UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-8267 EMCOR Group, Inc. ------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 11-2125338 - --------------------------------- ------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 301 Merritt Seven Corporate Park Norwalk, Connecticut 06851-1060 - --------------------------------- ------------------------------- (Address of Principal Executive (Zip Code) Offices) (203) 849-7800 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) 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 Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X| Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on July 19, 2006: 31,555,380 shares.
EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of June 30, 2006 and December 31, 2005 1 Condensed Consolidated Statements of Operations - three months ended June 30, 2006 and 2005 3 Condensed Consolidated Statements of Operations - six months ended June 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2006 and 2005 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - six months ended June 30, 2006 and 2005 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures about Market Risk 26 Item 4 Controls and Procedures 26 PART II - Other Information Item 1 Legal Proceedings 27 Item 1A Risk Factors 27 Item 4 Submission of Matters to a Vote of Security Holders 27 Item 6 Exhibits 28
PART I. - FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- June 30, December 31, 2006 2005 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 180,900 $ 103,785 Accounts receivable, net 1,078,615 1,046,380 Costs and estimated earnings in excess of billings on uncompleted contracts 158,922 185,634 Inventories 13,112 10,175 Prepaid expenses and other 47,514 43,829 ---------- ---------- Total current assets 1,479,063 1,389,803 Investments, notes and other long-term receivables 25,453 28,659 Property, plant and equipment, net 47,070 46,443 Goodwill 283,039 283,412 Identifiable intangible assets, net 15,429 16,990 Other assets 9,925 13,634 ---------- ---------- Total assets $1,859,979 $1,778,941 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) - -------------------------------------------------------------------------------- June 30, December 31, 2006 2005 (Unaudited) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under working capital credit line $ - $ - Current maturities of long-term debt and capital lease obligations 659 551 Accounts payable 452,860 452,709 Billings in excess of costs and estimated earnings on uncompleted contracts 388,146 330,235 Accrued payroll and benefits 128,427 154,276 Other accrued expenses and liabilities 96,108 107,545 ---------- ---------- Total current liabilities 1,066,200 1,045,316 Long-term debt and capital lease obligations 1,377 1,406 Other long-term obligations 133,628 116,783 ---------- ---------- Total liabilities 1,201,205 1,163,505 ---------- ---------- Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding - - Common stock, $0.01 par value, 80,000,000 shares authorized, 33,508,232 and 33,266,154 shares issued, respectively 335 333 Capital surplus 338,621 325,232 Accumulated other comprehensive income (loss) 712 (5,370) Retained earnings 337,044 313,170 Treasury stock, at cost 1,961,718 and 2,162,388 shares, respectively (17,938) (17,929) ---------- ---------- Total stockholders' equity 658,774 615,436 ---------- ---------- Total liabilities and stockholders' equity $1,859,979 $1,778,941 ========== ========== 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 June 30, 2006 2005 - -------------------------------------------------------------------------------- Revenues $1,220,423 $1,168,831 Cost of sales 1,086,895 1,056,860 ---------- ---------- Gross profit 133,528 111,971 Selling, general and administrative expenses 108,194 96,994 Restructuring expenses - 301 ---------- ---------- Operating income 25,334 14,676 Interest expense (642) (2,353) Interest income 1,132 716 Minority interest (672) (987) ---------- ---------- Income from continuing operations before income taxes 25,152 12,052 Income tax provision 8,291 4,413 ---------- ---------- Income from continuing operations 16,861 7,639 Income from discontinued operations, net of income taxes - 294 ---------- ---------- Net income $ 16,861 $ 7,933 ========== ========== Net income per common share - Basic From continuing operations $ 0.53 $ 0.24 From discontinued operations - 0.01 ---------- ---------- $ 0.53 $ 0.25 ========== ========== Net income per common share - Diluted From continuing operations $ 0.52 $ 0.24 From discontinued operations - 0.01 ---------- ---------- $ 0.52 $ 0.25 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)(Unaudited) - -------------------------------------------------------------------------------- Six months ended June 30, 2006 2005 - -------------------------------------------------------------------------------- Revenues $2,371,500 $2,252,586 Cost of sales 2,123,139 2,041,413 ---------- ---------- Gross profit 248,361 211,173 Selling, general and administrative expenses 210,700 189,301 Restructuring expenses - 1,472 ---------- ---------- Operating income 37,661 20,400 Interest expense (1,341) (4,566) Interest income 2,069 1,289 Minority interest (928) (1,852) ---------- ---------- Income from continuing operations before income taxes 37,461 15,271 Income tax provision 12,967 5,598 ---------- ---------- Income from continuing operations 24,494 9,673 (Loss) income from discontinued operations, net of income taxes (620) 173 ---------- ---------- Net income $ 23,874 $ 9,846 ========== ========== Net income (loss) per common share - Basic From continuing operations $ 0.78 $ 0.31 From discontinued operations (0.02) 0.01 ---------- ---------- $ 0.76 $ 0.32 ========== ========== Net income (loss) per common share - Diluted From continuing operations $ 0.75 $ 0.31 From discontinued operations (0.02) 0.00 ---------- ---------- $ 0.73 $ 0.31 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)(Unaudited) - ------------------------------------------------------------------------------------------------------------ Six months ended June 30, 2006 2005 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: <S> <C> <C> Net income $ 23,874 $ 9,846 Depreciation and amortization 8,766 9,031 Amortization of identifiable intangibles 1,550 1,722 Minority interest 928 1,852 Deferred income taxes 3,716 6,904 Loss on sale of discontinued operation, net of income taxes 620 - Excess tax benefits from share-based compensation (2,724) - Equity income from unconsolidated entities (3,597) (749) Other non-cash items 5,097 1,211 Distributions from unconsolidated entities 6,229 638 Changes in operating assets and liabilities 32,971 (2,323) --------- --------- Net cash provided by operating activities 77,430 28,132 --------- --------- Cash flows from investing activities: Payments for acquisition of a business and earn-out agreements (786) (497) Proceeds from sale of discontinued operation 1,203 - Proceeds from sale of property, plant and equipment 313 752 Purchase of property, plant and equipment (9,716) (5,928) Investment in and advances to unconsolidated entities and joint ventures (277) (1,797) Net proceeds (disbursements) related to other investments 851 (171) --------- --------- Net cash used in investing activities (8,412) (7,641) --------- --------- Cash flows from financing activities: Proceeds from working capital credit line 149,500 517,700 Repayments of working capital credit line (149,500) (527,700) Net repayments for long-term debt (24) (33) Repayments for capital lease obligations (106) (105) Proceeds from exercise of stock options 5,503 1,172 Excess tax benefits from share-based compensation 2,724 - --------- --------- Net cash provided by (used in) financing activities 8,097 (8,966) --------- --------- Increase in cash and cash equivalents 77,115 11,525 Cash and cash equivalents at beginning of year 103,785 59,109 --------- --------- Cash and cash equivalents at end of period $ 180,900 $ 70,634 ========= ========= Supplemental cash flow information: Cash paid for: Interest $ 927 $ 3,662 Income taxes $ 13,989 $ 4,704 Non-cash financing activities: Assets acquired under capital lease obligations $ 209 $ 86 Note receivable from sale of subsidiary $ 246 $ - See Notes to Condensed Consolidated Financial Statements. </TABLE>
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands, except share data)(Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated other Common Capital comprehensive Retained Treasury Comprehensive Total stock surplus income(loss)(1) earnings stock income - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2005 $562,361 $326 $317,959 $ 7,699 $253,128 $(16,751) Net income 9,846 - - - 9,846 - $ 9,846 Foreign currency translation adjustments (2,648) - - (2,648) - - (2,648) ------- Comprehensive income $ 7,198 ======= Issuance of treasury stock for restricted stock units (3) - - (540) - - 540 Treasury stock, at cost (4) (871) - - - - (871) Common stock issued under stock option plans, net (5) 1,172 6 2,057 - - (891) Value of restricted stock units (2) 1,358 - 1,358 - - - -------- ---- -------- ------- -------- -------- Balance, June 30, 2005 $571,218 $332 $320,834 $ 5,051 $262,974 $(17,973) ======== ==== ======== ======= ======== ======== Balance, January 1, 2006 $615,436 $333 $325,232 $(5,370) $313,170 $(17,929) Net income 23,874 - - - 23,874 - $23,874 Foreign currency translation adjustments 6,082 - - 6,082 - - 6,082 ------- Comprehensive income $29,956 ======= Issuance of treasury stock for restricted stock units (3) - - (551) - - 551 Treasury stock, at cost (4) (1,587) - - - - (1,587) Common stock issued under stock option plans, net (5) 10,070 2 9,041 - - 1,027 Value of issued restricted stock units 1,091 - 1,091 - - - Share-based compensation expense 3,808 - 3,808 - - - -------- ---- -------- ------- -------- -------- Balance, June 30, 2006 $658,774 $335 $338,621 $ 712 $337,044 $(17,938) ======== ==== ======== ======= ======== ======== </TABLE> (1) Represents cumulative foreign currency translation adjustments and minimum pension liability adjustments. (2) Shares of common stock will be issued in respect of restricted stock units granted pursuant to EMCOR's Executive Stock Bonus Plan. This amount represents the value of restricted stock units at the date of grant. (3) Represents common stock transferred at cost from treasury stock upon the vesting of restricted stock units. (4) Represents value of shares of common stock withheld by EMCOR for income tax withholding requirements upon the vesting of restricted stock units. (5) Includes the tax benefit of stock option exercises. 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 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 accounting principles generally accepted in the United States have been condensed or omitted. References to the "Company," "EMCOR," "we," "us," "our" and words of similar import refers to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary to present fairly our financial position and the results of our operations. The results of operations for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. On February 10, 2006, we effected a 2-for-1 stock split in the form of a stock distribution of one common share for each common share owned on the record date of January 30, 2006. The capital stock accounts, all share data and earnings per share data give effect to the stock split, applied retrospectively, to all periods presented. The results of operations for all periods presented reflect discontinued operations accounting due to the sale of a subsidiary in each of September 2005 and January 2006. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B Discontinued Operations On January 31, 2006, we sold a subsidiary that had been part of our United States mechanical construction and facilities services segment. On September 30, 2005, we sold a subsidiary that had been part of our United States facilities services segment. Results of these operations for all periods presented in our Consolidated Financial Statements reflect discontinued operations accounting. Included in the results of discontinued operations for the six months ended June 30, 2006 was a loss of $0.6 million (net of income taxes) by reason of the January 2006 sale of the subsidiary that had been part of our United States mechanical construction and facilities services segment. An aggregate of $4.0 million in cash and notes in the aggregate principal amount of $1.6 million were received as consideration for both of these sales. The principal amount of the notes outstanding as of June 30, 2006 was $0.04 million. The components of the results of operations for the discontinued operations are not presented as they are not material to the consolidated results of operations. NOTE C Earnings Per Share Calculation of Basic and Diluted Earnings Per Share The following tables summarize our calculation of Basic and Diluted Earnings Per Share ("EPS") for the three and six month periods ended June 30, 2006 and 2005:
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE C Earnings Per Share - (continued) <TABLE> <CAPTION> Three Months Ended June 30, ------------------------------- 2006 2005 ---- ---- Numerator: <S> <C> <C> Income before discontinued operations $16,861,000 $7,639,000 Income from discontinued operations - 294,000 ----------- ---------- Net income available to common stockholders $16,861,000 $7,933,000 =========== ========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 31,571,736 31,281,690 Effect of diluted securities 1,139,146 495,470 ----------- ---------- Shares used to compute diluted earnings per share 32,710,882 31,777,160 =========== ========== Basic earnings per share: Continuing operations $ 0.53 $ 0.24 Discontinued operations - 0.01 ----------- ---------- Total $ 0.53 $ 0.25 =========== ========== Diluted earnings per share: Continuing operations $ 0.52 $ 0.24 Discontinued operations - 0.01 ----------- ---------- Total $ 0.52 $ 0.25 =========== ========== </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, ------------------------------- 2006 2005 ---- ---- Numerator: <S> <C> <C> Income before discontinued operations $24,494,000 $9,673,000 (Loss)income from discontinued operations (620,000) 173,000 ----------- ---------- Net income available to common stockholders $23,874,000 $9,846,000 =========== ========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 31,444,264 30,997,812 Effect of diluted securities 1,049,790 593,992 ----------- ---------- Shares used to compute diluted earnings per share 32,494,054 31,591,804 =========== ========== Basic earnings (loss) per share: Continuing operations $ 0.78 $ 0.31 Discontinued operations (0.02) 0.01 ----------- ---------- Total $ 0.76 $ 0.32 =========== ========== Diluted earnings (loss) per share: Continuing operations $ 0.75 $ 0.31 Discontinued operations (0.02) 0.00 ----------- ---------- Total $ 0.73 $ 0.31 =========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE C Earnings Per Share - (continued) There were zero anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three and six month periods ended June 30, 2006, respectively. There were 287,230 and 484,999 anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three and six month periods ended June 30, 2005, respectively. NOTE D Valuation of Stock Option Grants We have various types of stock compensation plans and programs which are administered by the compensation committee of our board of directors. Note I - Stock Options and Stock Plans of the Notes to the Consolidated Financial Statements contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2005 should be referred to for additional information regarding the stock-based compensation plans and programs. On January 1, 2006, we adopted Statement No. 123(R) "Share-Based Payment" ("Statement 123(R)") issued by the Financial Accounting Standards Board ("FASB"). With the adoption of Statement 123(R), all share-based payments to our employees and non-employee directors, including grants of stock options, have been recognized in the income statement based on their fair values utilizing the modified prospective method of accounting. The impact of the adoption of Statement 123(R) resulted in $2.3 million and $2.9 million of compensation expense in the three and six months ended June 30, 2006, respectively. As a result, net income was adversely impacted in these periods by $1.3 million and $1.7 million and diluted earnings per share ("Diluted EPS") was adversely impacted by $0.04 and $0.05, respectively. Approximately $1.9 million of compensation expense, net of income taxes, will be recognized over the approximately 21 month remaining vesting period for stock options outstanding at June 30, 2006. Prior to January 1, 2006, we applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related interpretations in accounting for stock options. Accordingly, no compensation expense has been recognized in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 in respect of stock options granted during that period inasmuch as we granted stock options at fair market value. Had compensation expense for the options for the three and six month periods ended June 30, 2005 been determined consistent with FASB Statement No. 123, "Accounting for Stock-Based Compensation" and FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," our net income, basic earnings per share ("Basic EPS") and Diluted EPS would have been reduced from the "as reported amounts" below to the "pro forma amounts" below (in thousands, except per share amounts): For the three For the six months ended months ended June 30, June 30, 2005 2005 ------------- ------------ Income from continuing operations: As reported $7,639 $9,673 Less: Total stock-based compensation expense determined under fair value based method, net of related tax effects 814 1,229 ------ ------ Pro Forma $6,825 $8,444 ====== ====== Basic EPS: As reported $ 0.24 $ 0.31 Pro Forma $ 0.22 $ 0.27 Diluted EPS: As reported $ 0.24 $ 0.31 Pro Forma $ 0.21 $ 0.27
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE D Valuation of Stock Option Grants - (continued) 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 three months For the six months ended June 30, ended June 30, 2006 2005 2006 2005 -------------------- ------------------ Dividend yield 0% 0% 0% 0% Expected volatility 35.0% 34.9% 35.0% 36.7% Risk-free interest rate 5.1% 3.9% 5.0% 3.9% Expected life of options in years 6.36 6.36 6.36 6.33 Weighted average grant date fair value $21.11 $10.60 $20.33 $ 8.17 Forfeitures of stock options have been historically immaterial to the calculation and are estimated as zero in both periods presented. As of December 31, 2005, there were 3,648,728 stock options outstanding. For the three months ended June 30, 2006, there were 60,000 stock options granted (average exercise price of $46.20 per share), 172,138 stock options were exercised (average exercise price of $18.27 per share) and no stock options expired or were forfeited. For the six months ended June 30, 2006, there were 79,062 stock options granted (average exercise price of $42.77 per share), 379,338 stock options were exercised (average exercise price of $14.71 per share) and no stock options expired or were forfeited. At June 30, 2006, there were 3,348,452 options outstanding at an average exercise price of $20.08 per share with a remaining contractual life of 5.8 years, and 2,769,797 options were exercisable at an average exercise price of $19.57 per share which options had a remaining contractual life of 5.3 years. As a result of stock option exercises, $5.5 million of proceeds were received during the six months ended June 30, 2006. The income tax benefit derived as a result of such exercises was $4.6 million, of which $2.7 million represented excess tax benefits from share-based compensation. This compares to $1.2 million of proceeds from stock option exercises for the six months ended June 30, 2005, on which the income tax benefit from stock option exercises was $2.4 million. Additionally, 5,095 and 152,281 restricted share units were awarded during the three and six months ended June 30, 2006 pursuant to non-employee director, key-person long term incentive plans and a separation agreement, for which $0.4 million and $0.8 million of compensation expense was recognized during the three and six months ended June 30, 2006, respectively. We also have outstanding phantom equity units accounted for as liability awards under 123(R), pursuant to which a $0.2 million expense reduction and $1.2 million of expense was recognized for the three and six months ended June 30, 2006, respectively, due to changes in the market price of our common stock from the award date. Common Stock As of June 30, 2006 and December 31, 2005, 31,546,514 and 31,103,766 shares of our common stock were outstanding, respectively.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Segment Information We have the following reportable segments which provide services associated with the design, integration, installation, startup, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for generation and distribution of electrical power, lighting systems, low-voltage systems such as fire alarm, security, communication and process control systems and voice and data systems); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems, fire protection systems, and plumbing, process and high-purity piping systems); (c) United States facilities services; (d) Canada construction and facilities services; (e) United Kingdom construction and facilities services; and (f) Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile operation and maintenance services, site-based operation and maintenance services, facility planning and consulting services, energy management programs and the design and construction of energy-related projects) which services are not generally related to customers' construction programs. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. "Other international construction and facilities services" represents our operations outside of the United States, Canada and the United Kingdom (primarily in the Middle East) performing electrical construction, mechanical construction and facilities services. The following tables present information about industry segments and geographic areas (in thousands): <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------- 2006 2005 ---- ---- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 307,499 $ 300,125 United States mechanical construction and facilities services 418,770 425,834 United States facilities services 232,201 187,780 ---------- ---------- Total United States operations 958,470 913,739 Canada construction and facilities services 84,671 84,273 United Kingdom construction and facilities services 177,282 170,819 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $1,220,423 $1,168,831 ========== ========== </TABLE> <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------- 2006 2005 ---- ---- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 308,228 $ 303,775 United States mechanical construction and facilities services 422,645 427,688 United States facilities services 233,609 188,661 Less intersegment revenues (6,012) (6,385) ---------- ---------- Total United States operations 958,470 913,739 Canada construction and facilities services 84,671 84,273 United Kingdom construction and facilities services 177,282 170,819 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $1,220,423 $1,168,831 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Segment Information - (continued) <TABLE> <CAPTION> For the six months ended June 30, ---------------------------------- 2006 2005 ---- ---- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 617,718 $ 576,009 United States mechanical construction and facilities services 799,073 817,133 United States facilities services 450,711 371,203 ---------- ---------- Total United States operations 1,867,502 1,764,345 Canada construction and facilities services 164,239 150,475 United Kingdom construction and facilities services 339,759 337,766 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $2,371,500 $2,252,586 ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ---------------------------------- 2006 2005 ---- ---- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 620,373 $ 583,500 United States mechanical construction and facilities services 806,092 820,667 United States facilities services 452,871 372,555 Less intersegment revenues (11,834) (12,377) ---------- ---------- Total United States operations 1,867,502 1,764,345 Canada construction and facilities services 164,239 150,475 United Kingdom construction and facilities services 339,759 337,766 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $2,371,500 $2,252,586 ========== ========== </TABLE> <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------- 2006 2005 ---- ---- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 11,063 $ 12,052 United States mechanical construction and facilities services 11,011 4,370 United States facilities services 10,080 7,551 ---------- ---------- Total United States operations 32,154 23,973 Canada construction and facilities services 2,089 (1,525) United Kingdom construction and facilities services 3,694 2,365 Other international construction and facilities services (41) 13 Corporate administration (12,562) (9,849) Restructuring expenses - (301) ---------- ---------- Total worldwide operations 25,334 14,676 Other corporate items: Interest expense (642) (2,353) Interest income 1,132 716 Minority interest (672) (987) ---------- ---------- Income from continuing operations before income taxes $ 25,152 $ 12,052 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Segment Information - (continued) <TABLE> <CAPTION> For the six months ended June 30, --------------------------------- 2006 2005 ---- ---- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 19,437 $ 28,048 United States mechanical construction and facilities services 18,436 896 United States facilities services 14,727 12,592 -------- -------- Total United States operations 52,600 41,536 Canada construction and facilities services 3,081 (2,251) United Kingdom construction and facilities services 5,381 1,892 Other international construction and facilities services 732 (38) Corporate administration (24,133) (19,267) Restructuring expenses - (1,472) -------- -------- Total worldwide operations 37,661 20,400 Other corporate items: Interest expense (1,341) (4,566) Interest income 2,069 1,289 Minority interest (928) (1,852) -------- -------- Income from continuing operations before income taxes $ 37,461 $ 15,271 ======== ======== </TABLE> <TABLE> <CAPTION> June 30, December 31, 2006 2005 ---------- ------------ Total assets: <S> <C> <C> United States electrical construction and facilities services $ 349,973 $ 357,368 United States mechanical construction and facilities services 666,007 673,315 United States facilities services 350,025 331,495 ---------- ---------- Total United States operations 1,366,005 1,362,178 Canada construction and facilities services 113,400 137,241 United Kingdom construction and facilities services 252,034 154,633 Other international construction and facilities services 1,067 3,008 Corporate administration 127,473 121,881 ---------- ---------- Total worldwide operations $1,859,979 $1,778,941 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE F Retirement Plans Components of Net Periodic Pension Benefit Cost The components of net periodic pension benefit cost for the three and six months ended June 30, 2006 and 2005 were as follows (in thousands): <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service cost $ 1,062 $ 999 $ 2,080 $ 2,004 Interest cost 2,598 2,480 5,091 4,979 Expected return on plan assets (2,770) (2,528) (5,427) (5,076) Amortization of prior service cost 18 22 36 45 Amortization of net loss 415 345 813 693 ------- ------- ------- ------- Net periodic pension benefit cost $ 1,323 $ 1,318 $ 2,593 $ 2,645 ======= ======= ======= ======= </TABLE> Employer Contributions For the six months ended June 30, 2006, EMCOR's United Kingdom subsidiary contributed $3.1 million to its defined benefit pension plan and anticipates contributing an additional $3.3 million during the remainder of 2006. NOTE G Income Taxes For the three months ended June 30, 2006 and 2005, the income tax provision was $8.3 million and $4.4 million, respectively. For the six months ended June 30, 2006 and 2005, the income tax provision was $13.0 million and $5.6 million, respectively. The estimated effective income tax rate was 38% for the three and six months ended June 30, 2006 compared to 37% for the comparable 2005 periods. The reported tax provision includes an adjustment made as it relates to the deductibility of certain compensation arrangements for income tax purposes. NOTE H Legal Proceedings See Part II - Other Information, Item 1 - Legal Proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We are one of the largest mechanical and electrical 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 approximately 70 principal operating subsidiaries and joint venture entities. Our offices are located in 41 states and the District of Columbia in the United States, six provinces in Canada and 12 primary locations in the United Kingdom. Overview Our revenues for the second quarter of 2006 were $1.22 billion compared to $1.17 billion for the second quarter of 2005. Our net income was $16.9 million for the second quarter of 2006 compared to $7.9 million for the second quarter of 2005. Diluted earnings per share were $0.52 per share for the second quarter compared to $0.25 per share for the second quarter of 2005. Our revenues for the six months ended June 30, 2006 were $2.37 billion compared to $2.25 billion for the six months ended June 30, 2005. Our net income was $23.9 million for the six months ended June 30, 2006 compared to $9.8 million for the six months ended June 30, 2005. Diluted earnings per share were $0.73 per share for the six months ended June 30, 2006 compared to $0.31 per share for the six months ended June 30, 2005. Our revenues increased in the three and six months ended June 30, 2006 compared to the same periods in 2005 principally due to increased availability of higher margin project work. Our net income and diluted earnings per share for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005 were positively impacted by (a) generally improved performance and increased gross profit on United States mechanical construction and Canada construction contracts and (b) increased availability of generally higher gross margin work in the United States. Additionally, our 2006 six month results were positively impacted by the absence of an $8.7 million non-cash expense recorded in the first quarter of 2005 as a result of proceedings in a civil action brought by a joint venture between our subsidiary Poole & Kent Corporation and an unrelated company against the Upper Occoquan Sewage Authority. Negatively impacting our 2006 six month results, when compared to the prior year's six month results, was the absence of a $5.6 million favorable insurance settlement recorded in the first quarter of 2005 (which primarily affected the United States electrical construction and facilities services segment). Selling, general and administrative expenses were higher in the three and six months ended June 30, 2006, compared to the same periods of 2005, primarily due to an increase in compensation expense as a result of improved operating results. Also contributing to the improvement were $2.1 million and $4.0 million of increases in net interest income for the three and six months ended June 30, 2006, respectively, compared to the comparable periods in 2005, primarily due to an increase in cash available for investment and a reduction in borrowings under the working capital credit line. In September 2005 and January 2006, we sold a subsidiary that had been part of our United States facilities services segment and a subsidiary that had been part of our United States mechanical construction and facilities services segment, respectively. Consequently, results of operations for all periods presented reflect discontinued operations accounting. Our results of operations for the six months ended June 30, 2006 reflect a loss of $0.6 million (net of income taxes) by reason of the January 2006 sale of the subsidiary that had been part of our United States mechanical construction and facilities services segment. We have stock-based compensation plans and programs. On January 1, 2006, we adopted Statement No. 123(R) "Share-Based Payment" ("Statement 123(R)") issued by the Financial Accounting Standards Board ("FASB"). With the adoption of Statement 123(R), all share-based payments to our employees and non-employee directors, including grants of stock options, have been recognized in the income statement based on their fair values utilizing the modified prospective method of accounting. The impact of the adoption of Statement 123(R) resulted in $2.3 million and $2.9 million of compensation expense in the three and six months ended June 30, 2006, respectively. As a result, net income was adversely impacted in these periods by $1.3 million and $1.7 million and diluted earnings per share was adversely impacted by $0.04 and $0.05, respectively. Approximately $1.9 million of compensation expense, net of income taxes, will be recognized over the approximately 21 month remaining vesting period for stock options outstanding at June 30, 2006. Prior to January 1, 2006, we applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related interpretations in accounting for stock options. Accordingly, no compensation expense has been recognized in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 in respect of stock options granted during those periods inasmuch as we granted stock options at fair market value. Operating Segments We have the following reportable segments which provide services associated with the design, integration, installation, startup, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for generation and distribution of electrical power, lighting systems, low-voltage systems such as fire alarm, security, communication and process control systems and voice and data systems); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems, fire protection systems, and plumbing, process and high-purity piping systems); (c) United States facilities services; (d) Canada construction and facilities services; (e) United Kingdom construction and facilities services; and (f) Other international construction and facilities services. The segment "United States facilities services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities (mobile operation and maintenance services, site-based operation and maintenance services, facility planning and consulting services, energy management programs and the design and construction of energy-related projects) which services are not generally related to customers' construction programs. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. "Other international construction and facilities services" represents our operations outside of the United States, Canada and the United Kingdom (primarily in the Middle East) performing electrical construction, mechanical construction and facilities services. Results of Operations The results presented reflect certain reclassifications of prior period amounts to conform to current year presentation. Revenues The following table presents our operating segment revenues from unrelated entities and their respective percentage of total revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, -------------------------------------------------- % of % of 2006 Total 2005 Total --------------------- --------------------- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 307,499 25% $ 300,125 26% United States mechanical construction and facilities services 418,770 34% 425,834 36% United States facilities services 232,201 19% 187,780 16% ---------- ---------- Total United States operations 958,470 79% 913,739 78% Canada construction and facilities services 84,671 7% 84,273 7% United Kingdom construction and facilities services 177,282 15% 170,819 15% Other international construction and facilities services - - - - ---------- ---------- Total worldwide operations $1,220,423 100% $1,168,831 100% ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ------------------------------------------------- % of % of 2006 Total 2005 Total --------------------- -------------------- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 617,718 26% $ 576,009 26% United States mechanical construction and facilities services 799,073 34% 817,133 36% United States facilities services 450,711 19% 371,203 16% ---------- ---------- Total United States operations 1,867,502 79% 1,764,345 78% Canada construction and facilities services 164,239 7% 150,475 7% United Kingdom construction and facilities services 339,759 14% 337,766 15% Other international construction and facilities services - - - - ---------- ---------- Total worldwide operations $2,371,500 100% $2,252,586 100% ========== ========== </TABLE> Our revenues for the second quarter of 2006 were $1.22 billion compared to $1.17 billion for the second quarter of 2005. Our net income was $16.9 million for the second quarter of 2006 compared to $7.9 million for the second quarter of 2005. Diluted earnings per share were $0.52 per share for the second quarter compared to $0.25 per share for the second quarter of 2005. Our revenues for the six months ended June 30, 2006 were $2.37 billion compared to $2.25 billion for the six months ended June 30, 2005. Our net income was $23.9 million for the six months ended June 30, 2006 compared to $9.8 million for the six months ended June 30, 2005. Diluted earnings per share were $0.73 per share for the six months ended June 30, 2006 compared to $0.31 per share for the six months ended June 30, 2005. Our contract backlog at June 30, 2006 was $3.22 billion compared to $2.72 billion at June 30, 2005. Our contract backlog was $2.76 billion at December 31, 2005. These increases in backlog, which were primarily attributable to United States operations, were due to increased availability of commercial construction projects. Backlog is not a term recognized under accounting principles generally accepted in the United States; however, it is a common measurement used in our industry. Our 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 any of our facilities services contracts exceeds 12 months, the unrecognized revenues attributable to any such contracts included in backlog are limited to only 12 months of such contracts' revenues. Revenues of our United States electrical construction and facilities services segment for the three and six months ended June 30, 2006 increased $7.4 million and $41.7 million compared to the three and six months ended June 30, 2005, respectively. The revenues increases were due to the increased availability of commercial and government project work. Revenues of our United States mechanical construction and facilities services segment for the three and six months ended June 30, 2006 decreased $7.1 million and $18.1 million compared to the three and six months ended June 30, 2005, respectively. The revenues decreases were primarily attributable to a planned decrease in activities of certain subsidiaries resulting in the curtailment of their bidding on certain public sector projects, partially offset by increased commercial work. Our United States facilities services revenues, which include those operations that principally provide maintenance and consulting services, increased $44.4 million and $79.5 million for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005, respectively. These increases in revenues were primarily attributable to site-based government related work and to mobile services offered by this segment, and to revenues from a mobile services company acquired in November 2005. Revenues of our Canada construction and facilities services increased by $0.4 million and $13.8 million for the three and six months ended June 30, 2006 compared to the same periods in 2005, respectively. The revenues increases primarily reflected increases of $8.3 million and $12.9 million for the three and six month periods, respectively, relating to the change in the rate of exchange for Canadian dollars to United States dollars due to the strengthening of the Canadian dollar. The increase in revenues due to the change in the rate of exchange for the three months ended June 30, 2006 compared to the same 2005 period was partially offset by a temporary decrease in oil and gas work. Our United Kingdom construction and facilities services revenues increased $6.5 million and $2.0 million for the three and six months ended June 30, 2006 compared to the same periods in 2005, respectively, primarily due to increased work on rail projects. The increases were offset by decreases of $2.6 million and $13.6 million for the three and six month periods, respectively, relating to the rate of exchange for British pounds to United States dollars as a result of the weakening of the British pound.
Cost of sales and Gross profit The following table presents our cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Cost of sales $1,086,895 $1,056,860 $2,123,139 $2,041,413 Gross profit 133,528 111,971 248,361 211,173 Gross profit, as a percentage of revenues 10.9% 9.6% 10.5% 9.4% </TABLE> Our gross profit (revenues less cost of sales) increased $21.6 million and $37.2 million for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005. Gross profit as a percentage of revenues was 10.9% and 10.5% for the three and six months ended June 30, 2006, respectively, compared to 9.6% and 9.4% for the three and six months ended June 30, 2005, respectively. The increase in gross profit for the three and six months ended June 30, 2006 compared to the same periods in 2005 was primarily attributable to (a) generally improved performance on United States mechanical construction and Canadian construction contracts and (b) increased availability of generally higher margin work in the United States. Additionally, results for the six months ended June 30, 2006 were positively impacted by the absence of an $8.7 million non-cash expense recorded in the first quarter of 2005 as a result of proceedings in a civil action brought by a joint venture between our subsidiary Poole & Kent Corporation and an unrelated company against the Upper Occoquan Sewage Authority. Negatively impacting the 2006 six month results when compared to the prior year period was the absence of a $5.6 million favorable insurance settlement recorded in the first quarter of 2005 (which primarily affected the United States electrical construction and facilities services segment). Selling, general and administrative expenses The following table presents our selling, general and administrative expenses, and selling, general and administrative expenses as a percentage of revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Selling, general and administrative expenses $108,194 $96,994 $210,700 $189,301 Selling, general and administrative expenses, as a percentage of revenues 8.9% 8.3% 8.9% 8.4% </TABLE> Our selling, general and administrative expenses for the three months ended June 30, 2006 increased by $11.2 million to $108.2 million compared to $97.0 million for the three months ended June 30, 2005. Selling, general and administrative expenses as a percentage of revenues were 8.9% for the three months ended June 30, 2006 compared to 8.3% for the three months ended June 30, 2005. Our selling, general and administrative expenses for the six months ended June 30, 2006 increased by $21.4 million to $210.7 million when compared to $189.3 million for the six months ended June 30, 2005. Selling, general and administrative expenses as a percentage of revenues were 8.9% for the six months ended June 30, 2006 compared to 8.4% for the six months ended June 30, 2005. For the three and six month periods ended June 30, 2006 compared to the same periods in 2005, selling, general and administrative expenses increased both in amount and as a percentage of revenues primarily as a result of an increase in incentive-based compensation expense. Selling, general and administrative expenses also increased due to compensation expense of $2.3 million and $2.9 million for the three and six months ended June 30, 2006, respectively, as a result of the adoption of Statement 123(R) on January 1, 2006.
Restructuring expenses Restructuring expenses, primarily relating to employee severance obligations, were $0.3 million and $1.5 million for the three and six months ended June 30, 2005. As of June 30, 2006, there were no unpaid restructuring obligations. Operating income The following table presents our operating income (loss), and operating income (loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, ---------------------------------------------------------- % of % of Segment Segment 2006 Revenues 2005 Revenues ---- -------- ---- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 11,063 3.6% $12,052 4.0% United States mechanical construction and facilities services 11,011 2.6% 4,370 1.0% United States facilities services 10,080 4.3% 7,551 4.0% -------- ------- Total United States operations 32,154 3.4% 23,973 2.6% Canada construction and facilities services 2,089 2.5% (1,525) (1.8)% United Kingdom construction and facilities services 3,694 2.1% 2,365 1.4% Other international construction and facilities services (41) 13 Corporate administration (12,562) (9,849) Restructuring expenses - (301) -------- ------- Total worldwide operations 25,334 2.1% 14,676 1.3% Other corporate items: Interest expense (642) (2,353) Interest income 1,132 716 Minority interest (672) (987) -------- ------- Income from continuing operations before income taxes $ 25,152 $12,052 ======== ======= </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ---------------------------------------------------------- % of % of Segment Segment 2006 Revenues 2005 Revenues ---- -------- ---- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 19,437 3.1% $ 28,048 4.9% United States mechanical construction and facilities services 18,436 2.3% 896 0.1% United States facilities services 14,727 3.3% 12,592 3.4% -------- -------- Total United States operations 52,600 2.8% 41,536 2.4% Canada construction and facilities services 3,081 1.9% (2,251) (1.5)% United Kingdom construction and facilities services 5,381 1.6% 1,892 0.6% Other international construction and facilities services 732 (38) Corporate administration (24,133) (19,267) Restructuring expenses - (1,472) -------- -------- Total worldwide operations 37,661 1.6% 20,400 0.9% Other corporate items: Interest expense (1,341) (4,566) Interest income 2,069 1,289 Minority interest (928) (1,852) -------- -------- Income from continuing operations before income taxes $ 37,461 $ 15,271 ======== ======== </TABLE> As described below in more detail, our operating income increased by $10.7 million for the three months ended June 30, 2006 to $25.3 million compared to operating income of $14.7 million for the three months ended June 30, 2005. Our operating income increased by $17.3 million for the six months ended June 30, 2006 to $37.7 million compared to operating income of $20.4 million for the six months ended June 30, 2005. Our United States electrical construction and facilities services operating income of $11.1 million for the three months ended June 30, 2006 decreased $1.0 million compared to operating income of $12.1 million for the three months ended June 30, 2005. Operating income of $19.4 million for the six months ended June 30, 2006 decreased $8.6 million compared to operating income of $28.0 million for the six months ended June 30, 2005. The decrease in operating income for the three and six months ended June 30, 2006 was primarily the result of reduced transportation infrastructure and financial services projects, which produced higher operating margins in the 2005 periods. Absent from the six months ended June 30, 2006 was approximately $4.5 million in income from the settlement of the insurance coverage related dispute recorded during the first quarter of 2005. Selling, general and administrative expenses increased primarily due to increased variable compensation expense, at certain subsidiaries in this segment, pertaining to incentive-based compensation programs in each of the three and six month periods. Our United States mechanical construction and facilities services operating income of $11.0 million for the three months ended June 30, 2006 increased $6.6 million compared to operating income of $4.4 million for the three months ended June 30, 2005. Operating income of $18.4 million for the six months ended June 30, 2006 increased $17.5 million compared to operating income of $0.9 million for the six months ended June 30, 2005. This segment benefited from increased operating income from high-tech and specialty-type processing work. These improvements were also partially attributable to planned curtailment of bidding by certain subsidiaries on certain public sector contracts which had recorded operating losses in the 2005 periods. The increase in selling, general and administrative expenses was primarily related to increased incentive-based compensation expense, at certain subsidiaries in this segment, in each of the three and six month periods. The operating income for the six months ended June 30, 2005 reflects an approximately $8.7 million reduction in gross profit as a result of the write-off of unrecovered costs with respect to an action against the Upper Occoquan Sewage Authority. In addition, absent was approximately $1.1 million in income related to the settlement of an insurance coverage related dispute recorded in the first quarter of 2005. Our United States facilities services operating income for the three months ended June 30, 2006 was $10.1 million compared to operating income of $7.6 million for the three months ended June 30, 2005. Operating income for the six months ended June 30, 2006 was $14.7 million compared to operating income of $12.6 million for the six months ended June 30, 2005. Operating income improved for the 2006 periods, compared to the 2005 periods, due to improved gross margins on mobile services work and to operating income contributed by a company acquired in November 2005; however, these increases were offset partially by incentive-based compensation expense and to less operating income from certain site-based operations contracts. Our Canada construction and facilities services operating income was $2.1 million for the three months ended June 30, 2006 compared to an operating loss of $1.5 million for the three months ended June 30, 2005. Operating income was $3.1 million for the six months ended June 30, 2006 compared to an operating loss of $2.3 million for the six months ended June 30, 2005. The improvements in operating income were attributable to improved hospital, mining and auto manufacturing construction contract performance and a planned reduction in selling, general and administrative expenses. Our United Kingdom construction and facilities services operating income for the three months ended June 30, 2006 was $3.7 million compared to operating income of $2.4 million for the three months ended June 30, 2005. Operating income for the six months ended June 30, 2006 was $5.4 million compared to operating income of $1.9 million for the six months ended June 30, 2005. These increases in operating income were primarily attributable to increased performance of, and gross profit earned on, rail projects and to increased facilities services work. Other international construction and facilities services operating loss was $0.04 million for the three months ended June 30, 2006 compared to operating income of $0.01 million for the three months ended June 30, 2005. Operating income was $0.7 million for the six months ended June 30, 2006 compared to operating losses of $0.04 million for the six months ended June 30, 2005. Corporate administration expenses for the three months ended June 30, 2006 were $12.6 million compared to $9.8 million for the three months ended June 30, 2005. Corporate administration expenses for the six months ended June 30, 2006 was $24.1 million compared to $19.3 million for the six months ended June 30, 2005. The increase in expenses was primarily due to $2.3 million and $2.9 million of expenses related to the adoption of Statement 123(R) for the three and six month periods ended June 30, 2006, respectively, and increases in incentive-based compensation of $0.6 million and $1.9 million for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005. Restructuring expenses, primarily relating to employee severance obligations, were $0.3 million and $1.5 million for the three and six months ended June 30, 2005. Interest expense for the three months ended June 30, 2006 and 2005 was $0.6 million and $2.4 million, respectively. Interest expense for the six months ended June 30, 2006 and 2005 was $1.3 million and $4.6 million, respectively. The decrease in interest expense was primarily due to the reduction in borrowing levels during the three and six months ended June 30, 2006 compared to the borrowing levels in the three and six months ended June 30, 2005. Interest income for the three months ended June 30, 2006 was $1.1 million compared to $0.7 million for the three months ended June 30, 2005. Interest income for the six months ended June 30, 2006 was $2.1 million compared to $1.3 million for the six months ended June 30, 2005. The increases in interest income were primarily related to an increase in cash available for investment. The estimated effective income tax rate was 38% for the three and six months ended June 30, 2006 compared to 37% for the comparable 2005 periods. The reported tax provision includes an adjustment made as it relates to the deductibility of certain compensation arrangements for income tax purposes. Liquidity and Capital Resources The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands): For the six months ended June 30, --------------------------- 2006 2005 ---- ---- Net cash provided by operating activities $77,430 $28,132 Net cash used in investing activities $(8,412) $(7,641) Net cash provided by (used in) financing activities $ 8,097 $(8,966) Our consolidated cash balance increased by approximately $77.1 to $180.9 million at June 30, 2006 from $103.8 million at December 31, 2005. The increase in net cash provided by operating activities for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was primarily due to an increase in working capital as a result of an increase in net over-billings. Net cash used in investing activities of $8.4 million for the six months ended June 30, 2006 increased $0.8 million compared to $7.6 million for the same period in the prior year primarily due to an increase in the purchase of property, plant and equipment of $3.8 million from the same period in the prior year, of which $2.3 million in purchases of equipment related to the start-up of a site-based contract in our United States facilities services segment, partially offset by $1.2 million of proceeds from the sale of a discontinued operation and an increase in net proceeds from other investing activities. Net cash provided by financing activities of $8.1 million for the six months ended June 30, 2006 increased $17.1 million compared to net cash used in financing activities of $9.0 million for the six months ended June 30, 2005. This increase was primarily attributable to the absence of net borrowings under the working capital credit line for 2006 compared to $10.0 million of net borrowings for 2005, to an increase in the proceeds from the exercise of stock options of $4.3 million, and to the excess tax benefit from share-based compensation of $2.7 million for the six months ended June 30, 2006.
<TABLE> <CAPTION> Payments Due by Period ------------------------------------------------ Less Contractual than 1-3 4-5 After Obligations Total 1 year years years 5 years - --------------------------------------------- ----- ------ ----- ----- ------- <S> <C> <C> <C> <C> <C> Other long-term debt $ 0.4 $ 0.1 $ 0.2 $ 0.1 $ - Capital lease obligations 1.7 0.6 0.8 0.3 - Operating leases 243.2 52.8 92.6 64.7 33.1 Minimum funding requirement for pension plan 6.4 6.4 - - - Open purchase obligations (1) 684.4 571.5 112.2 0.7 - Other long-term obligations (2) 138.3 15.6 122.7 - - -------- ------ ------ ----- ----- Total Contractual Obligations $1,074.4 $647.0 $328.5 $65.8 $33.1 ======== ====== ====== ===== ===== </TABLE> <TABLE> <CAPTION> Amount of Commitment Expiration by Period ------------------------------------------------ Less Other Commercial Total than 1-3 4-5 After Commitments Committed 1 year years years 5 years - --------------------------------------------- --------- ------ ----- ----- ------- <S> <C> <C> <C> <C> <C> <C> Revolving credit facility (3) $ - $ - $ - $ - $ - Letters of credit 61.8 - 61.8 - - Guarantees 25.0 - - - 25.0 ----- ----- ----- --- ----- Total Commercial Obligations $86.8 $ - $61.8 $ - $25.0 ===== ===== ===== === ===== </TABLE> (1) Represent open purchase orders for material and subcontracting costs related to the Company's construction and service contracts. These purchase orders are not reflected in our consolidated balance sheet and should not impact future cash flows as amounts will be recovered through customer billings. (2) Represent primarily insurance related liabilities, classified as other long-term liabilities in our consolidated balance sheets. Cash payments for insurance related liabilities may be payable beyond three years, but it is not practical to estimate. (3) We classify these borrowings as short-term on its consolidated balance sheet because of our intent and ability to repay the amounts on a short-term basis. Our revolving credit agreement (the "Revolving Credit Facility") provides for a credit facility of $375.0 million. As of June 30, 2006 and December 31, 2005, we had approximately $61.8 million and $53.3 million of letters of credit outstanding, respectively, under the Revolving Credit Facility. There were no borrowings under the Revolving Credit Facility as of June 30, 2006 and December 31, 2005. One of our subsidiaries has guaranteed indebtedness of a venture in which it has a 40% interest; the other venture partner, Baltimore Gas and Electric, has a 60% interest. The venture designs, constructs, owns, operates, leases and maintains facilities to produce chilled water for sale to customers for use in air conditioning commercial properties. These guarantees are not expected to have a material effect on our financial position or results of operations. We and Baltimore Gas and Electric are jointly and severally liable, in the event of default, for the venture's $25.0 million borrowing due December 2031. 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 June 30, 2006, Surety Companies had issued Surety Bonds for our account in the aggregate amount of approximately $1.8 billion. The Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond. The largest single Surety Bond outstanding for our account is approximately $170.0 million. 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 the 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. We may also increase liquidity through an equity offering or other debt instruments. Short-term changes in macroeconomic trends may have an effect, positively or negatively, on liquidity. Our focus on the facilities services market is intended to provide a buffer against economic downturns, as the facilities services market is characterized by annual and multi-year contracts that provide a more predictable stream of cash flow than the construction market. Short-term liquidity is also impacted by the type and length of construction contracts in place. During economic downturns, such as the downturn during 2001 through 2004 in the commercial construction industry, there were typically fewer small and discretionary projects from the private sector and companies like us more aggressively bid more large long-term infrastructure and public sector contracts. Performance of long duration contracts typically requires working capital until initial billing milestones are achieved. 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 $229.2 million and $144.6 million as of June 30, 2006 and December 31, 2005, respectively. Long-term liquidity requirements can be expected to be met through cash generated from operations, the Revolving Credit Facility, and the sale of various secured or unsecured debt and/or equity interests in the public and private markets. Based upon our current credit ratings and financial position, we can reasonably expect to be able to issue long-term debt instruments and/or equity. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction services, which is in turn influenced by macroeconomic trends including interest rates and governmental economic policy. Our ability to perform work at profitable levels is critical to meeting long-term liquidity requirements. We believe that our current cash balances and our borrowing capacity available under the Revolving Credit Facility or other forms of financing available through debt or equity offerings, combined with cash expected to be generated from operations, will be sufficient to provide us with short-term and foreseeable long-term liquidity and to enable us to meet 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 $67.0 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 June 30, 2006 and December 31, 2005, we utilized approximately $57.8 million and $49.4 million, respectively, of letters of credit obtained under our revolving credit facility as collateral for our insurance obligations. Adoption of New Accounting Pronouncements During the six months ended June 30, 2006, we adopted Statement No. 123(R) "Share-Based Payment" ("Statement 123(R)") issued by the Financial Accounting Standards Board ("FASB"). Statement 123(R) is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), supersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25") and amends FASB Statement No. 95 "Statement of Cash Flows". Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, with the adoption of Statement 123(R) on January 1, 2006, all share-based payments to employees, including grants of stock options, have been recognized in the income statement based on their fair values, accounted for by utilizing the modified prospective basis of accounting. Application of Critical Accounting Policies The condensed 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 B - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 7 of the annual report on Form 10-K for the year ended December 31, 2005. 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 estimates and judgments pertaining to (a) revenue recognition from (i) long-term construction contracts for which the percentage of completion method of accounting is used and (ii) services contracts, (b) collectibility or valuation of accounts receivable, (c) insurance liabilities, (d) income taxes and (e) intangible assets. Revenue Recognition for 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 principles generally accepted in the United States, Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts," and, accordingly, the method used for revenue recognition within our industry. Percentage-of-completion for each contract is measured principally by the ratio of costs incurred to date to perform each contract to the estimated total costs to perform such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date to perform each contract to the estimated total labor costs to perform such contract. 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 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. Such amounts are recorded at estimated net realizable value and take into account factors that may affect the ability to bill unbilled revenues and collect amounts after billing. 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 service contracts as such contracts are accounted for in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition, revised and updated" ("SAB 104"). There are two basic types of services contracts: (a) fixed price services contracts which are signed in advance for maintenance, repair and retrofit work over periods typically ranging from one to three years (pursuant to which our employees may be at a customer's site full time) and (b) services contracts which may or may not be signed in advance for similar maintenance, repair and retrofit work on an as needed basis (frequently referred to as time and material work). Fixed price services contracts are generally performed over the contract period, and, accordingly, revenue is recognized on a pro-rata basis over the life of the contract. Revenues derived from other services contracts are recognized when the services are performed in accordance with SAB 104. Expenses related to all services contracts are recognized as incurred. Accounts Receivable We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the probability of collection of receivables. Relevant assessment factors include the credit worthiness of the customer, our prior collection history with the customer and related aging of the past due balances. The provision for bad debts during the six months ended June 30, 2006 and 2005 were $1.3 million and $0.4 million, respectively. At June 30, 2006 and December 31, 2005, accounts receivable of $1,078.6 million and $1,046.4 million, respectively, included allowances of $28.4 million and $30.0 million, respectively. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to a deterioration of its financial condition. The allowance requirements are based on the best facts available and are re-evaluated as additional information is received.
Insurance Liabilities We have deductibles for certain workers' compensation, auto 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 the liability for claims incurred and an estimate of claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of these obligations. We believe our liabilities 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 actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and are then recorded in the period that the experience becomes known. Income Taxes We have net deferred tax assets primarily resulting from deductible temporary differences of $8.6 million at June 30, 2006, compared to net deferred tax assets of $12.3 million at December 31, 2005, which will reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of June 30, 2006 and December 31, 2005, the total valuation allowance on gross deferred tax assets was approximately $16.7 million and $18.7 million, respectively. Goodwill and Intangible Assets As of June 30, 2006, we had goodwill and net identifiable intangible assets (primarily the market value of our backlog, customer relationships and trademarks and trade names) of $283.0 million and $15.4 million, respectively, in connection with the acquisition of certain companies. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. These forecasts reflect assumptions regarding the ability to successfully integrate acquired companies. FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142") requires goodwill to be tested for impairment, on at least an annual basis (each October 1), and be written down when impaired, rather than amortized as previous standards required. Furthermore, Statement 142 requires identifiable intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Changes in strategy and/or market conditions may result in adjustments to recorded intangible asset balances. As of June 30, 2006, no indicators of impairment of our goodwill or identifiable intangible assets resulted from our impairment review which was performed in accordance with the provisions of Statement 142 and FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have not used any material derivative financial instruments during the three and six months ended June 30, 2006 and 2005, including trading or speculation on changes in interest rates, or commodity prices of materials used in our business. We are exposed to market risk for changes in interest rates for borrowings under the Revolving Credit Facility. Borrowings under that facility bear interest at variable rates, and the fair value of borrowings are not affected by changes in market interest rates. As of June 30, 2006, there were no borrowings outstanding under the facility. Had there been borrowings, they would bear interest at (1) a rate which is the prime commercial lending rate announced by Harris Nesbitt from time to time (8.25% at June 30, 2006) plus 0% to 1.0% based on certain financial tests or (2) United States dollar LIBOR (at June 30, 2006 the rate was 5.33%) plus 1.5% to 2.5% based on certain financial tests. Letter of credit fees issued under this facility range from 0.50% to 2.25% of the respective face amounts of the letters of credit issued and are charged based on the type of letter of credit issued and certain financial tests. The Revolving Credit Facility expires in October 2010. There is no guarantee that we will be able to renew the facility at its expiration. We are also exposed to 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 customers' abilities to pay these obligations are 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 discussion of Accounts Receivable under the heading, "Application of Critical Accounting Policies" in the Management's Discussion and Analysis of Results of Operations and Financial Condition. Amounts invested in our foreign operations are translated into U.S. dollars at exchange rates in effect at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), a component of stockholders' equity, in the condensed consolidated balance sheets. We believe the exposure to the effects that fluctuating foreign currencies may have on the 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 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 5,000 vehicles. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that continued price increases of commodities, if they were to occur, would be recoverable. ITEM 4. CONTROLS AND PROCEDURES. Based on an evaluation of our disclosure controls and procedures (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934), our Chairman of the Board and our Chief Executive Officer, Frank T. MacInnis, and our Chief Financial Officer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. - OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. Except as indicated below, there have been no new material developments during the quarter ended June 30, 2006 regarding legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2005 (the "2005 Form 10-K") or in our Form 10-Q for the quarter ended March 31, 2006. We reported in our 2005 Form 10-K that as a result of a jury verdict and subsequent ruling by the trial judge in a civil action brought by a joint venture (the "JV") between our subsidiary Poole & Kent Corporation and an unrelated company in the Fairfax, Virginia Circuit Court in which the JV sought damages from the Upper Occoquan Sewage Authority ("UOSA") resulting from material breaches of a construction contract between the JV and UOSA, it was determined that the JV is entitled to be paid approximately $17.0 million by UOSA in addition to the amounts already received from UOSA. Both the JV and UOSA filed petitions for an appeal of the decision with the Supreme Court of Virginia. The Supreme Court has denied the appeals of both parties, as well as subsequent petitions by both parties requesting the Supreme Court of Virginia to reconsider its denial of the appeals. The JV has asserted additional claims against UOSA relating to the same project which are also pending in the Fairfax, Virginia Circuit Court and which could result in another trial between the JV and UOSA to be held at a date not yet determined and in which the JV would seek damages in excess of $18.0 million. ITEM 1A. RISK FACTORS. There have been no material changes from the risk factors previously disclosed in our 2005 Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders of EMCOR (the "Annual Meeting") was held on June 15, 2006. (b) The Board of Directors of EMCOR consists of seven individuals each of whom was nominated at the Annual Meeting for re-election as a director of EMCOR for the ensuing year. Each director was re-elected. (c) Set forth below are the names of each director elected at the Annual Meeting, the number of shares voted for his re-election and the number of votes withheld from his re-election. 421,609 shares abstained from voting for directors. There were no broker non-votes. Name Votes For Votes Withheld - ------------------------------------------------------------------------------- Stephen W. Bershad 28,286,016 506,357 David A. B. Brown 27,505,088 1,287,285 Larry J. Bump 28,546,221 246,152 Albert Fried, Jr. 28,285,113 507,260 Richard F. Hamm, Jr. 28,645,836 146,737 Frank T. MacInnis 28,247,939 544,434 Michael T. Yonker 28,542,347 250,026 In addition, at the Annual Meeting, stockholders voted upon a proposal to approve adoption by the Board of Directors of an amendment (the "Amendment"), described in the proxy statement for the Annual Meeting, to the Company's 2005 Management Stock Incentive Plan, 26,564,742 shares voted in favor of approval, 1,746,248 voted against approval, and 481,383 shares abstained from voting thereon. There were no broker non-votes. At the Annual Meeting, the stockholders also voted upon a proposal to ratify the appointment by the Audit Committee of the Company's Board of Directors of Ernst & Young LLP, independent auditors, as EMCOR's independent auditors for 2006; 28,775,358 shares voted in favor of ratification, 14,738 shares voted against ratification and 2,279 shares abstained from voting thereon. There were no broker non-votes.
ITEM 6. EXHIBITS. <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 2(a) Disclosure Statement and Third Amended Joint Plan of Exhibit 2(a) to EMCOR's Reorganization (the "Plan of Reorganization") proposed Registration Statement on Form 10 as by EMCOR Group, Inc. (formerly JWP INC.) (the "Company" Originally filed March 17, 1995 ("Form 10") or "EMCOR") and its subsidiary SellCo Corporation ("SellCo"), as approved for dissemination by the United States Bankruptcy Court, Southern District of New York (the "Bankruptcy Court"), on August 22, 1994. 2(b) Modification to the Plan of Reorganization dated Exhibit 2(b) to Form 10 September 29, 1994 2(c) Second Modification to the Plan of Reorganization Exhibit 2(c) to Form 10 dated September 30, 1994 2(d) Confirmation Order of the Bankruptcy Court dated Exhibit 2(d) to Form 10 September 30, 1994 (the "Confirmation Order") confirming the Plan of Reorganization, as amended 2(e) Amendment to the Confirmation Order dated December 8, Exhibit 2(e) to Form 10 1994 2(f) Post-confirmation modification to the Plan of Exhibit 2(f) to Form 10 Reorganization entered on December 13, 1994 2(g) Purchase Agreement dated as of February 11, 2002 by Exhibit 2.1 to EMCOR's Report on Form and among Comfort Systems USA, Inc. and EMCOR-CSI 8-K dated February 14, 2002 Holding Co. 3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to Form 10 December 15, 1994 3(a-2) Amendment dated November 28, 1995 to the Restated Exhibit 3(a-2)to EMCOR's Annual Report on Certificate of Incorporation of EMCOR Form 10-K for the year ended December 31, 1995 ("1995 Form 10-K") 3(a-3) Amendment dated February 12, 1998 to the Restated Exhibit 3(a-3) to EMCOR's Annual Report Certificate of Incorporation on Form 10-K for the year ended December 31, 1997 ("1997 Form 10-K") 3(a-4) Amendment dated January 27, 2006 to the Restated Exhibit 3(a-4) to EMCOR's Annual Report Certificate of Incorporation on Form 10-K for the year ended December 31, 2005 ( "2005 Form 10-K") 3(b) Amended and Restated By-Laws Exhibit 3(b) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K") 3(c) Rights Agreement dated March 3, 1997 between EMCOR and Exhibit 1 to EMCOR's Report on Form 8-K Bank of New York dated March 3, 1997 4(a) U.S. $375,000,000 Credit Agreement dated October 14, Exhibit 4 to EMCOR's Report on Form 8-K 2005 by and among EMCOR Group, Inc. and certain of its (Date of Report October 17, 2005) subsidiaries and Harris N.A. individually and as Agent for the Lenders which are or became parties thereto (the "Credit Agreement") 4(b) Assignment and Acceptance dated October 14, 2005 Exhibit 4(b) to 2005 Form 10-K between Harris Nesbitt Financing, Inc. ("HNF") as assignor, and Bank of Montreal, as assignee of 100% interest of HNF in the Credit Agreement to Bank of Montreal </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- -------------------------------------- <S> <C> <C> 4(c) Commitment Amount Increase Request dated November 21, Exhibit 4(c) to 2005 Form 10-K 2005 between EMCOR and the Northern Trust Company effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(d) Commitment Amount Increase Request dated November 21, Exhibit 4(d) to 2005 Form 10-K 2005 between EMCOR and Bank of Montreal effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(e) Commitment Amount Increase Request dated November 21, Exhibit 4(e) to 2005 Form 10-K 2005 between EMCOR and National City Bank of Indiana effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement 4(f) Assignment and Acceptance dated November 29, 2005 Exhibit 4(f) to 2005 Form 10-K between Bank of Montreal, as assignee, and Fifth Third Bank, as assignee, of 30% interest of Bank of Montreal in the Credit Agreement to Fifth Third Bank 4(g) Assignment and Acceptance dated November 29, 2005 Exhibit 4(g) to 2005 Form 10-K between Bank of Montreal, as assignee, and Northern Trust Company, as assignee, of 20% interest of Bank of Montreal in the Credit Agreement to Bank of Montreal 10(a) Severance Agreement between EMCOR and Frank T. MacInnis Exhibit 10.2 to EMCOR's Report on Form 8-K (Date of Report April 25, 2005)("April 2005 Form 8-K") 10(b) Form of Severance Agreement between EMCOR and each of Exhibit 10.1 to the April 2005 Form Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz 8-K and Mark A. Pompa 10(c) Letter Agreement dated October 12, 2004 between Exhibit 10.1 to EMCOR's Report on Anthony Guzzi and EMCOR (the "Guzzi Letter Agreement") Form 8-K (Date of Report October 12, 2004) 10(d) Form of Confidentiality Agreement Exhibit C to Guzzi Letter Agreement 10(e) Form of Indemnification Agreement between EMCOR and Exhibit F to Guzzi Letter Agreement each of its officers and directors 10(f) Severance Agreement dated October 25, 2005 between Exhibit D to the Guzzi Letter Anthony Guzzi and EMCOR Agreement 10(g-1) 1994 Management Stock Option Plan ("1994 Option Plan") Exhibit 10(o) to Form 10 10(g-2) Amendment to Section 12 of the 1994 Option Plan Exhibit (g-2) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2001 ("2001 Form 10-K") 10(g-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2001 Form 10-K 10(h-1) 1995 Non-Employee Directors' Non-Qualified Stock Exhibit 10(p) to 2001 Form 10-K Option Plan ("1995 Option Plan") 10(h-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2001 Form 10-K </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- ------------------------------------------------------- ----------------------------------------- <S> <C> <C> 10(i-1) 1997 Non-Employee Directors' Non-Qualified Stock Exhibit 10(k) to EMCOR's Annual Report on Option Plan ("1997 Option Plan") Form 10-K for the year ended December 31, 1999 ("1999 Form 10-K") 10(i-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2001 Form 10-K 10(j) 1997 Stock Plan for Directors Exhibit 10(l) to 1999 Form 10-K 10(k-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(a) to EMCOR's Quarterly between Frank T. MacInnis and EMCOR ("MacInnis Report on Form 10-Q for the quarter Continuity Agreement") ended June 30, 1998 ("June 1998 Form 10-Q") 10(k-2) Amendment dated as of May 4, 1999 to MacInnis Exhibit 10(h) for the quarter ended Continuity Agreement June 30, 1999 (June 1999 Form 10-Q) 10(l-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(c) to the June 1998 Form 10-Q Sheldon I. Cammaker and EMCOR ("Cammaker Continuity Agreement") 10(l-2) Amendment dated as of May 4, 1999 to Cammaker Exhibit 10(i) to the June 1999 Form 10-Q Continuity Agreement 10(m-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(d) to the June 1998 Form 10-Q Leicle E. Chesser and EMCOR ("Chesser Continuity Agreement") 10(m-2) Amendment dated as of May 4, 1999 to Chesser Exhibit 10(j) to the June 1999 Form 10-Q Continuity Agreement 10(n-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(f) to the June 1998 Form 10-Q R. Kevin Matz and EMCOR ("Matz Continuity Agreement") 10(n-2) Amendment dated as of May 4, 1999 to Matz Continuity Exhibit 10(m) to the June 1999 Form 10-Q Agreement 10(n-3) Amendment dated as of January 1, 2002 to Matz Exhibit 10(o-3) to Form 10-Q for the Continuity Agreement quarter ended March 31, 2002 ("March 2002 10-Q") 10(o-1) Continuity Agreement dated as of June 22, 1998 between Exhibit 10(g) to the June 1998 Form 10-Q Mark A. Pompa and EMCOR ("Pompa Continuity Agreement") 10(o-2) Amendment dated as of May 4, 1999 to Pompa Continuity Exhibit 10(n) to the June 1999 Form 10-Q Agreement 10(o-3) Amendment dated as of January 1, 2002 to Pompa Exhibit 10(p-3) to the March 2002 10-Q Continuity Agreement 10(p) Change of Control Agreement dated as of October 25, Exhibit E to Guzzi Letter Agreement 2004 between Anthony Guzzi ("Guzzi") and EMCOR 10(q) Release and Settlement Agreement dated December 22, Exhibit 10(q) to 1999 Form 10-K 1999 between Thomas D. Cunningham and EMCOR 10(r) Separation Agreement and Mutual release dated April 3, Exhibit 10.1 to EMCOR's Report on Form 2006 between Leicle E. Chesser and EMCOR 8-K (Date of Report April 4, 2006) </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ------------ ------------------------------------------------------- -------------------------------------- <S> <C> <C> 10(s-1) Executive Stock Bonus Plan, as amended (the "Stock Exhibit 4.1 to EMCOR's Registration Bonus Plan") Statement on Form S-8 (No. 333-112940 filed with the Securities and Exchange Commission on February 18, 2004 (the "2004 Form S-8") 10(s-2) Form of Certificate Representing Restrictive Stock Exhibit 10.1 to EMCOR's Report on Units ("RSU's") issued under the Stock Bonus Plan Form 8-K (Date of Report March 4, Manditorily Awarded 2005) ("March 4, 2005 Form 8-K") 10(s-3) Form of Certificate Representing RSU's issued under Exhibit 10.2 to March 4, 2005 Form the Stock Bonus Plan Voluntarily Awarded 8-K 10(t) Incentive Plan for Senior Executive Officers of EMCOR Exhibit 10.3 to March 4, 2005 Form Group, Inc. ("Incentive Plan for Senior Executives") 8-K 10(u) First Amendment to Incentive Plan for Senior Exhibit 10(t) to 2005 Form 10-K Executives 10(v) EMCOR Group, Inc. Long-Term Incentive Plan Exhibit 10 to Form 8-K (Date of Report December 15, 2005) 10(w) 2003 Non-Employee Directors' Stock Option Exhibit A to EMCOR's proxy statement ("2003 Proxy Statement") Plan for its annual meeting held June 12, 2003 10(x-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement 10(x-2) Amendments to 2003 Management Stock Incentive Plan Exhibit 10(t-2) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2003 ("2003 Form 10-K") 10(y) Form of Stock Option Agreement evidencing grant of Exhibit 10.1 to Form 8-K (Date of stock options under the 2003 Management Stock Report January 5, 2005) Incentive Plan 10(z) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for its annual meeting held June 16, 2005 ("2005 Proxy Statement") 10(a)(a) 2005 Management Stock Incentive Plan Exhibit C to EMCOR's 2003 Proxy Statement 10(b)(b) Amendment to 2005 Management Stock Incentive Plan Exhibit B to EMCOR's Proxy Statement for its annual meeting held June 15, 2006 10(c)(c) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement 10(d)(d) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8 dated May 5, 1999 10(e)(e) Form of EMCOR Option Agreement for Messrs. Frank T. Exhibit 4.5 to 2004 Form S-8 MacInnis, Jeffrey M. Levy, Sheldon I. Cammaker, Leicle E. Chesser, R. Kevin Matz and Mark A. Pompa (collectively the "Executive Officers") for options granted January 4, 1999, January 3, 2000 and January 2, 2001 10(f)(f) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.6 to 2004 Form S-8 granted December 14, 2001 </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ------------ ------------------------------------------------------- -------------------------------------- <S> <C> <C> 10(g)(g) Form of EMCOR Option Agreement for Executive Officers Exhibit 4.7 to 2004 Form S-8 granted January 2, 2002, January 2, 2003 and January 2, 2004 10(h)(h) Form of EMCOR Option Agreement for Directors granted Exhibit 4.8 to 2004 Form S-8 June 19, 2002, October 25, 2002 and February 27, 2003 10(i)(i) Form of EMCOR Option Agreement for Executive Officers Exhibit 10(g)(g) to 2005 Form 10-K and Guzzi dated January 3, 2005 10(j)(j) Release and Settlement Agreement dated February 25, Exhibit 10(a)(a) to EMCOR's Annual 2004 between Jeffrey M. Levy and EMCOR Report on Form 10-K for the year ended December 31, 2004 ("2004 Form 10-K") 10(k)(k) Form of letter agreement between EMCOR and each Exhibit 10(b)(b) to 2004 Form 10-K Executive Officer with respect to acceleration of options granted January 2, 2003 and January 2, 2004 11 Computation of Basic EPS and Diluted EPS for the Note C of the Notes to the Condensed three and six months ended June 30, 2006 and 2005 Consolidated Financial Statements 31.1 Certification Pursuant to Section 302 of the Page ___ Sarbanes-Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer * 31.2 Certification Pursuant to Section 302 of the Page ___ Sarbanes-Oxley Act of 2002 by the Executive Vice President, Chief Financial Officer and Treasurer * 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Page ___ adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer ** 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Page ___ adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Executive Vice President, Chief Financial Officer and Treasurer ** </TABLE> - -------------- * Filed Herewith ** Furnished Herewith
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. Date: July 27, 2006 EMCOR GROUP, INC. ------------------------------------------------- (Registrant) /s/FRANK T. MACINNIS ------------------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer /s/MARK A. POMPA ------------------------------------------------- Mark A. Pompa Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
Exhibit 31.1 CERTIFICATION I, Frank T. MacInnis, Chairman of the Board and Chief Executive Officer of EMCOR Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 27, 2006 /s/FRANK T. MACINNIS ---------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer
Exhibit 31.2 CERTIFICATION I, Mark A. Pompa, Executive Vice President, Chief Financial Officer and Treasurer of EMCOR Group, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of EMCOR Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 27, 2006 /s/MARK A. POMPA -------------------------------------------- Mark A. Pompa Executive Vice President, Chief Financial Officer and Treasurer
Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank T. MacInnis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 27, 2006 /s/FRANK T. MACINNIS ----------------------------------- Frank T. MacInnis Chief Executive Officer
Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A. Pompa, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 27, 2006 /s/MARK A. POMPA ---------------------------------- Mark A. Pompa Chief Financial Officer