29) Other international construction and facilities services (275) (575) Corporate administration (7,659) (6,522) ------- ------- Total worldwide operations 12,531 1.5% 10,846 1.3% Other corporate items: Interest expense (517) (2,219) Interest income 934 1,477 ------- ------- Income before income taxes $12,948 $10,104 ======= ======= </TABLE> EMCOR had operating income of $12.5 million for the three months ended March 31, 2002 compared with operating income of $10.8 million for the three months ended March 31, 2001. The increase of $1.7 million in operating income for the three months ended March 31, 2002 as compared to the same period in 2001 was due primarily to operating income of $1.8 million from the acquired Comfort companies. United States electrical construction and facilities services operating income (before deduction of general corporate and other expenses discussed below) for the three months ended March 31, 2002 was $16.3 million or 5.6% of revenues, compared to $14.6 million or 4.4% of revenues for the three months ended March 31, 2001. The $1.7 million increase in operating income for the three months ended March 31, 2002 compared to the same period in 2001 was primarily impacted by steady activity from power plant and transportation infrastructure construction projects on the west and east coasts and increased operating income from various activities in the Salt Lake City and Ohio markets. United States mechanical construction and facilities services operating income for the three months ended March 31, 2002 was $6.6 million or 2.1% of revenues, compared to $4.6 million or 1.6% of revenues for the three months ended March 31, 2001. The $2.0 million increase in operating income was attributable to (i) results of operations for the acquired Comfort companies, (ii) power plant construction activity on the west and east coasts, and (iii) improved results for EMCOR's Poole & Kent subsidiary operations which had losses in the prior year. The prior year Poole & Kent losses had been primarily attributable to its operations in the North and South Carolina markets, where such operations have since been significantly reduced. United States other services operating losses were $0.9 million and $1.9 million for the three months ended March 31, 2002 and 2001, respectively. The decrease in operating losses was primarily attributable to an increase in gross profit and a decrease in selling, general and administrative expenses as the operations have become more established and thus require less overhead spending.
Canada construction and facilities services operating loss was $0.5 million compared to $0.6 million operating income for the three months ended March 31, 2002 and 2001, respectively. The decrease in operating income in the current period was primarily due to a reduction in the number of fast-track type jobs versus the same period in the prior year and a slower rate of work on the long-term contracts that result in profit recognition over a longer time period. United Kingdom construction and facilities services operating losses for the three months ended March 31, 2002 and 2001 was $1.0 million and $0.03 million, respectively. The increase in operating loss for the three months ended March 31, 2002 compared to the first quarter of 2001 was attributable to the type of jobs and locations in the current period. The facilities services business continues to increase revenues and operating income, while the construction market has slowed since last year. Other international construction and facilities services operating loss was $0.3 million for the three months ended March 31, 2002 compared to operating loss of $0.6 million for three months ended March 31, 2001. EMCOR continues to pursue new business selectively in the Middle East, South African and European markets; however, the availability of opportunities has been significantly reduced as a result of local economic factors, particularly in the Middle East. General corporate expenses for the three months ended March 31, 2002 were $7.7 million compared to $6.5 million for the three months ended March 31, 2001. The increase in general corporate expenses was due to an increase variable compensation cost expense over the prior year of $1.1 million due to the increased value of the Restricted Stock Units and to incremental overhead expenses associated with the Comfort acquisition. Interest income (expense), net for the three months ended March 31, 2002 and 2001 was $0.4 million and ($0.7) million, respectively. Interest income decreased $0.6 million for the three months ended March 31, 2002 compared to the same three months in 2001 due to lower cash on hand. The interest expense decrease for the 2002 three month period was primarily due to the conversion of $115.0 million of EMCOR's 5.75% Convertible Subordinated Notes, net of related deferred financing costs, into approximately 4.2 million shares of EMCOR common stock in May and June of 2001. The income tax provision increased to $5.7 million for the three months ended March 31, 2002, versus $4.5 million for the same period in 2001. The increase in this provision was primarily due to increased income before taxes. The effective income tax rate was 44% in both periods presented. EMCOR's backlog was $2.5 billion at March 31, 2002 and $2.4 billion at December 31, 2001. The increase in backlog was primarily due to the acquired Comfort companies of $0.2 billion, offset partially by slight decreases in each of the United States, the United Kingdom and Canada segments. EMCOR's backlog at March 31, 2002 was $2.5 billion compared to $2.0 billion at March 31, 2001. The increase was primarily attributable to the acquired Comfort companies' backlog of $0.2 billion plus a net increase of $0.3 million for projects awarded in the United States, the United Kingdom and Canada.
Liquidity and Capital Resources The following table presents EMCOR's net cash provided by (used in) operating activities, investing activities and financing activities (in thousands): For the three months ended March 31, 2002 2001 ---- ---- Net cash provided by operating activities $ 53,511 $14,376 Net cash used in investing activities $(150,438) $(3,811) Net cash provided by financing activities $ 49,678 $ 420 EMCOR's consolidated cash balance decreased by approximately $47.3 million from $189.8 million at December 31, 2001 to $142.5 million at March 31, 2002. Net cash provided by operating activities of $53.5 million for the three months ended March 31, 2002 was a $39.1 million increase from the net cash provided by operating activities of $14.4 million in the same period last year. The increase in net cash provided by operating activities was primarily attributable to increased net income, decreased accounts receivable and decreased contracts in progress, net, offset partially by decreased accounts payable. Net cash used in investing activities of $150.4 million for the three months ended March 31, 2002 increased by $146.6 million compared to $3.8 million in the same period last year. The increase was due primarily to payments for the acquired Comfort companies, offset partially by a decrease in EMCOR's investments, notes and other long-term receivables. Net cash provided by financing activities of $49.7 million was a $49.3 million increase from the net cash provided by financing activities of $0.4 million for the three months ended March 31, 2001. The increase in net cash provided by financing activities was attributable to borrowings under working capital credit lines used to finance the Comfort acquisition and proceeds from the exercise of stock options, offset by a reduction in net repayments of long-term debt and capital lease payments. As of March 31, 2002, EMCOR's total borrowing capacity under its revolving credit facility was $150.0 million. EMCOR had approximately $21.4 million of letters of credit outstanding under the revolving credit facility as of that date. As of March 31, 2002, the amount outstanding under the revolving credit facility was $50.0 million. There were no revolving loans outstanding as of December 31, 2001 under the revolving credit facility. EMCOR believes that current cash balances and borrowing capacity available under its line of credit, combined with cash expected to be generated from operations, will be sufficient to provide short-term and foreseeable long-term liquidity and meet expected capital expenditure requirements. New Accounting Pronouncements EMCOR has adopted the following accounting standards issued by the Financial Accounting Standards Board ("FASB"): Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangibles assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. All companies have six months subsequent to the date of adoption to complete the initial goodwill impairment test. EMCOR has not yet determined if SFAS 142 will have any further impact on its existing goodwill.
The FASB has issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model based on the framework established in Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 provides accounting guidance for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", ("APB 30") for the disposal of segment of a business. The adoption of SFAS 144, which was effective January 1, 2002, did not have a material impact on EMCOR's results of operations, financial position or cash flows. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995, particularly statements regarding market opportunities, market share growth, competitive growth, gross profit, and selling, general and administrative expenses. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in any such forward-looking statements. Such risk and uncertainties include, but are not limited to adverse changes in general economic conditions, including changes in the specific markets for EMCOR's services, adverse business conditions, decreased or lack of growth in the mechanical and electrical construction and facilities services industries, increased competition, pricing pressures, risks associated with foreign operations and other factors.
PART II - OTHER INFORMATION Item 1 - Legal Proceedings There have been no new developments during the quarter ended March 31, 2002 regarding legal proceedings reported in EMCOR's Annual Report on Form 10-K for the year ended December 31, 2001. Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Incorporated by Reference Exhibit No Description to, or Page Number ---------- ----------- ------------------------- 2.1 Purchase Agreement dated as Incorporated herein by of February 11, 2002 by and among reference to Exhibit 2.1 Comfort Systems USA, Inc. and of EMCOR's current report EMCOR - CSI Holding Co. on Form 8-K, dated as of February 14, 2002 10(o-3) Amendment dated as of Page January 1, 2002 to R. Kevin Matz Continuity Agreement 10(p-3) Amendment dated as of Page January 1, 2002 to Mark A. Pompa Continuity Agreement 11 Computation of Basic Note C of the Notes EPS and Diluted EPS to the Condensed for the three months Consolidated Financial ended March 31, 2002 Statements. and 2001 (b) Reports on Form 8-K dated February 14, 2002 and March 13, 2002 were filed during the quarter ended March 31, 2002.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMCOR GROUP, INC. ----------------- (Registrant) Date: April 30, 2002 By: /s/FRANK T. MACINNIS ------------------------------------ Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Date: April 30, 2002 By: /s/LEICLE E. CHESSER ------------------------------------ Leicle E. Chesser Executive Vice President and Chief Financial Officer Date: April 30, 2002 By: /s/ MARK A. POMPA ------------------------------------ Mark A. Pompa Vice President and Controller
Exhibit 10(o-3) As of January 1, 2002 Mr. R. Kevin Matz EMCOR Group, Inc. 101 Merritt Seven Norwalk, CT 06851 Dear Kevin: Reference is made to the Continuity Agreement dated as of June 22, 1998 between EMCOR Group, Inc. and you (the "Agreement"). This is to confirm our understanding that the "two and one quarter (2-1/4)" figure in Section 4(a) of the Agreement is hereby eliminated and the figure "three (3)" is hereby substituted therefore. Please sign and return a copy of this letter agreement to confirm your agreement with the foregoing. Very truly yours, EMCOR GROUP, INC. By /s/FRANK T. MACINNIS ----------------------- Frank T. MacInnis Chairman of the Board and Chief Executive Officer The foregoing is hereby confirmed and agreed to: /s/R. KEVIN MATZ - ---------------- R. Kevin Matz
Exhibit 10(p-3) As of January 1, 2002 Mr. Mark A. Pompa EMCOR Group, Inc. 101 Merritt Seven Norwalk, CT 06851 Dear Mark: Reference is made to the Continuity Agreement dated as of June 22, 1998 between EMCOR Group, Inc. and you (the "Agreement"). This is to confirm our understanding that the "two and one quarter (2-1/4)" figure in Section 4(a) of the Agreement is hereby eliminated and the figure "three (3)" is hereby substituted therefore. Please sign and return a copy of this letter agreement to confirm your agreement with the foregoing. Very truly yours, EMCOR GROUP, INC. By /s/FRANK T. MACINNIS -------------------- Frank T. MacInnis Chairman of the Board and Chief Executive Officer The foregoing is hereby confirmed and agreed to: /s/MARK A. POMPA - ---------------- Mark A. Pompa